Bharti Airtel may return as leader of the pack in FY14

The sun is nowhere near setting on the telecom sector. Though the decade-long boom in the voice market may be ending, the sector holds plenty of promise.

Like every economy, India needs to build its virtual infrastructure, along with the physical. And, the telecom sector is preparing to deliver on this.

So, the market is gradually turning positive on the largest company in the sector, Bharti Airtel, which is expected to recoup some of its lost revenue and subscriber market share.

Though these are still early days, the 'hostile regulatory environment' seems to be improving. This is reflected in the 22 per cent jump in Bharti's share price over the last three months.

Though it would be a long haul before the industry returns to the high growth seen in the past, the worst is over; Bharti Airtel's earnings are likely to show a marked improvement in FY14.

Operationally, the biggest overhang on the sector was the massive 40 per cent erosion in call rates through the last 18 months.

Sanjay Kapoor, Bharti Airtel's chief executive for India and South Asia, believes no matter how efficient a company is, it's difficult to combat such price erosion.

After the cancellation of 122 licences last year, consolidation has begun and the destructive pricing environment is coming to an end. Kapoor believes realisations would improve, as the gap between headline tariff (90 paise) and realisations (42 paise) is narrowing.

"Whenever there is a recovery in prices, the benefit flows straight into the bottom line and any improvement in realisations per minute would be earnings-accretive," he says.

Though subscriber additions have declined through the last few months, Kapoor believes this is good, as the concept of using and throwing SIM cards is history.

The new activation process, which would enable distributors to activate connections only after physical verification, would prevent churn and lead to consumer stickiness.

Rumit Dugar, vice-president, institutional research (information and telecom), Religare Capital Markets, says what has been happening through the last 12-15 months, in terms of competitive intensity and pricing, would change, as players are scaling down presence. Rates are expected to rise.

Axis Capital expects Bharti's revenue per minute (RPM) to increase 3.5 per cent in FY14. Here's the math: Every one-paisa increase in RPM adds Rs 21 to the value per share.

In the second quarter, Bharti's voice RPM stood at 37 paise. Analysts expect this to rise 3.5-4 per cent in FY14. The company's management believes prices would recover from the current lows, but adds specifying the rise is difficult.

However, given the 40 per cent fall, there is headroom for growth. The company has already weeded out free minutes from the system without increasing headline tariffs.

The Telecom Regulatory Authority of India came up with regulations on the kind of bundling operators

could offer in terms of text messages and voice minutes, which hit the industry. However, some of these have been relaxed.

The cancellation of licences has reduced the number of operators in most circles from 11 to eight, and this may drop further.

Avendus Equity Research says the number of operators per circle would fall, as fewer telecom service providers would bid due to the high reserve prices for spectrum - few players would pay Rs 6,000 crore (Rs 60 billion) for a metro circle at a time when the subscriber base is declining and revenue growth is stagnant.

Lower competition would mean lower spends on sales and marketing.

Bharti believes the data battle hasn't begun yet. Though data revenues stand at 8 per cent of overall revenues, the pace of growth is rapid, as the penetration of smartphones is on the rise. Across the world, 3G rollout takes three to four years, says Kapoor.

Despite the current stagnation in revenues, he says the Indian market holds promise because there's opportunity in India, as the penetration level isn't 75 per cent.

"The actual penetration is only about 55 per cent, while for rural India, it is just 42 per cent. There's plenty of opportunity in data and we are focused on that. After building infrastructure, we are concentrating on enhancing customer experience and with the proliferation of smart devices and improved price points at sub-$80, data consumption will explode," says Kapoor.

Religare's Dugar, however, says though the data story is unfolding, it's still 12-15 months away.

Despite the positives, there are many concerns on spectrum. However, the failure to find takers for spectrum in the 1,800-MHz frequency in the Rajasthan, Mumbai, Delhi and Karnataka circles and the lack of bidders for CDMA spectrum has made it clear the industry isn't willing to make unrealistic payouts.

On spectrum refarming, the broad perception is since there is no precedence of any country carrying this out, chances are the entire block may not be refarmed.

The Street is not certain about the tenability of the refarming option, neither is it sure of the government's seriousness in pushing it at twice the price of spectrum blocks in the 1,800-MHz frequency.

Even as the environment improves in India, the company's operations in Africa remain a challenge, as the acquisition hasn't played out as expected. African operations continue to post losses.

Kotak Institutional Equities says, "Absolute losses in Africa have expanded year-on-year in each of the last two quarters - in the first half of FY13, net loss in Bharti Africa is about 90 per cent of the FY12 net loss, and we expect the Africa business to report a higher net loss in FY13 compared to FY12."

Analysts say to make the acquisition viable, the company needs to deliver $1.8 billion in earnings before interest, tax, depreciation and amortisation.

However, since India continues to drive profitability, improvement in the home market bodes well for the company in the coming year.