A surge in finance costs coupled with tepid growth in Africa’s telecom sector has impacted Bharti Airtel’s profitability for the quarter ended June 2013. The company reported a 9.71 per cent decline in its net consolidated profits from Rs 7.62 billion for the quarter ended June 2012 to Rs 6.88 billion for the corresponding quarter in 2013. The decline in the bottom line occurred primarily on account of a 58 per cent increase in finance costs to Rs 11.67 billion owing to a 9.8 per cent depreciation in the value of the rupee during the quarter under review.

In contrast, Bharti’s overall revenues grew by 9.1 per cent from Rs 185.6 billion for the quarter ended June 2012 to Rs 202.63 billion in the corresponding quarter in 2013. Higher revenues resulted in an increase in the earnings before interest, taxes, depreciation and amortisation (EBITDA) margin from 29.6 per cent to 32.3 per cent.

Improved performance in India

Airtel’s revenues from its Indian operations increased by 11.58 per cent from Rs 126.57 billion for the quarter ended June 2012 to Rs 141.23 billion in the corresponding quarter in 2013. This was a result of  higher voice and data revenues, which increased by 9.54 per cent to Rs 95.94 billion and by 91.09 per cent to Rs 8.58 billion respectively, during this period.

Airtel’s minutes of usage per subscriber increased by 5 per cent from 433 for the quarter ended June 2012 to 455 in the corresponding quarter in 2013. This, in turn, led to an improved ARPU of Rs 166 for April-June 2013 as compared to Rs 154 for the same quarter in 2012. However, the average realisation per minute (ARPM) increased by just 2 per cent from Re 0.35 to Re 0.36, despite successive tariff hikes and the withdrawal of promotional offers since early 2013.

Meanwhile, the data segment continued to register impressive growth. The number of data subscribers increased by 20 per cent to 46.58 million as of June 2013, of which 6.79 million were 3G customers. This was a result of 2G and 4G data tariff cuts in select circles along with a surge in demand for bandwidth-intensive services. It also resulted in a 59 per cent increase in data ARPUs to Rs 63 for the quarter ended June 2013.

African worries loom

Airtel is yet to recover its investment in Africa, despite operating in the market for over three years. The operator registered a loss of $106 million for the quarter ended June 2013 as against $124 million for the corresponding quarter in 2012. Political instability in Nigeria and a reduction in interconnection charges in Nigeria, the Democratic Republic of Congo and Tanzania impacted its top line growth. Airtel’s revenues for the quarter under review stood at $1.062 billion as compared to $1.066 billion in 2012. The company’s operational performance in the voice segment also took a hit. Net subscriber additions fell by 82 per cent year on year to 485,000 for the quarter ended June 2013. Airtel witnessed a 16 per cent decline in its ARPU to $5.5, mainly on account of a 21 per cent decrease in voice ARPUs to $4.5.

However, the data services segment witnessed steady growth. As of end-June 2013, its data subscriber base stood at 15.54 million, with mobile users accounting for 24.2 per cent share. The contribution of data services to overall mobile revenues increased by 2 percentage points to 5.4 per cent for the quarter under review.

The road ahead

Airtel is likely to face regulatory headwinds in the domestic market with the Department of Telecommunications imposing penalties on the company.

Bharti also faces major financial risks in the near term on account of the exchange rate fluctuation. Most of the company’s debt is dollar denominated and unhedged against currency changes. A further depreciation of the rupee would lead to significant capital outgo in the coming quarters, thereby constraining overall profitability. However, the operator’s biggest concern is the declining revenue growth in the African market. Slower-than-expected growth would increase the payback period, which will impact its future profit margins. Meanwhile, in India, Airtel’s mobile revenues for July-September 2013 may decline marginally owing to the reduction in national roaming and 2G data tariffs. The decline may be partially offset if the operator continues to hike voice tariffs across circles.

Although Airtel’s better-than-expected quarterly results will elicit investor interest, a cautious approach would be in order until the company shows a sustained performance improvement over the next few quarters.