Bharti has a problem with growing its volumes: JM Fin

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Bharti has a problem with growing its volumes: JM Fin

Sanjay Chawla, senior telecom analyst at JM Financial analyses Bharti's Q3 performance. He tells CNBC-TV18 that what is disappointing with Bharti results is that Ebitda margins have shrunk 150 basis points quarter-on-quarter.

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Excerpts from Markets Midday on CNBC-TV18 Watch the full show » ALSO READ News and Notices about Bharti Airtel See interviews with Bharti Airtel Management See what other Experts & Brokerages are saying about Bharti Airtel See previous Results of Bharti Airtel

Sanjay Chawla, senior telecom analyst at JM Financial tells CNBC-TV18 that what is disappointing with Bharti results is that Ebitda margins have shrunk 150 basis points quarter-on-quarter. "The main businesses are intact, it is the fixed-line business, pay-TV and enterprise long-distance business apart from expenses at corporate overhead levels that's giving the company the pain," he says.

Chawla says that especially for Bharti, it is becoming a challenge in terms of growing the volume. "In fact, minutes growth rate for the whole industry is coming down to single digit levels," he says. According to him, the ARPM or the tariffs increases which have happened are dampening the usage.

Below is the edited transcript of the interview. Also watch the accompanying video.

Q: What according to you disappointed on the results for Bharti Airtel the most for this quarter and what do you think the guidance would be going forward?

A: In terms of performance, revenues have turned out to be slightly above our expectations. It's the Ebitda which has disappointed because of the margin pressure. Ebitda margins were down almost 150 basis points quarter on quarter. But interestingly, the disappointment is not coming from the major business segments which are the India mobile business, India tower business as well as the Africa mobile business. These three major business segments account for more than 90% of Bharti's consolidated Ebitda and these three businesses have actually performed in line. So the disappointment is really coming from the other French businesses if one may call them which are basically the fixed line business, the pay TV business, which is still pretty small, the enterprise long distance business as well as the expenses at the corporate over head level.

Q: Broadly, the take away appears to be that mobile volumes in India are down but revenue per minute has gone up. So would you say that the company and the industry have reached a stage where increased tariffs will come only at the cost of higher subscriber and so they are probably hitting some kind of a barrier in terms of increasing tariffs?

A: At the overall level, that's turning out to be true because the industry minutes growth rate or the volume growth rate is coming down now. But this is more true in case of Bharti given its size and scale. If you look at Idea's numbers, the minutes growth rate was 7.3% quarter on quarter where as in case of Bharti, the India mobile business minutes growth has been less than 1% quarter on quarter. So there is a significant difference between the performances of the two companies. For Bharti, it is becoming a challenge in terms of growing the volume. Part of that is, of course as you said, the ARPM or the tariffs increases which have happened are dampening the usage somewhat. In future also our expectation is that minutes growth rate for the whole industry would come down to single digit levels. But if the revenue growth rate has to be in double digits then pricing will have to play a much important role which as of now we don't think anybody on the street has factored.

Q: There are some brokerages which are actually concerned on the declining market share for Bharti in terms of the India operations. Is that a concern that you share as well?

A: We also share that concern because Bharti's revenue market share in India has been declining for the last 9-10 quarters. We expect the similar trend to continue in future as well, at least for the next one to two years. But the degree of difference in market share or the growth rate between Bharti and the sector, that we expect to narrow down in the coming quarters. So Bharti's mobile business in India will continue to grow at a lower rate compared to the sector. But the difference is going to narrow in coming quarters. We will have to wait and see but that's the key meeting to watch.

Q: So what would your call on Bharti be in particular and what would your pecking order be in the entire telecom space? Just take us through that.

A: As I said, the Ebitda disappointment for Bharti this quarter has come in primarily from some businesses. The major businesses continue to perform in line. Now overall, there maybe some trimming down of Ebitda and earnings forecast for Bharti, but in terms of the decline in target price or the value of the company, we don't expect a significant dent in that. The reason is that as I said, the major businesses are continuing to perform in line at the Ebitda level. Secondly, the capex is turning out to be lower in India which is also probably driven by lower volume growth. So that should also help free cash flow as well as the value of the company. Thirdly, one should also start factoring in some positive impact from the Supreme Court verdict recently because a lot of the target prices have built in some downside on account of license renewal cost. License renewal cost may come down if pricing is benchmarked to the 2G auction price which is going to happen in the next three to four months.

Q: But that will be countered by the TRAI perhaps getting away from that forbearance policy and becoming more active in tariff guidance if not fixing?

A: These are still very early days in terms of giving up tariff forbearance because I think TRAI probably is missing out the fact that other than Bharti none of the other players in the industry are earning a return on equity which is in double digits. So in that light obviously it does not make sense to cap the tariff or regulate the tariffs. So net-net our view is that at the current levels Bharti is not a sell and it does offer a decent 10-15% upside on a 12 month basis. But our top pick remains Idea which we expect would outperform Bharti by at least 10% points in the next 12 months.