Bharti Airtel has declared its third quarter results. Its Q3 net profit was up at Rs 1,722 crore versus Rs 1,614 crore, QoQ. Its Q3 net sales stood at Rs 6,964 crore versus Rs 6,337 crore. Its OPM was at 42.6%.
Speaking to CNBC-TV18, the management said that the scale of GSM network will grow substantially over the next couple of years.
Bharti is not at a disadvantage to Reliance Communications with respect to spectrum allotment. They hope to reach an amicable solution on the spectrum issue. Bharti expects to be a major beneficiary in Indus Tower revenue plans.
Indus Tower will start delivering revenues from February 1.
Bharti's mobility is at 80% of revenues and margins at 42%. They will focus on affordability play across the country as a strategy. There is continued elasticity and demand in the market, they said.
Current margins are at 42.6% and they will look at sustaining margins at profit before tax. They expect to sustain current revenues and margin growth.
They expect some movement forward on the spectrum issue; Bharti needs more spectrum to ease pressure on growth and that interim spectrum allocation will support growth plans, they said.
Bharti Airtel, Akhil Gupta (Jt MD), Manoj Kohli (President & CEO), Sarvjit Dhillon (CFO, Dir-Strategy), Sanjay Kapoor (Pres - Mobile Services), Atul Bindal (President-Telemedia Services), David Nishball (President -Enterprise Services), speak to CNBC-TV18.
Excerpts from an exclusive interview with the management:
Q: 42.6% EBITDA margins what does work? Is it non-mobility, which has kicked in like last quarter?
Gupta: I think all segments are kicking in mobility as well as non-mobility and I have always maintained that this is a business where one can see scale benefit and we are clearly seeing that. So I think 42.6% pretty healthy.
Q: Record additions in this quarter and 64 lakh subscribers; strong momentum still continuing with net additions?
Kohli: We believe it’s been an outstanding quarter for us and market is sustaining high growth; market grew by 24 million customers, we grew by 6.4 million, overall the network growth has been dramatic. We have crossed 3,20,000 villages, 4,900 towns, our MOU (minutes of usage) has grown by 5 minutes, which means the elasticity of demand from customers has been very gratifying to our affordability strategy. So excellent market growth.
Q: Can you break-up the margin picture between mobility and non-mobility?
Dhillon: All of our businesses are growing as mentioned and mobility saw 80% of business, so we are seeing in excess of 42% margins and really driven by the growth and the market is growing and elasticity of demand is there. So mobility is leading it. Broadband and telephony we have exceeded 42% and now its 43%. So, all of our businesses are growing in that respect.
Q: Minutes of usage have gone up in this quarter, though ARPUs have slipped a bit. Do you see more divergence between the two and they are moving in the opposite directions, even going forward?
Gupta: I think this is likely to continue; this is a business where one must increase traffic. The recent massive cuts, which we initiated in the market in the outgoing rates are showing that the elasticity is there. There is more traffic and even though the rate per minute and the ARPUs do come down, we have always maintained that doesn’t have too much significance in our business.
Q: The market has been stirred up quite a bit with the Rs 1 plan that you have unleashed; first take us through the rationale of unleashing such a plan. Why did you have to do it?
Kohli: We believe as we go into rural India, which has a 700 million population, we need to bring affordability. As a brand leader in the country, I think we will lead the affordability platform; in this case, not only are we making it more affordable, we are also simplifying the proposition for the customer. Rs 1 local call across the board has been received very well within the last 4-6 weeks, we have seen traffic grow very well and customers have responded well especially in the rural parts of the country.
I have personally been in the villages and I have seen customers being delighted about this change, so I think we are touching the hearts of the customers.
Q: What implications does this kind of a plan have on your operating margins in the foreseeable future?
Dhillion: Our business is based on volumes. This quarter, we have crossed 87 billion minutes on our networks, 10 billion minutes higher than last quarter and YoY 50 billion has gone to 87 billion. So clearly, the elasticity is coming through, as we go wider and deeper, we have an established fixed-cost base-price. That combination by itself is sustaining margins very well and we hope to see that continuing in the future. In the last quarter itself, we added about 15,000 sites. Our financials are observing all of this today and 42.6% margins is a very healthy situation, I think.
Q: You believe that even going forward, you can maintain this kind of a margin profile with the aggressive plans that you are launching?
Gupta: First of all, one needs to define what a margin is. To my mind, EBITDA margin has been misused and taken for too long, because I look at margins as a profit before tax margin, that’s how this business should be looking at. For instance, from the next quarter, we would be converting as far as Bharti Airtel is concerned, a lot of capex into opex with the formation of Indus Towers and Bharti Infratel, so the passive infrastructure is going out. So I do believe that the profit before tax, which is the real margin we will track, I think that should be sustainable for sure.
Q: You think so?
Kohli: I am sure it will, I agree with Akhil Gupta that now it is the issue of revenue and net profit before tax and I think our margins on net profit before tax should show a positive trend, because our economies of scale, efficiencies are improving, our cost structure definitely is getting linear, so we should see that improvement.
Q: What is happening on the spectrum front, market is very worried between one-month back and now has the situation changed at all?
Gupta: I have to be a bit constrained about what we say on spectrum since the matter is subjudiced. I think the big debate is out in the open, a lot has been said and written, so I do not think individual players should start commenting, but all I would say is that there is some movement forward with the TRAI norms. We are getting spectrum in ten circles, we should get entitled to a few more circles within the next couple of months. I think things are moving forward and we always maintained that every time there are controversies like this, at the end of the day, you do come to a solution, which is amicable and fair to all concerns.
Q: What is your expectation, when will you get more spectrum for a market like West Bengal, for example?
Kohli: We have been entitled with spectrum in ten markets including West Bengal. So our capacities will improve, our quality of networks will further improve and I think this will set us up well for next year’s growth.
Q: What about key markets like Delhi, Maharashtra, Tamil Nadu, Rajasthan?
Kohli: Many of these key markets have been covered in the ten entitlements we have.
Q: Adequate spectrum?
Kohli: Yes.
Gupta: Adequate is always a bit dicey; I think you can always do with more. We do believe that we should be getting more, but I think there is improvement, we are getting some that would ease the pressure in terms of the growth, which we have.
Q: What is the problem it raises, the metros where you need more spectrum or the non-metros?
Gupta: Namely, it is the major cities where there is more density, those are always more spectrum constrained.
Q: You are okay with the non-metros in terms of spectrum or is there a problem or availability issue that arise?
Kohli: They are CBD areas where we have intensity of traffic and that is where the problem is - in smaller towns. Villages, I think the situation is fine.
In the CBD area, we are investing more money in terms of more sites, more indoor solutions etc. which is helping.
Q: Let me put the question differently. You cannot answer what you will get, that’s for the regulators to decide, but on current reckoning, can you deliver this kind of growth for the next four quarters on current available spectrum or if you don’t get additional spectrum, this kind of growth will be throughout?
Kohli: We believe that interim allocation as per the TRAI norms will definitely support our growth plans.
Gupta: There is a relief as I said with the ten circles getting some more spectrum. There is a definite relief; whether this is ideal? Perhaps, no.
But we will find our way around and all I can assure is, we will not let this growth suffer whatever it takes.
Q: What outlook for margins do you have for the next three-four quarters, given the capex that you have planned?
Dhillon: Guidance is not something that we give. Having said that, our track records shows that with the growth that we are seeing and what was heartening in this quarter is that we grew revenues at 10% and a lot of that has flown through the bottomline obviously.
We do anticipate that we will continue with this kind of growth level. So without giving any guidance on that we hope that we will sustain at least where we are today.
Q: Do you think mobility margins can be held above 40%?
Dhillon: They have been tracking above 40% now for quite a well. Broadband and telephony also has crossed 40%, which is a tele media business. So on current going rate, we are anticipating that that should continue especially with the current volumes at over the next few years. India is very under penetrated, we are only at 27% penetration rates, so we have a long way to go.
Gupta: One thing to notice that from this quarter in fact from February 1, we will be moving on to the payment of passive infrastructure as a revenue item. This percentage on the EBITDA margin will obviously be affected; it will come down but as I said the profit before tax would improve, because Indus and Infratel will provide a massive advantage of cost not only to us but all the operators.
Q: Can you update us what’s happening with the tower business?
Gupta: The company has already being formed and we have got the demerger from the Delhi High Court. Indus Towers, which is a joint venture with Vodafone and Idea, is up and running. The revenue starts kicking into the company from February 1. So it’s absolutely on schedule. They are stepping up the deployment and we expect that we will be the major beneficiaries, because we will be able to penetrate deep down into India now.
Q: Any further plans to unlock value or ascribe a valuation, part stake sale etc. have you given it some more thought?
Gupta: We have already announced that we are raising a billion dollars, with it major investors coming in and there could be some more. But unlocking value is going to show in the business not in the valuation that’s a derivative.
Q: What do you mean by there could be some more?
Gupta: Could be some more investments.
Q: To raise a significant amount?
Gupta: Not too much.
Q: Nothing compared to a billion?
Gupta: Nothing compared to a billion.
Q: What do you make of this scepticism that you see with Bharti in the stock market? I know you cannot determine what the stock price would be, but you also sense that the stock is not outperforming the market in a significant way. What is your sense of the market’s apprehensions at this point?
Kohli: I believe the market needs to focus on data and facts and the data and facts clearly prove that the performance of the company is improving steadily. I think our topline has grown by Rs 630 crore, which is quite unprecedented, the minutes growth has been USD 10 billion higher than the last quarter, the momentum of growth has been capped in all the businesses, the broadband margins are unprecedented at 43%, enterprise business is picking up, spectrum allocations are taking place.
So in my view all these data points should be noted by stock market and I am sure they should be recognised in days to come.
Q: What is the problem, you must have noted that Reliance Communications has done much better as a stock; there is no divergence in reported numbers as such, why this divergence?
Gupta: I understand that in any sector, whenever there are some uncertainties - regulatory or otherwise - the markets are a little nervous. I think markets do like stability in terms of policies and regulation and my feeling is that as I said, we are optimistic that sooner or later there will be an amicable solution to this whole problem, which has arisen, I think that nervousness should go away. What happens to the stock market actually does not really matter too much, because it is dependent on so many other factors than your own performance.
Q: But on current reckoning, do you think the market is right in believing that R-Comm is in more advantageous position with spectrum issues than Bharti, because that is a feeling translating into stock prices?
Gupta: I definitely do not agree that we are at a disadvantage, I will not comment about any of our competitors because we have deep respect for all the competitors. But I am more confident than ever before that in the coming year definitely, we will not only sustain our leadership position, but actually improve it significantly.
Kohli: I believe that our commitment to GSM has been validated by this rush into GSM and the benefit Bharti will get will be higher than anyone else, because our scale in GSM networks is going to grow in the next couple of years. Our managing services innovation will give us great benefits.
The overall capex rates of GSM with GSM’s volumes growing in India will give us definite benefits. So I believe that the propensity to go towards GSM will benefit Bharti to some extent.
Q: You do not perceive any disadvantage in the market place competing with Reliance Communications?
Kohli: On market place, we are a strong execution machinery and I think we execute everyday, we have been in the market everyday.
Gupta: Reliance has already been there, it is not that they are new. They are already there, each one of these players and as I said we have deep respect for their abilities for all our competitors, but we are very confident that our leadership will actually widen the margins.
Q: Regardless of how this spectrum business finally pans out?
Gupta: Yes, as long as we keep doing our things right, I am sure we will keep up our leadership.
Q: I was asking Manoj Kohli about the Rs 1 plan; how is it working and what impact or penetration have you had so far?
Kapoor: If you really look at this quarter, there’s been stimulation on the new customers who have joined the bandwagon, 6.3 million is the highest we have ever done. The demand stipulated on the prepaid side of the business, where Rs 1 has done the trick with 15 million customers, who moved from almost Rs 2 plan to a Rs 1 domain and the percentage of the outgoing calls which went up. I think all three stipulated and did the magic and therefore an 11% growth that we have had, we grown 49% YoY basis and I think it’s been a stupendous quarter.
Q: What about margins on the mobility front?
Kapoor: Well sustained, we are sustaining over 40% for the last 4 quarters now and also the fact that we have grown 3.2% over the last one year is a phenomenal growth on the margins.
Q: There is a quite a bit of expectation on the DTH front, can you just give us the detail plans of the rollout?
Bindal: We are getting ready for a very impactful media launch. In the first half of the fiscal year, preferably the first quarter itself should see us get into the market with both our IPTV (Internet Protocol Television) a well as DTH offerings. We have got the license in place, we have got the 6 transponders in place, currently the plans are an effort to ensure that we have a plus one on almost all parts of the value chain, so we are excited.
Q: There are two well-entrenched players and there’s one other giant, which is getting in, what will you do to shake up the market to make your entry meaningful?
Bindal: To my mind, I think this market is just about to begun, the potential is huge, if one looks at the number of towns. For us the benchmark is what we have been able to do very successfully over the years with prepaid, which has really been underpinned by three things - the great brand, customer experience and a distribution expertise and strength. We believe that those three together should really help us in opening that market wide open. I don’t think competitive intensity is an issue at all there. I think to ensure each of these three aspects is really a plus one or plus two over everybody else that is.
Q: How are things on the enterprise front - international voice and data?
Nishball: I think on the international voice and data front, we have seen very good results in this quarter. The volume for international long distance continues to grow, so YoY we have about 50% increase in international long-distance volume.
International data actually is the thing that has grown the strongest, though we have seen a doubling of our international bandwidth for international private lines as well as internet services since the beginning of this year. A lot of that has happened in the last four months since we closed the i2i transactions where we took four ownerships of that cable asset.
Q: What about QoQ how do the numbers stack up?
Nishball: In QoQ we are seeing very good volume growth, I think about 17% on national long distance and 18% on international long distance. As I mentioned earlier, the international data business also has really hit the accelerator since their completion of the i2i acquisition.
Q: What are margins like on the enterprise front on this quarter?
Nishball: On the corporate side, we have very steady margins above 42% reported this quarter and about the same in the last quarter. So we are very steady on the carrier side, there is some market pressure as well, as I think a strategy which we are driving to increase volumes to drive unit cost and pass the benefits on to our customers, particularly since about 50% of our total carrier volumes is group traffic.
Q: Sustainable, you think a 42% margin profile?
Nishball: On corporate, yes.
Q: What’s happening on the broadband front? Can you update us?
Bindal: I think it’s been an excellent quarter in terms of the strategy flowing through to the results. We have expanded the margins nicely; we are now sitting at 43.4%, and yet another quarter where we delivered an incremental margin larger than the incremental revenue. So the revenue and the business efficiency flow is coming through. All this is coming because of the broadband penetrations very steadily moving up; we have moved that up almost by about 2% point; if one looks at our home segment and by more than 0.5% point across the entire population.
There is a huge focus on the SMBs, the small and medium size businesses have helped us to sustain the ARPUs so they have remained much the same in the same ballpark area. So it's an excellent business strategy flowing into execution where the focus is on classes and not masses; it's not that there is going to be a wide scale large expansion, but we want to niche target very specifically and sharply and then ensure that there is value being delivered to those.
Going forward, the broadband strategy is going to be delivered on the back of a technology upgrade. We've got 8 Mbps plans and others very nicely coming through. The SMB’s focus, which would become the one Airtel window where we would provide all the solutions and services to these customers and of course media as we talked about; I think that’s a future of telemedia.
Q: With the kind of aggressive plans you are rolling out now, how much do you expect to garner by way of incremental minutes of usage and how much will ARPUs take away from that growth you think, going forward?
Kapoor: If you look at our minute growth this quarter, it clearly has spelled out that there are segments in the market that are still elastic and we believe that some of the moves that we have made subsequent to the Rs 1 that we did on lifetime value is again going to touch another 15-16 million customers and one will see some impact of elasticity falling through. It will come across for sure.
Going forward, and as we go to rural India, we have sustained the minutes. Today about 24% of our base comes from rural India and incrementally about 35% of our customers come from rural India. But even going forward, I think the minutes have been sustained. So I guess that affordability story is carrying through usage increase even in rural India as we penetrate and proliferate.
Q: How much more will ARPUs comedown with these kinds of plans?
Kapoor: We have always believed that it’s not the ARPU game that we play. We believe in our three line graph and as long as that three line graph moves in the right direction, we are never worried. We believe that we are a minute factory and we concentrate both the realised price and the rate per minute that’s what matters to us.
Q: How worried are you in those markets where Reliance Communications will make its GMS foray?
Kapoor: It’s very interesting if one looks at our gap with the closest competitor today, the closest competitor is about 14 million customers away and if one looks at the same charts about two years back, the gap was much narrower. So the gap has only widened in the last few months or few quarters and I think that’s gone to our advantage and Reliance Communications has been in the GSM trade for a long time. So even in those markets, we have gained over the last many quarters.
Q: How do you see the carrier business shaping up? Did you see sustaining pressure there, which might eat away or erode your margins even more going forward?
Nishball: I think, the carrier business is really a business of scale, unit cost and coverage and really that is what we are focusing on. YoY 80% growth in terms of our national long distance volume, 50% growth on international and more than doubling of our international bandwidth for data. From a coverage stand point, we are now covering almost 70,000 km of fiber throughout the country. We have also increased a number of interconnections into the fixed line networks.
So we have grown by more than 150% this year, so as long as we are driving the volumes in unit cost and it is all flowing through to our revenue increase, even QoQ we are looking about 30% topline revenue increase, inspite of significant pricing pressure, I think we are very comfortable that we are achieving our carrier strategy.
Q: Can you give us a firm date for the DTH launch?
Bindal: Most definitely we are trying to target the first quarter of next year.
Q: That’s April to June, can you narrow it down a bit further for us?
Bindal: I’m afraid it won’t really be possible for me to go much sharper than that, but I think each and every part of that value chain is being planned and programmed right now.
Q: And it’s a big national launch?
Bindal: We would start with a focus launch, which would be national in terms of its width, in terms of numbers of cities that we choose, we would most definitely like to get it down absolutely right first and then roll it out. As one can well imagine, unlike the telecom network, you don’t have to roll that network out on a city by city basis. Once you have the transponders up in the sky, it’s really a function of the distribution chain in place and so on.
So from the capability and skill set point of view, we would be there from day one to roll it out nationally, but just purely from a rigor of strategy and ensuring that you get everything first time right. We may really have a slightly phased out approach and priorized approach.
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