Bharti Airtel’s Q2 shows it can still put up a good fight against Reliance Jio

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Bharti Airtel Ltd staged a commendable show in the September quarter (Q2) as it moved to weather the onslaught from Reliance Jio Infocomm Ltd. Revenue and profit numbers at the consolidated level were ahead of analysts’ forecasts.

Bharti Airtel’s 12% year-on-year drop in consolidated revenue to Rs21,777 crore was less severe than what the Street had pencilled in. But with tight cost control, the operating profit of Rs8,003 crore was 15% lower year-on-year, but 6% higher than 13 brokers’ average estimate on Bloomberg. Therefore, operating margin at 36.4% was a substantial 170 basis points higher than estimates.

One basis point is one-hundred of a percentage point.

While some credit must be given to the improving operating performance of its Africa business, it was the India mobile services business that did well amid clouds of uncertainty. Operating margin at 34.4% came way ahead of analysts’ forecasts. Average revenue per user at Rs145/subscriber/month was on expected lines, 6% lower sequentially and 23% lower year-on-year. However, the fourfold growth in mobile data traffic and 33.6% growth in broadband customer base was commendable. Voice and data usage per customer improved both sequentially and on a year-on-year basis.

Another interesting feature in Bharti Airtel’s results was the Rs6,100 crore capex for the quarter. According to a report by Kotak Securities Ltd, this adds up to a capex of Rs11,200 crore, that is tracking well ahead of the annual guidance, given by the company. Nearly 80% of the capex incurred in the first six months was spent on India’s wireless business. “Airtel’s response to Reliance Jio disruption has been sure-footed at least as far as costs, capex and capacity creation are concerned,” says the report.

In other words, if the June quarter signalled wearing off of the Reliance Jio impact, the September quarter has reinforced the company’s commitment to forge ahead in the mobile services business rife with cut-throat competition.

However, it is not yet time to rejoice. According to Gopal Vittal, managing director and chief executive (India and South Asia) of Bharti Airtel, “The financial stress in the industry continues due to double digit revenue decline and will be further accentuated by the reduction in interconnectivity usage charges (IUC) rates in the next quarter.” Note that the telecom firms, other than Reliance Jio, have been disgruntled over the 57% drop in IUC rates effected a month ago. This may lead to a loss of revenue and a consequent drop in profitability in the near term.

That said, Airtel has tried to hold its own against Jio in the past two quarters, giving investors hope that it can stage a comeback of sorts. This is also seen in the stock’s upward trajectory more recently.

A note by PhillipCapital (India) Pvt. Ltd says, “While the next quarter will see challenges on account of IUC cut, but with subscriber gains from smaller operators, some market tariff improvement, seasonally stronger quarter Bharti should manage its EBIDTA trajectory well. We remain positive on Bharti.” Ebitda is short for earnings before interest, tax, depreciation and amortization.