Bharti Airtel profitability declines due to debt and slow 3G growth

The poor show by Indian telecom majors is evident from the results for the June 2012 quarter. The prime reason for the concern is due to heavy capital expenditure mostly with borrowed money. The profitability from the of the 2G-based services has declined and 3G services has not taken off in major way as expected.

Both Bharti Airtel and Idea Cellular reported declining average revenue per user (ARPU) and revenue per minute (ARPM) for the quarter. The major deterrent has been the interest cost which has eaten into the profit margins.

Bharti Airtel Q1 profit falls 37% to Rs 762 crore. The interest outgo as percentage of revenue shot up to 4.2% in the June quarter from 2% two years ago. The operating expenses have also increased including the network costs, pulling down its operating profitability substantially. At 30.2%, the earnings margin before interest, depreciation, and taxes was the lowest in at least 10 quarters.

For Bharti, its African operations are also a worry. ARPU there fell by 12% to $6.5 in the June quarter. The per minute revenue on its network slid even sharply by 25%, resulting in a 170 bps reduction in its operating margin to 25.8% in the quarter.

The improvement in performance is unlikely in near future unless the data usage per users show some significant growth. The 2G service auctions in some circles may further pull down the profitability for telecom companies.