Bharti signals worst is over for Indian telecom

NEW DELHI, INDIA: Bharti Airtel signalled a bottom for the struggling cellular market as cut-rate pricing shows signs of stabilising and market focus shifts to profit margins for India's top mobile operator.

Facing tough competition in a crowded market, Bharti's profit fell by a third but it is betting on growth in Africa, where the mobile penetration level is less than India's 54 per cent and there are fewer competitors.

Bharti's results included its new African operations, which were on its balance sheet for only 23 days in the quarter ended June. Bharti acquired the loss-making business from Kuwaiti telecoms group Zain  for a pricey $9 billion in June to become the world's fifth-biggest mobile operator.

Also read: Airtel to acquire Telecom Seychelles for $62 mn

After call prices in India tumbled to as low as 0.4 U.S. cents a minute — with most of the price declines taking place in the second half of 2009 — there were no big price cuts in April-June.

"Telecom is in a transition phase. We are expecting gradual recovery in revenue streams from value added and 3G segments, which should become visible towards the end of the calendar year," said K.K. Mital, portfolio manager at Globe Capital.

Bharti's EBITDA margin, a key gauge of profitability, fell to 36.9 per cent in April-June from 41.3 per cent a year ago.

"If I was to stick to the economic viability and sustenance, I would say probably the worst is over, any emotional outburst nobody can predict," Sanjay Kapoor, Bharti's Chief Executive for India and South Asia, told a news conference.

Bharti shares closed down 1.4 per cent in a weak Mumbai market. The shares had risen as much as 3.5 per cent.

Bharti, with about 137 million users in India, controls about 21 per cent of the market of 635 million. It also offers services in Bangladesh and Sri Lanka, but the operations are much smaller.

The firm said it is still looking at an initial public offering of its tower unit.

Bharti's founder, billionaire Sunil Mittal, who started his career selling bicycle parts, saw an opportunity in telecoms in the mid-1990s when India was opening up the sector for private participation.

Bharti began with just one licence to operate a mobile network in Delhi and has grown to become the No. 1 player.

{#PageBreak#}

Sector bottoms out?

Some analysts say the worst may be over for pricing in the Indian telecoms sector, which has attracted operators including Japan's NTT Docomo 9437 and Russia's Sistema.

Bharti, in which Southeast Asia's top phone firm SingTel owns just over a 32 per cent stake, said industry economics do not allow any further price cuts.

"The key concern for investors is whether the company will be able to maintain its margins. The tariff war seems to be over and most of its impact is already priced into the stock," Sonam Udasi, head of research at IDBI Capital, said on Wednesday.

"We believe the company can keep its margins. There could be better cost management going forward and the company will also look to unlock value from its tower business," he said.

The sector faces pressure from recently-completed auctions for 3G and broadband airwaves which cost far more than expected. Firms such as Bharti, Reliance Comm, Vodafone, Tata Teleservices and Reliance Industries, spent a combined $23 billion to grab licences.

The auction also reintroduced an unpredictable 900-pound gorilla to the market in Mukesh Ambani's Reliance Industries, India's biggest listed firm, which bought the only company to win country-wide broadband wireless spectrum.

Vodafone Group Plc VOD, which controls India's third-biggest mobile operator, took a charge of $3.3 billion due to fierce competition and rapidly escalating spectrum costs in the country.

"I think, on sheer economics, to go down (on prices) any further will be suicidal for anybody. But at times market forces go beyond rationale," said Bharti's Kapoor, referring to prices for voice calls.

Bharti now faces the task of integrating and turning around its acquisition of telecoms operations in 15 African countries.

"Over a period of a year or so, we think Bharti will start benefitting from the Zain deal," Udasi said.

Bharti said net profit fell to 16.82 billion rupees ($361.7 million) under international accounting standards for its first quarter ended June, from 24.75 billion rupees a year ago.

The results are not comparable but Bharti was expected to report a net profit of 18.91 billion rupees.

Derivatives and exchange fluctuations led to a loss of 2.16 billion rupees in the first quarter as the dollar strengthened against the rupee. Bharti, which buys equipment in dollars and also had foreign loans, had a forex gain of 2.79 billion rupees a year ago.

Total revenue rose to 122.31 billion rupees from 104.14 billion rupees.

Bharti's average revenue per user in India fell 22.7 per cent to 215 rupees in April-June but minutes of usage rose 0.4 per cent to 480 minutes.

Bharti shares, valued at about $27 billion, fell about 16 per cent in Apri-June but have jumped about 24 per cent since end-June. Rival Reliance Communications RLCM reports quarterly results on Friday.