How Bharti Airtel is managing a telecom turnaround?

Bharti took a huge hit in the Sep-19 quarter as it wrote off the entire AGR dues in its P&L account. Paradoxically, that also marked the bottoming out of the Bharti stock price.

May 22, 2020 01:05 IST India Infoline News Service

A little over 6 months back, Bharti Airtel found itself in deep trouble. The Supreme Court had imposed a massive Rs33,000cr levy on Bharti Airtel towards AGR (adjusted gross revenue). These were retrospective from 2003. Bharti took a huge hit in the Sep-19 quarter as it wrote off the entire AGR dues in its P&L account. Paradoxically,  that also marked the bottoming out of the Bharti stock price as shown in the chart below.

Data Source: NSE

If you look at the chart of Bharti Airtel, there are 3 distinct price points flagged. The first flag marks the bottom of Bharti after there was finally some clarity on the AGR issue. That represented the point where uncertainty was behind the stock. The second flag represents the rally from October to February when the stock gained over 50%. The third flag represents a new high on the stock as the stock recouped 50% from the pandemic lows in late March. What explains this sharp turnaround?
 
At a macro level, the lockdown favoured telcos
 
That was a surprise bonus for telecom companies. With Vodafone Idea having lost most of its mojo, the field was open to Bharti Airtel and Reliance Jio to make the most of it. The longer than expected lockdown meant that work-from-home (WFH) became an alternative business model. Jio and Airtel were best positioned to give a boost to their voice and data business. The lockdown meant that homes and offices had to invest more in voice and data usage. With a war chest in place for Airtel and the industry down to a virtual duopoly, the lockdown gave them the much needed boost.
 
Bharti Airtel returns to positive EBIT
 
In the telecom business, EBIT is a better metrics compared to PAT. This is more so in the current telecom scenario where capital costs are still high and there are huge liabilities in the form of AGR and license fee payouts. The EBIT of Bharti Airtel has shown a smart turnaround in the last five  quarters as shown in the table below.
Financial Quarter Earnings before interest and tax (EBIT)
March-2019 Rs(-874) crore
June-2019 Rs(-1,242) crore
September-2019 Rs(-1,145) crore
December-2019 Rs(-825) crore
March-2020 Rs26 crore
 
Data Source: Bharti Airtel
 
The turnaround in the EBIT of Bharti Airtel was driven by two factors; quality market share and sharply higher ARPUs. We shall look at ARPUs separately and focus here on the market share quality. For the Mar-20 quarter, the subscriber base overall was flat. However, the better yielding 4G data subscriber base grew by a healthy 7.2%. As of Mar-20, 4G subscribers account for a little over 52% of the total subscriber base. What is more interesting from a futuristic perspective is that Airtel garnered more than 40% of the estimated incremental share in 4G subscribers. That puts the turnaround in context.
 
Real turnaround for Bharti Airtel came via ARPUs
 
Average revenue per user (ARPU) has been one of the most important metrics to evaluate the profitability of a voice / data company. Here is an ARPU comparison of Airtel and Jio.


A little over 6 quarters back, Airtel had seen its ARPUs dip below Rs100. The subsequent hike in tariffs and the elimination of low value customers helped Bharti Airtel to substantially improve its ARPUs. This is evident from the fact that Airtel’s ARPUs have increased by 20% in the last four quarters itself. The good news for Bharti Airtel appears to be that it has managed to gain market share despite higher tariffs leading to improved ARPUs.
 
For Jio, the problem is its big focus on the Jio Phone subscribers. These are low value customers and are putting pressure on  ARPUs. Bharti is also attracting the interest of Indian mutual funds with an infusion of over Rs700cr into Bharti Airtel in April. For the time being, the combination of the lockdown, better ARPUs and the duopoly shift is working in favour of Bharti Airtel.

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