No immediate threat to profits, margins: Bharti Airtel

Q: So is this the trend that we are going to see continuing in the next couple of quarters as well because 35 down to about 30, is this something that we could expect QoQ?

Gupta: No, I think the fundamental point is that since today the companies have a choice of a fungibility between capex and opex depending on who chooses what model, the EBITDA margins are no longer comparable between periods between different companies. If you look at our EBITDA margins, a part of the EBITDA margins are obviously sitting in the other segments like the passive infrastructure, the national long sistance side and that is why when you see it on a consolidated basis, we have the same margins. So I would not say that margins are under pressure.

As I have always said, we have a situation where on one hand there are a lot of economies of scale, which kick in but surely the tariffs are under pressure, they will always be under pressure in very intense competitions, but we are holding up very well.

Q: MOU is up 5% QoQ beating street expectations, but the revenue per minute is down marginally, does that worry you?

Kohli: That does worry us because we see an excellent consumption of new minutes by customers. I think consumption in the last quarter went up by about 33 minutes in one quarter over a base of 65 million customers. This quarter consumption has gone up by 27 minutes over about 72 million customers, which I think shows that the propensity of customer, the elasticity of customer usage is very positive. So we believe that even the new customers, incremental customers coming from rural areas are starting off well. They are using the phones very well. Earlier we thought that the gestation period will be longer, but now the rural customers are picking up traffic very well. So we are actually delighted by this elasticity, which continues to show up.

On per minute revenue, we are fine because Access Deficit Charges (ADC) has been passed on from April 1 onwards, which actually has made this impact.

Q: 41.5% margins - do you think there are more levers for margin expansion? I can think of many levers for margin erosion over the next couple of quarters especially on account of regulatory issues but are there more levers for margin expansion?

Dhillon: Before we go into that, I think first it has been a very satisfactory quarter for us. Clearly the engine of growth has been the wireless side with 7.5 million adds. We have crossed in excess of 120 billion minutes on our networks from a 100 billion last year. So that’s clearly having a play in the marketplace, we also had a couple of interventions, which are designed by us in this quarter on the wireless side with the STD and roaming. So that’s by design, which had its impact on the rate per minute. When all flows through and we see the balance pact taking place, to say that we have a stable margin 41.5% versus last quarter is a very healthy picture from my point of view. These issues of we will be under pressure from quarter-to-quarter, there is nothing new in this; it has been going on for many quarters. So there is nothing else I can add actually on that point of view.

We will continue to expand our business model across the country, we will look at niche businesses in the telemedia side and the enterprise side; from that point of view we are in a very fairly stable position. Going forward obviously a lot of that is flowing through the net profits of the company.

Q: If I can pick up on the point that Sandeep Gurumurthi was talking about in terms of drivers as far as margin erosion is concerned, the uncertainity on the policy front because there are several things that could really skew the picture significantly. How worried and how apprehensive are you at this point in time about the policy uncertainity?

Gupta: I am not aware of any such big things, which can skew the picture in a significant manner. There will always be some debate about some increase in spectrum charge so on and so forth, but I am absolutely clear that there is nothing on the horizon, which can significantly erode profitability or margin detrimentally. So I don’t agree with the hypothesis that there are things in the pipeline, which can completely erode in the problem, I don’t think so.

Q: What could the impact be if what is being planned on the policy front does actually get rolled out. What are the back of the envelope calculations, if any?

Gupta: The fact is that as Mr Sarvjit Dhillon said, there is nothing new in this. These things have gone on, as the industry progresses there have been some pressures on the revenue front for the government on these matters and as I said, this is a business, where you can keep increasing and improving your efficiencies. So on one hand you can keep doing that and on the other hand there is very intense competition, there are some of these pressures but what we have seen over a period of time is that this needs to balance out.

Q: On non-mobile margins, which have done very well and they continue to do well in a sense they are the key for whatever margin growth that we have seen, do you see that going forward as well now more so, because you are looking at a Direct-To-Home (DTH) launch this quarter hopefully?

Bindal: We believe we will be able to consolidate it and grow further from here as we have had a cracking start to the year. The non-mobile growth as well as profitability and efficiency continues to come through. If you look at the broadband revenues, they have grown almost 48% over the same quarter last year. We are the largest and the fastest landline growth company now in a quarter, where otherwise the growth has actually declined and it has been a negative quarter and all this has come with margins expansion, where the EBITDA has actually grown by over 100% over the same time last year.

If you were put on top of that the DTH plan, then I think our entry into the media segment that would be almost a second prepaid in the mobile revolution, which would takes place in this country. So we believe we are at a very healthy consistent stage now where we have 42% margins and that is a very healthy level of operations.

Q: A word on the enterprise side of it?

Nishball: On the enterprise side, we have seen consistent growth of about 64% topline growth versus the same quarter last year. At the same time, the EBITDA margin has doubled since the same quarter last year. So we are seeing strong consistent growth; we are able to sustain margins in the highly competitive market by continuing to drive our network investment almost 80,000 km of fibre in the country, major new international cables.

Q: How much rural traction do you see going forward? Do you think this is going to be sustainable, the kind of subscriber growth you have seen. What is the outlook because we have seen pressure coming in, competition is intensifying, and it’s getting fearsome? What’s the outlook, both on additions as well as tariffs?   

Kapoor: Before I get to your question, I will touch base on some of the important things that need to be brought to the limelight. First and foremost, our dominance in the market has gone up; we have moved our share of net additions of customers from 25.5% to 28.7%.

Second is the size; now we are the fourth largest country operator in the world after the two Chinese operators and AT&T; that makes us very large.

The third important thing is that despite of getting into rural India with more than 50% customers now coming out of rural India, we are still holding on to our ARPUs and the minutes are still growing, which is a positive trend to say that the economy that has been set for us 1.1 billion minutes a day seems to be sustaining.

Finally, the value added services revenue this quarter has gone up to just under 10% which is a record in the last 12 months which means also there is traction around this area.

Now to answer your question - looking at the trends in the past, we have not migrated to 2.5 million at one go. We started with less than half a million to quarter of a million to one million and we been grown. There is no reason for us to believe that this is going to slowdown especially in an economy which is only 26% penetrated. I clearly see that this is a trend and has got great track record and its continuing and we are very bullish especially with rural penetration only touching 8-8.5%. So there is a huge opportunity ahead.

On the tariffs, I do believe that it is comparative, like my colleague said earlier. We will always have that pressure, but I do believe that we are probably close to the bottom. I do not see tariffs can drop by a huge margin from here. It might be few paise here or there; it can’t be a major change from where we are.

Q: The story that has dominated headlines for almost 4-5 months now is the MTN. You got engaged but you broke up just before the marriage could actually take place, now there is a whiff and a suggestion that possibly the runaway bride could be caught and wooed again, is that a possibility?

Akhil Gupta: MTN, since the past 6 months has been a subject of intense speculation the milers, conjectures, everybody’s own interpretations - so I don’t think I should add more to that confusion and speculation.

Q: Clear the air then, is there a possibility that you could resume the conversation with MTN?

Gupta: It’s difficult for anyone to say what are the possibilities but I would like to stick to our company policy that it’s very clearly established that this is speculative. So we would like to stick to the company policy of no comments on speculations.

Q: Will there be a cooling off period before you will actually change this point if view or this stand that you have currently taken?

Gupta: The answer to that will have to be same because that’s again speculation; so let’s put no comments on that.

Q: Do you think the synergy still exists between Bharti Airtel and MTN, a lot of analysts we have been speaking to over the last couple of months do believe that there are a lot of synergies; both are operators that get to expand in 21 markets. The synergies still exist and if what anything that has changed is that since the last two months is the MTN share price has fallen significantly and to that extent, easier for you to do a deal now, so that hasn’t changed?

Gupta: The synergies have nothing to do with share price and valuations. Obviously there are some synergies and that’s the reason why we initiated a dialogue with them and we very transparently announced why we had to withdraw. So nothing has changed as far as that synergy is concerned and the fitment between the two companies is concerned. That’s very much there.

Q: So nothing has changed as far as you wanting to change the structure that you had originally rejected and the no eventuality would be open to going back to the other structure, so you still maintain that whether its MTN or any other company, you are not open to any idea of being a subsidiary even if that means that the promoter gets the main control over the combine entity?

Gupta: I don’t think our positions have changed; we were very transparent when we withdrew, but what would happen in future? As I said things are very hypothetical at this stage. I think its for MTN really to decide what they want to do.

Q: If they were to come back to you and say that we are okay with the structure that you had proposed to us on the basis of which the term of sheet was signed, would you still be willing to go ahead?

Gupta: Again that’s speculation. Therefore, no comments; we will be wrong to start commenting on piece-meal, so let’s wait and see how things go.

Q: So you haven’t started the dialogue right now?

A: It’s for MTN; they should come and start the talks.

Q; It is for you as well, you were talking as well, has any dialogue happened, that’s not speculative, you could say you have or you haven’t?

Gupta: No dialogue, we have to wait for MTN, they have to announce what they want.

Q: Have feelers been sent out from either side?

Gupta: It’s too early because they have just done that, we will have to wait and see what their move is.

Q: Let us get to the regulatory issues -we spoke about it briefly a little while ago. A whole host of that, I think there are at least three-four regulatory issues that could significantly impact which possibly won their last quarter 3G. Where we were at 3G one year back and where we are today, there is no policy yet, but when there is going to be one it is pretty certain what it is going to be? Base price of Rs 2,200 crore - that is double of what it was originally suggested, the fact that now new foreign players will be allowed to participate in 3G auctions automatically that is going mean that we are going to look at bidding war and the fact that now all bidders will have to match the highest bid as against the second highest bid which was originally recommended by the regulator. On all three accounts it is very clear you will have to bid more than what you must have originally thought for 3G spectrum, doesn’t that make things difficult for you?

Kohli: We have not finalized a 3G plan because the government policy has not finalized. How government wants to allocate 3G spectrum is the final prerogative of the government. We have always said, we welcome new competition; if government want to bring in new players that is fine with us. We would surely like to execute this plan as soon as government policy is formalized an auction or whatever methodology government wants to follow is finalized. So we await the final policy.

Q: One time imposition of a spectrum acquisition fee for allotment beyond 6.2 megahertz. I know there is a lot of politics surrounding it as well but it’s almost clear that this is going to happen. What is that fee going to be? There are lot of circles in which you are sitting on spectrum beyond 6.2 megahertz. This question is both for you Mr. Dhillon - What could be the financial impact of such a move and Mr. Kapoor - how many such circles are there in which you are sitting on spectrum above 6.2 megahertz?

Dhillon: I think that is speculative at the moment. Like Mr. Kohli said, it’s similar to 3G. We will have to see what comes out; this is in the foray at the moment - we will have to wait. Once we assess that and it comes through, we can then decide how we are going to handle it. So at the moment it’s difficult to say what’s that going to be because we don’t know.

Kapoor: I ditto what Mr. Dhillon said - that it’s speculative at the moment and it’s an industry matter that I am sure industry will deal with collectively. Spectrum although is very important ingredient for us to grow, I think up to now, we have been successful to get the spectrum that’s required to make our business stick. In about eight circles, we have got some additional spectrum and about seven applications are pending for us. Hopefully we should be able to get that clear as government clears up more files on spectrum.   

Q: Fifteen circles over a period of how many months - do you think you would have gotten spectrum because there was a lot of uncertainty at least two quarters back as to where the Bharti Airtel will get a distance spectrum or not, you are saying that eight circles you have already got and seven files are pending, you are hopeful of getting it shortly, is that right?

Kapoor: Yes.

Q: What are the seven circles, does that include the key metro circles as well like Delhi?

Kapoor: In Delhi, we have already got some but I do not remember the circles offhand. All I can say is that in the last two quarters we have been successful to get about eight circles and hopeful of the balance seven as well.

Q: Since we are talking about politics and since we are talking about policy, any apprehensions about the emergence of the Samajwadi Party as a king maker at the Center, what is your response and reaction to that?

Gupta: I believe that the matters about policy which affect the industry must be dealt fundamentally by the industry association because it is not appropriate for individual players to start airing their views because we have an association which is called Cellular Operators Association of India (COIA), Association of Unified Telecom Service Providers of India (AUSPI), they are the ones who have to take it on behalf of the whole industry.

So they need to engage with the government on whatever matters developed and that is the right forum because it is fundamentally wrong for individual players to our mind to start commenting on matters, which affect the entire industry because once there are industry matters, it is best left to the association.