Bharti Airtel Limited (532454) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. I'm Rajitha, the moderator, for this conference. Welcome to the Bharti Airtel Limited Third Quarter ended December 31, 2019 Earnings Call. [Operator Instructions] In case of a natural disaster, the conference call will be culminated post an announcement. Present with us on the call today is the senior leadership team of Bharti Airtel Limited. Before I hand over the call, I must remind you that the overview and discussions today may include certain forward-looking statements that must be viewed in conjunction with the risks that we face. I now hand over the call to our first speaker of the day, Mr. Badal Bagri. Thank you, and over to you, Mr. Bagri.

Thank you. Good afternoon, ladies and gentlemen. Thank you for joining us today for this call to discuss our results for the third quarter and 9 months ended 31st December 2019, which we announced yesterday. Present with me on the call today are Gopal, Harjeet, Nakul and Komal. The quarter gone by was very eventful for many reasons, including customer additions, industry repair initiatives, regulatory changes and judiciary outcomes. As you are aware, the industry is faced with an unfavorable verdict on the AGR definition case from the Honorable Supreme Court. As per the supplementary order, the affected parties were directed to pay the dues amount to DoT within a period of 3 months, which ended on 23rd January 2020. Since the review petition filed by the operators seeking reexamination of the matter was rejected, the operators have filed an application for modification of the supplemental order before the Honorable Supreme Court, which is pending/disposed. And the CoA, on behalf of the industry, has already made representation to the government for providing relief by the way of deferment of the payouts beside granting a moratorium period and continued interest rates. We are hopeful of a constructive engagement with the judiciary and the government on this matter. We will not be able to comment on this topic any further as the matter is sub judice. The government continues to be cognizant of the stress faced by the sector and after deliberation by a high-level committee of secretaries has approved the option for the telcos to defer the payment of annual spectrum auction installments due for the next 2 financial years, while keeping the overall tenure of payments unchanged. This will provide a much-needed cash flow relief to the sector. Also, based on the plea from the industry, seeking a flow tariff on data, TRAI has floated a consultation paper and is currently inviting comments from all stakeholders. This quarter also saw regulatory changes in the form of extension of interconnection user charges till 31st December 2020. Moving to business performance. Let's talk about our Mobile business. The broader industry, having now consolidated to 3 large players, continues to see some resemblance of stability and growth. The industry, in a long-awaited move, revised the tariff for the prepaid mobile customers upwards in December 2019. A combination of record 4G data customer additions, our continued focus on upgrading and high-value customers, coupled with tariff revisions, has resulted in an ARPU increase of INR 7 in the quarter to reach INR 135. We continue to believe that the industry ARPUs need to move up further to ensure viability of the sector, especially at the time when the incumbent peers have been saddled with a large regulatory burden and yet to have to continue to invest towards next-generation networks and 5G. We believe that industry ARPU needs to move to INR 300 in the long term. This will provide the right balance between customer aspirations and [ central ] investments. The ARPU enhancement on the back of tariff hikes, data net adds and overall upgrading of customers ensure that we continue the sequential revenue growth trend that we have been witnessing in the past few quarters. This quarter, there has been a reporting change on account of reorganization of our optic fiber operations, which have been transferred to a wholly-owned subsidiary. As a result, the group reorganized the business whereby the assets and the liabilities pertaining to bandwidth capacities have been allocated directly to all the respective segments. Previously, these operations were part of the Mobile segment and bandwidth capacities were built by the Mobile Services segment to other segments. To this extent, there has been a reduction in the reported mobile revenues. However, there is no change in ARPU on account of this reporting change, as the same has always been reported based on customer revenues. Our underlying Mobile Services revenue accelerated that -- their growth trajectory this quarter and grew by 5% -- 5.1% quarter-over-quarter, which is one of our highest sequential growth rates recorded in the last 5 years. The quarter saw Airtel's highest ever 4G data customer additions of 21 million. With this, we have 138 million data customers, of which about 124 million are on 4G. We do believe that 4G handset penetration still has significant headroom to increase. And therefore, for the foreseeable future, this number has potential to grow further. Our focus on quality customers is also evident from the best-in-class yet improving operational parameters. The network continued to witness strong engagement of the customers as the monthly average data usage from the customers -- customer base grew by 6.2% sequentially and voice usage was at 898 minutes per sub, a growth of 5.9% sequentially. On the network front, we added more than 4,200 sites during the quarter and close to 12,000 mobile broadband stations. We also further added capacities across the network through additional sectorization and Massive MIMOs. We completed 3G shutdown in 11 circles and reformed spectrum to 4G. During the quarter, we became the first mobile operator to introduce voice over Wi-Fi in India. This product leverages cutting-edge technology to enhance the indoor voice calling experience for Airtel smartphone customers. In one of the fastest uptake of a new network technology in India, customers using Airtel's voiceover Wi-Fi has already reached 1 billion within first month of launch. Our focus on creating an ecosystem of digital services has been yielding good results. Wynk Music, our music streaming app, continues to see a surge in its popularity among smartphone users in India with over 50 million monthly active users. According to App Annie data, this app was the most popular music streaming app in India with highest daily active users for the month of October 2019. We continue to expand our partnership ecosystem and joined hands with global leaders, including Lionsgate, Starzplay and CuriosityStream to provide best-in-class content on Airtel XStream. Talking briefly about other businesses. Digital TV Services business continues to grow on the back of customer additions. This quarter, we added over 100,000 customers while sustaining ARPUs. Our converged digital equipment play, Airtel XStream, has taken off to a very strong start and we are hopeful of scaling it up even more. Airtel business continues to grow, led by the demand of connectivity, data centers and solutions across the spectrum. Reported numbers were a shade low due to seasonality around having traffic. While we continue to enjoy a very strong market leadership across the enterprise market in India, we are pushing further on growing the enterprise offerings in the SME space. We recently partnered with Google Cloud to boost collaboration, productivity and digital transformation by offering G Suite to small and medium-sized businesses. Home broadband revenues have also grown this quarter on the back of our strong fiber network and simplified pricing propositions. We remain excited about this portfolio and continue our quest of focused expansion in this segment. Overall trends in other lines of business remain intact. Moving on to other noteworthy areas and significant events for this quarter. On Infratel, as you may -- as you would be aware, the Board of Directors of Infratel have approved the extension of the long stop date for the proposed merger with Indus till 24th February. We await the finality of the same to be able to comment on this topic any further. Subsequent to the balance sheet date, Airtel successfully raised USD 2 billion through QIP, which is largest ever by a private sector issuer in India and $1 billion through FCCB, which is the largest offering from an Indian issuer in the last 12 years. Both the QIP and FCCB were priced at the tightest end possible, with the QIP issuance at a mere 1.57% discount to the SEBI floor price, and the FCCB at coupon of 1.5% and conversion premium of 20% over the QIP price. The transaction was anchored by many existing and new shareholders. Several of the large global long-only funds, sovereign wealth funds, domestic mutual funds, insurance companies participated in the offering in sizable quantities. Long-only investors comprised 80% of the total demand for the QIP. We intend to use this fund to raise proceeds for augmenting our long-term resources and strengthening the balance sheet beside any AGR-related eventuality. Moving quickly to consolidated results. Consolidated revenue for the quarter stood at INR 219 billion, up 3.9% compared to INR 211 billion in the previous quarter. Consolidated EBITDA was at INR 94 billion during the quarter compared to INR 89 billion in the last quarter. EBITDA expansion was broad-based across India and Africa. EBITDA margin for the quarter was at 42.6% as compared to 42.3% in the previous quarter. Reported India EBITDA margin was at 41.2%, flat quarter-over-quarter. However, on a like-to-like basis, without the impact of high license fee due to the adverse AGR judgment, margins would have been higher at about 41.5%. EBIT margin for the quarter was at 10.9% as compared to 9.4% in the previous quarter. Net finance costs for the quarter were at INR 30 billion, slightly up due to higher gross debt, even as the net debt for the quarter was lower. The resultant loss before tax and exceptional items for the quarter was at INR 4.5 billion as compared to a loss of INR 6.2 billion in the previous quarter. There was net exceptional charge of INR 10.5 billion during the quarter, which compromise -- which comprised of various items, including interest on license fee and spectrum usage charges pursuant to the AGR judgment, charges relating to accelerated depreciation of 3G network equipment and a release of provision on account of full and final settlement of customary indemnities to a clutch of investors of Airtel Africa Plc. The resultant net loss for the quarter ended came in at INR 10 billion. Consolidated net debt of the company has decreased to INR 1,149 billion from INR 1,180 billion in the previous quarter. This does not take into account the proceeds from QIP, which were realized only in January 2020, but includes the impact of the perpetual bond raised in the company during the quarter. The net debt-to-EBITDA ratio as in December 2019 was very healthy at 3.07x as compared to 4.41x as on December 2018 and 3.3x in the previous quarter. To sum up, the telecom industry in India is finally seeing industry repair through tariff hikes. Our Mobile business has accelerated their growth trajectory, while our nonmobile business continues to keep the upper trend intact. Africa remains on its profitable growth journey with reporting eighth consecutive quarter of year-over-year double-digit revenue growth, while improving EBITDA margins. We are hopeful that we will get a favorable outcome from the engagement with judicial regulators going forward to ensure long-term growth and viability of the sector. With this, we open up for questions and answers.

[Operator Instructions] The first question comes from Mr. Manish Adukia from Goldman Sachs, Mumbai.

I have 2 questions. Firstly, if you can just tell us what has been the initial customer response to the tariff hikes that you did in December? If you can comment on the trends that you've seen in December and January to these hikes? And has there been any evidence of downtrading or SIM consolidation as a result of the tariff hike? And second, the 4G subscriber momentum in the quarter ending December was quite strong, material acceleration versus September quarter. Can you help us understand what was driving this acceleration in 4G customer adds? And how sustainable are these trends?

Manish, this is Gopal. I think on the 4G customer additions, we had a strong momentum in the last quarter. And this was on account of some changes in tariffs that happened back in October and November where one of our competitors was charging for off-net minutes. And I think that led to a surge of customers consolidating their second SIM and switching to our network. So I think that was one of the drivers. I think the overall response to the tariff hike, I would say, has been satisfactory. We've seen large parts of it go through without much of a concern, primarily because tariffs are at a very, very low level, exorbitantly low level in the country today. We think that while this is a welcome relief, it's not good enough. I think in the end state, we need to see an ARPU of about INR 300 in Indian telecom. And I think that is when we will turn a reasonable return on capital on the overall business. So the short answer to your question is that the response seems to be overall good.

Right. And Gopal, you talked about the fact that tariff need to go up further. But given the fact that the recent tariff hike, magnitude was pretty material, would it be safe to say that there might be some time now before we see another round of tariff increases? And maybe a related question. What is your expectation from the flow tariff consultation that the TRAI has initiated?

I can't comment on timing on tariff hikes. I think even with this round of tariff increases, today our ARPU is about INR 135. While the -- while our ARPUs will go up in the next quarter because of the tariff increases, they are just not good enough. I mean at INR 200, we will barely be head above water in terms of return on capital. So it's clearly something that we need to see moving. So I can't comment right now on what the timing is. I think the TRAI consultation has now been delayed in terms of response to the end of February. So we are readying with our response. And then, of course, the regulator -- the authority will decide how to take it forward. I think the situation in the industry has come to a pass where tariffs which have largely been under forbearance for over 2 decades have reached such an abysmally low level that the authority has put out this consultation to discuss this with industry. Let's wait and see what happens from here.

The next question comes from Mr. Sachin Salgaonkar from Bank of America, Mumbai.

My 2 questions are, first, on CapEx. Now Gopal, is it fair to assume that directionally CapEx may continue to go down before 5G hits on? But at the same time, we are seeing good net additions in number of towers or base stations, what you guys are seeing. So I just wanted to understand how are you thinking in terms of overall investments going forward? So that's first question. Second question is predominantly on competitive landscape. Now are you guys generally looking to invest into areas, let's say, where one of your competitors is not aggressively investing and seeing some incremental room for market share at their expense? I just wanted to understand on that as well.

I'm sorry, I couldn't understand that question.

Okay. So one of your competitors, Vodafone Idea, is talking about investing into those areas where they are relatively strong. So I just wanted to better understand that, is there room for you guys to sort of capitalize on that opportunity and gain more share?

Got it. Okay. Understood. I think, firstly, just to say that 2 years back, our CapEx had hit a peak of about INR 24,000 crores. We have consistently said that our CapEx outlook will be lower than our peak. While we don't give guidance, I would say that it's a dynamic situation. We have seen a surge in demand in both data on the transport side, on the access side. And at the end of the day, we are in a very competitive market. So for us, one of the important barometer that we would look at is market share, profitable market share, with a focus on chasing quality customers. So there may be some increase in CapEx in the immediate future. But overall, like I said, it will be significantly lower than where our peak CapEx was. From a competitive standpoint, the way we look at it is that we have about 190,000 towers. Almost all of our towers are now with 4G broadband. We are adding capacity, as we speak. We have reformed all of our 2,100 band spectrum, more or less, all of it. And by March, everything will be done. The second part is that we are looking to expand our towers. This year, we put up about 13 -- 12,000 towers. We will continue to see some increase in towers next year as well. And this will primarily be focused on in rural areas where we need to -- where we believe there is an opportunity to go and expand to drive 4G. And when that happens, obviously, we do that very prudently, very smartly, so that we get the best yield from the assets that we put out. And hopefully, that should also drive revenue for us. So competitive landscape, I would say, we look at opportunities across. But the only one guiding force that we put at the heart of our strategy is that we want to really chase quality customers.

Got it. And one follow-up is, what is your exit ARPU coming out of this quarter?

We have reported ARPU of INR 134. I think exit would be close to INR 140.

The next question comes from Mr. Parag Gupta from Morgan Stanley, Mumbai.

Gopal, just a couple of questions. Firstly, just to understand, when you talk about a INR 300 ARPU in the long term, I just want to understand how quickly can you get there? So can we see something happening on the postpaid side sometime this year itself? Or that's not on the anvil? And the second is, do you think we can see tariff hikes for prepaid customers in quick succession given the starting point itself is pretty low? So I just want to understand how quickly can these go up and what exactly the long-term mean out here? The second question is with respect to asset monetization. So you have talked about the intention to monetize in the past, and there has been a fair bit that has already happened. But can you tell us about what is the level of preparedness on some of your other plans, be it towers, be it optic fiber or anything else, just to get a better sense of what can we expect sometime this year?

So let me take the first question. I think INR 300 ARPU is the level at which we will return close to 15% return on capital. I'm not able to comment on when that will happen. I think that if India needs to see or we need to see substantial investments in 5G over the next few years to make sure that we build future-ready networks, which is in line with the developed parts of the world, then I think operators need to have healthy balance sheets and the capital required to actually put in those investments. And that is the reason why we believe that that's where the ARPU must go. On postpaid, you will appreciate that the postpaid pricing is still substantially higher than prepaid. The arbitrage has come down with the recent increase in prepaid pricing, and we're beginning to see some momentum restored on our postpaid side of our portfolio where we're beginning to add customers in the months of December and January. And that bodes well for us. I think that we will have to wait and let this tariff row -- this tariff increase settle down. And sometime next year, we will have to reassess and see whether the market can absorb a second round of tariff increase. So I'm not in a position to comment on it because it also depends on what happens with the rest of the competition, simply because if we were to take up pricing, which we can, which we did, in fact, on the 2nd of December, the good news was that the others followed. But if we did it and took up pricing and went completely off-kilter in terms of the premium, then you potentially could lose market share. So one of the things that we'll need to assess is how the market will absorb it. So I think that's an evolving situation. Do you want to pick up the asset monetization?

Thanks, Gopal. Parag, this is Harjeet. On your question on monetization, frankly, the way to look at this is in twofolds. You could seek monetization for the purposes of fundraising or monetization is an activity in the right evolution point of the business or sub-business vertical that we have. In the context of fundraising, I think it's important to see what has happened. There is no great necessity to be able to raise either for liquidity purposes because of the recent fundraises that have been done, both globally and, of course, over the last 1 month in India. And from a perspective of even managing the fundraise for a better capital structure or a debt or equity mix, I think the recent round of equity raise does bolster the capital structure, provides the right financial flexibility that one needs to have. So monetization driven out of, I think, any large fundraise required may not necessarily be the objective, then I think the choice is, one, from our earlier stated position on the tower side where post the potential merger, which is still waiting for approvals, there is a possibility of a stake sale there. That continues to be the stated position, but frankly, we have to be guided by how the merger process evolves. We still have 3, 4 weeks to go before the long stop date expires. And assuming that were to go through, we will evaluate whether it's the right time to have a stake sale done there. That is more in the way our historical evolution on the towerco portfolio has been. Apart from that, frankly, fiber has been put down in a subsidiary of Airtel. There are some verticals which are evolving fairly fast. DTH, you would have seen earlier, we have done a monetization. One could argue over time, data centers is a case in point. But all of these have to be driven by the business objectives and not necessarily because either the company needs funds or needs to monetize. So to that extent, I think we'll stay agile. And in general, post you well once before there is any plan on that account.

Got it. And Gopal, just a follow-up on the first question. You talked about generating 15% return on capital employed, which is what can get you there at INR 300. I just want to understand, in the upcoming spectrum auctions, are you going to be looking at picking up 700 megahertz or anything for 5G now? Or do you think it's not appropriate given that the balance sheet is still not fully repaired?

I think it's -- on 5G, if you look at it, the ecosystem is still nascent. Devices are still very expensive, and the applications are still to be developed. I think, both in China and the U.S, it's a very, very nascent ecosystem. The second factor, which we have talked about in past earnings calls, is that the reserve price on the spectrum that is being put on the block, which TRAI had recommended, we're yet to see what DoT -- what the government does. But what TRAI had recommended on the 3.5 gigahertz band is close to INR 49,000 crores -- or INR 50,000 crores for 100 megahertz of spectrum, which is -- 5G requires large blocks of spectrum, as you know. So at 100 megahertz, INR 50,000 crores is just something that we can't afford and it's -- we believe it's too high priced. So we will not pick it up at those prices.

The next question comes from Mr. Pranav Kshatriya from Edelweiss Securities, Mumbai.

A couple of questions. Firstly, if I look at the exit ARPU, if I just take INR 128 as a base ARPU till 6th of December and then calculate what could have been the ARPU for the remaining period, I get a figure of around INR 153-odd. So your comment of INR 140 exit ARPU, I just want to get some clarity on that? And second question is, you talked about Jio's charging for IUC led to some customers coming back to Bharti Airtel and that's the reason for the spurt in 4G subscriber additions. Has the things changed after Jio started offering bundled plan with 1,000 minutes net?

I think on the ARPU, it's a bit premature for me to comment on where it will end up. The reason being that the price increase went so on the 2nd of December and customers have different types of plans. There are 28-day plans, there are 56-day plans, the 84-day plans. So it's a mix of all kinds of plans. And so the full impact of whatever we did will be visible only in quarter 4. Like I said, I think quarter 4 ARPU will certainly be better than quarter 3. How much better it will be is a function of what happens from here until March, which is dependent on some consolidation that we see, any downtrading that happens and so on. So all of that, we will track closely. I think the market has settled. October, November was the period when there was instability -- or there was -- not instability, there was a change dynamic given the charge in that one of our competitors did on the off-net pricing. Since then, I think it's kind of settled. So we're back to an even keel and from here, it is -- I mean we're driving the business in the same way that we have been.

So I mean just on the second point, we should be expecting more like 8 million to 10 million kind of subscriber additions going forward. I mean is that what we should take from here?

No, we don't give that guidance, Pranav. That's something that we don't do.

The next question comes from Mr. Kunal Vora from BNP Paribas, Mumbai.

On postpaid subscriber additions, it seems very strong, almost 1.5 million, 11% increase quarter-on-quarter. What's driving this? Are you seeing movement of customers from your competition or is it Airtel Thanks? If you can throw some light on what's happening there?

Kunal, this is Badal here. So I'm assuming you have said that calculating the postpaid customers from the prepaid percentage which has been provided?

Sure. Perfect.

Yes. There was -- yes, so there was a small typo out there. Instead of 94.4%, there is a 94.5%. The revised deck has been circulated to the [indiscernible] community. So there has been a add in the postpaid customers in the quarter, but not as much as you have been -- as you have mentioned.

Sure. Okay. That's helpful. Second is, Jio started charging for off-network outgoing minutes this quarter. How did it impact you in terms of your IUC revenue?

I think that there was a change in the symmetry or the asymmetry of traffic that we had during the quarter primarily because of this. But the way we look at it is that we picked up extra customers, we picked up 21 million 4G customers. And so net-net, you can see the numbers reflected in our gross revenue growth. Clearly, it was a profitable mix that we were able to acquire.

Got it. But did the IUC revenue itself go down? Or let's say, what's the net IUC you have been recipient so far, what's the net IUC receipt or payment that you have made this quarter?

I would just say that the ratios have changed. So we don't report those numbers specifically. The ratios have changed. That's what I would say.

The next question comes from Mr. Vivekanand Subbaraman from AMBIT Capital, Mumbai.