>BHARTI AIRTEL: Pricing to ease; rural markets to fuel growth (IIFL)

Bharti Airtel attended IIFL’s conference and was represented by Manik Jhangiani (Group CFO) and Harjeet Kohli (Group Treasurer and IR head) and addressed concerns with regards to the ongoing tariff wars and regulatory challenges facing the industry. Bharti was cautiously optimistic on recovery prospects for the industry and bullish on its own prospects for reasons of reach, scale, low debt levels and brand strength. Key takeaways were:

• Tariff wars cannot go on for long, as new entrants are on capex-light and opex-heavy model. Hence, losses will be visible at EBITDA level and increase with volumes—making sustained price aggressiveness very expensive.

• Rural subscribers start with 50-100 MoUs a month, but within nine months, reach 70% of the average of 450 minutes. 56% of Bharti's net adds are rural. In rural areas, rate per minute is higher, while real estate costs are lower; tower-sharing helps lower opex, and diesel costs will be replaced by electricity over time. Hence, rural expansion is not such a drag on profitability as is generally presumed.

• 50% subscribers and a majority of high-ARPU prepaid subscribers have migrated to per-second billing. Hence, fall in rate per minute from migration should be largely over by 4Q. Rural subscribers, and to a small extent, urban subscribers, exhibited elasticity, delivering positive growth in 3Q.

• Pricing strategy was determined by associate Singtel's experience through its investment in Telkomsel of Indonesia, one of the most competitive markets in the world. The main learning was that the leader should not match the aggressor, because the aggressor becomes desperate to maintain a rate gap. This is why Bharti’s rate has stayed at 1.2p/second instead of 1p/second.

• 3G would definitely be positive for Bharti, as bid value will be based on benefits from voice traffic decongestion and data-related upsides. Competitors would need to match Bharti's bid, but without matching payoffs. 3G capex will largely replace 2G capex.

• In DTH, EBITDA loss was flat QoQ. Over 120m mobile subscribers form a big captive market, even if only 10% of mobile subscribers convert to DTH. Dish TV broke even at 4m and Bharti is at 2m, with better cost structure. Distribution synergies significant with mobile. 1.5m retail outlets and 10,000 exclusive distributors reaching Bharti DTH to places even Dish TV cannot.

To read the full report: BHARTI AIRTEL