Does Airtel Ebitda flatter to deceive?


For the past two quarters, Bharti Airtel Ltd has improved operating profit margins despite a sharp decline in the growth rate of its data business and continued sluggishness in the voice business. So, although revenues of the India mobile business rose by only 9.1% year-on-year in the June quarter, earnings before interest, taxes, depreciation and amortization (Ebitda) rose nearly 20%.

Ebitda per mobile customer rose nearly 8% year-on-year, which the company claimed was because of better economies of scale and cost control. But investors should note that some of these benefits are accruing because of the company’s large investments in acquiring spectrum. Costs related to this are reflected below the operating profit line, in higher depreciation and interest costs, making the Ebitda a sort of a mirage.

Earnings before interest and tax (Ebit) of the India mobile services business rose just 2.2% year-on-year. And Ebit per mobile user fell by around 8%.

The Street, however, typically focuses on the Ebitda line, and the beat on that front could help Airtel shares rally when trading resumes on Thursday.

It can also be argued that the high depreciation and interest costs are on expected lines, whereas the reported Ebitda was higher than estimates.

A higher proportion of data revenues results in higher overall margins. Besides, a large part of the gains in operating profit is because of a significantly lower outgo related to 3G intra-circle roaming arrangements with other operators. Now that Bharti has acquired 3G spectrum in the so-called gap circles, it doesn’t have to rely as much on other operators. But, as pointed out earlier, while the benefits from this move accrue in the company’s Ebitda, part of the costs is captured below the Ebitda line. Profit growth was also helped by an unexplained fall in employee costs.

Meanwhile, in the mainstay voice business, the company’s price realizations improved sequentially, as expected. Revenue per minute rose by 0.72% after successive declines in the preceding four quarters. This suggests better price discipline in the voice business, which is a heartening sign for investors. Volumes in the voice business grew a sluggish 2.2%, which is on expected lines, given the price increase.

In the data segment, which has been driving overall growth lately, price realizations continued to decline, although at a slightly lower pace. More importantly, the average revenue per user (Arpu) has increased by 2.8% sequentially and as much as 11.9% year-on-year. The company has been successful in growing usage by customers, which has more than offset the decline in prices. A year ago, its data customers consumed about 700 MB of data on an average; this has risen to over 900 MB.

And since Airtel and its peers have been in no great hurry to cut tariffs and attract many more new users, growth of the data segment has fallen. Year-on-year growth fell to 35% in the June quarter, from 45% in the March quarter. But as pointed out in this column earlier, the strategy seems to be to extract as much value as it can from the existing customer base, rather than cut prices drastically ahead of Jio’s launch.

It’s inevitable that data prices will fall sharply when Jio launches. Until then, the incumbents are content with lower growth rates at higher Arpus and higher profit margins.