Event: Bharti Airtel Limited Second Quarter Ended December 31, 2015 Earnings Call - PDF

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Earnings Conference Call Transcript Event: Bharti Airtel Limited Second Quarter Ended December 31, 2015 Earnings Call Event Date/Time: January 29, 2016 at 1500 hrs CORPORATE PARTICIPANTS Gopal Vittal
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Earnings Conference Call Transcript Event: Bharti Airtel Limited Second Quarter Ended December 31, 2015 Earnings Call Event Date/Time: January 29, 2016 at 1500 hrs CORPORATE PARTICIPANTS Gopal Vittal Managing Director and CEO (India and South Asia) Bharti Airtel Limited Nilanjan Roy Global Chief Financial Officer Bharti Airtel Limited Christian De Faria Chief Executive Officer - Africa - Bharti Airtel Limited Jaideep Paul Chief Finance Officer - Africa - Bharti Airtel Limited Harjeet Kohli Group Treasurer - Bharti Airtel Limited CONFERENCE CALL PARTICIPANTS Sachin Salgaonkar Bank of America - Mumbai Piyush Choudhary CIMB Mumbai Srinivas Rao Deutsche Bank Singapore Rajiv Sharma HSBC - Mumbai Pranav Kshatriya Edelweiss - Mumbai Casper Erskine New Street Research - UK Vinay Jai Singh Morgan Stanley - Mumbai Jimmy Chen Bernstein Hong Kong Amruta Pabalkar Morgan Stanley Mumbai PRESENTATION Good afternoon, ladies and gentlemen, I am Shareena, the moderator for this conference. Welcome to the Bharti Airtel Limited third quarter ended December 31, 2015 earnings call. For the duration of the presentation, all participant lines will be in the listen-only mode. After the presentation, the question and answer session will be conducted for all the participants on this call. 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 risk that we face. I now hand over the call to our first speaker of the day Mr. Nilanjan Roy. Thank you and over to you Mr. Roy! Nilanjan Roy - Chief Financial Officer India & South Asia- Bharti Airtel Limited Thank you. Good afternoon ladies and gentlemen. Thank you for joining us today for this earnings call to discuss our results for the third quarter ended December 31, 2015, which we announced yesterday. Let me introduce you to the senior leadership team, who are present with me on the call today, Gopal Vittal, Christian De Faria, Jaideep Paul and Harjeet Kohli. First let me share a few thoughts on the sector developments in the regulatory space. TRAI has recommended reserve pricing across bands for the upcoming auction. We welcome the move to put all the 2100-megahertz spectrum up for auction including - 2 - carrier aggregation with existing blocks, both of which will provide much needed relief to congested networks. Additional 2300 and 2500-megahertz spectrum is also a positive development. Now, let me turn to the key Company developments for the quarter. In July 2015, the Company entered into an agreement with Orange for divestment of its Africa operations in Burkina Faso, Chad, Congo B, and Sierra Leone. We are pleased to inform you that Airtel has signed a deal with Orange to sell its operations in Burkina Faso and Sierra Leone. The consolidated revenues of the two operations are about EUR 275 million. The outlay for Orange for these transactions will be based on the financials of Airtel s two subsidiaries for the year ended March 31, 2016 and will represent the equivalent of 7.9 times Airtel s EBITA in these two countries at that time. The completion of these transactions remains subject to approval by the competent authorities. The agreement over the other two opcos has lapsed. This transaction is about maximizing shareholder value while handing over these businesses to an operator who is committed to take the agenda in these countries forward. By means of this transaction Airtel will be able to establish a sharper focus on the remaining countries and further reduce its debt. As reported previously Airtel and Axiata have now signed a definitive agreement to merge their subsidiaries in Bangladesh. Postmerger, the combined entity operating as Robi will serve approximately 40 million customers. The joint strengths of Robi and Airtel will deliver the widest mobile network coverage across Bangladesh strengthening its position in the mobile Internet segment as well as consolidating its position as the second largest operator in the country. The proposed transaction is subject to conditions precedent, including receiving applicable approvals from relevant authorities and is expected to complete in the first half of The telecommunication landscape in Bangladesh has been one of high growth, although intensively competitive with six players. The proposed merger is set to strengthen the industry structure, competitiveness and more importantly, bring greater benefits to customers in terms of network quality and coverage and an improved offering of data products and services. Upon completion, Axiata will hold 68.3% controlling stake in the combined entity, while Bharti will hold 25%. The remaining 6.7% will be held by the existing shareholder NTT DOCOMO of Japan. You are aware of the announcement in the previous quarters regarding divestment of towers across 13 African countries. We are pleased to announce that the tower deals have consummated in eight of these countries for a total consideration of $1.8 billion including Burkina Faso, which was completed in the quarter. The tower deal process is ongoing in Niger. Airtel announced a proposed outlay in India of Rs Crores in the next three years towards the comprehensive network transformation program Project Leap. This 10-point program will enable the company to improve network quality and deliver worldclass voice and data experience for its customers in India. Further in an industry first, Airtel invited customers in its network modernization drive by launching a microsite It allows the customers to know everything they want to know about Project Leap and get a transparent view of coverage or voice and high-speed broadband services along with other details in their immediate localities. During the quarter, we continued to aggressively roll out our networks on 3G and 4G. Airtel was the first operator to launch 4G Pan- India and has expanded its 4G footprint to 14 markets. Out of the total number of 151,000 sites, over 50% now are 3G enabled. Airtel has the largest 3G network in India which is Pan-India excluding Kerala. Such a national footprint would allow us to participate in the data growth story going forward, reduce dependency on ICR arrangements and build a more cost optimized network. We are also pleased that Airtel has acquired 100% equity stake in Augere Wireless Broadband India, which holds 20 megahertz of BWA spectrum in the telecom circle of Madhya Pradesh and Chhattisgarh. Subject to statutory approvals, this will give us cumulative 4G capabilities in 15 telecom circles in India. Airtel s Wynk Music crossed a laudable feat of 12 million downloads, achieving this in a short span of little over 12 months of its launch. The Company also introduced new offerings on the service, such as data savings mode and high definition music catalog. Airtel has also expanded its content portfolio by launching Wynk Games, the latest OTT addition to the Wynk portfolio. The app offers a library of over 2000 global and local games from across genres. Let me now turn to the Company's operating metrics. We are happy to know that this quarter saw industry-leading net additions of 8.1 million. We have been consistently leading in the industry on net additions over the last one year. At the same time we are focused on quality sub-base and hence our churn levels continue to be the lowest in the industry in the comfortable range of 2.5% to 3.5%. The quarter saw voice volumes bounce back after a seasonally weak Q2. Minutes of use sequentially increased by 8.3 billion minutes, up 3% quarter-on-quarter. This quarter, our voice RPM decreased from 34.58p to 33.75p, a fall of 0.83 paisa more on the heat of some competitive pressures in a few circles. Input costs for the telecom sector are increasing, including spectrum, CapEx, network running OpEx. To sustain the health of this sector, we believe prices will need to increase in the medium-to-long term. However, as mentioned before, these rate adjustments may not follow a linear trajectory in the short term, but suffice to say that there is need for a disciplined approach to pricing, to fund the accelerated CapEx and spectrum that is getting deployed in the interest of the consumer. We are very happy to confirm that data revenues continued to march ahead with a double-digit growth quarter-on-quarter. Data consumption has increased by 17% sequentially and by 73% on a year-on-year basis. The Company s aggressive 3G and 4G roll out has resulted in impressive 3G net adds of 4.2 million in the quarter. Total data customers on our network now stand at 55 million or about 22.5% of the total customer base. Data ARPU is up 18% year-on-year to Rs.200 and at such early levels has already - 3 - surpassed the more mature voice ARPU at Rs.137. Its at the same level as overall mobile ARPU, again, bearing testimony to the demand for data. We firmly believe that we are still at a very nascent stage of data revenue pool development. Data now contributes 23.1% of mobile revenues as against 16.2% in the corresponding quarter last year. All of this has helped the underlying year-on-year mobile revenue grow strongly at 10.1%. EBITDA margin has improved from 37.3% to 38.9% year-on-year. We continue to show strong performance in our non-mobile portfolio in India. Telemedia grew 9.3% on an underlying basis, Airtel business grew 19.1% and DTH as well grew at 19.1% on a year-on-year basis. We believe our diverse yet complementary product suite, gives us a unique proposition to own the home market in India across the three streams of mobile, television and broadband. South Asia namely, Bangladesh and Sri Lanka also clocked a healthy 9% year-on-year growth. I am delighted to note that Africa performance is showing initial signs of growth and OpEx control despite currency fluctuations, with 4.6% year-on-year growth on an underlying basis. The data story is unfolding well and non-voice revenues in Africa are more than 28% of total revenues. Mobile data itself is now 14.3% of the total revenue. Our 3G network has enabled data volumes to increase a staggering 112% year-on-year. Airtel Money transaction volumes have grown by 81% year-on-year, shy of $5 billion during the quarter with more than 9.5 million customers transacting on the platform. Now moving on to the quarter s financial results. Consolidated revenues increased by 3.7% year-on-year; however, normalized for the impact of IUC in India and impact of the divestment of tower assets in Africa, revenues are up by 5.9% year-on-year. On the margin front, we continue to see India margins holding at above 40%, with a 40bps expansion over the previous quarter. Amortization costs in India have further stepped up due to the impact of 3G and 4G launches during the quarter. In Africa the weighted average currency depreciation in the last quarter has been 2.7%. These declines have impacted the reported revenues in dollar translations. To understand the intrinsic performance of the Africa operations all financials up to PBT and all operating metrics mentioned are in constant currency as of March 5, In Q3, gross revenues in Africa in constant currency are up 4.6%, underlying adjusted for tower disposals, and 3.1% on a reported YOY basis. EBITDA margins for the quarter are reported at 21.4%, as against 21.6% in the previous quarter. Normalized for the leased tower assets, the margins would have expanded to 22.9%, which is a second consecutive quarter of underlying margin improvement. At this point, we want to reiterate our strategy for Africa, which is five pronged. a) Customer growth with quality as the focus, b) Stronger data network roll out thereby garnering incremental RMS, c) Airtel Money adoption to induce loyalty and reduce churn, d) Localized go-to-market with intelligent volume and rate play and e) Finally, replicate the War on Waste in Africa, as well as focus on retaining quality talent pool. We have maintained our focus on growing customer base and networks and have added over 805 3G sites this quarter. The continued trend of growth in customer base, volumes of voice and data as well as the adoption of Mobile Money is a reaffirmation of the potential growth in Africa. Coupled with the demographic dividend, there is no doubt that Africa will see the benefits of scale in the future. Net finance costs for the Company at Rs.13,910 million were higher by Rs.3,459 million year-on-year on account of higher spectrum-related costs, interest on FLO, and lower investment income offset by lower derivative and ForEx losses compared to the corresponding quarter last year. The effective tax rate, excluding dividend distribution tax in India for the period of nine months came in at 30.3% compared to 25.5% for the full year ended March 31, The increase in the underlying effective tax rate in India is primarily on account of lower tax deductions, due to expiry in tax holiday unit. The tax charge in Africa for the period of nine months ended December 31, 2015 at $143 million versus last year full year charge of $203 million has been lower primarily due to higher operating losses and change in profit mix of the countries. Consolidated net income before exceptional items for the quarter came in at Rs. 13,963 million, a decrease of 19% year-on-year. Exceptional items in the quarter comprise of, firstly, a net gain of Rs.60 million pertaining to the divestment of telecom tower assets. Secondly, a charge of Rs.1,152 million towards the operating cost on network re-farming and upgradation program and third, a charge of Rs.2,313 million towards restructuring activities in a few countries and the net tax impact of Rs.428 million and impact on minority interest of Rs.182 million on the above. We believe these onetime costs will make us more agile as well as improve our network quality substantially for the future. The consolidated net income after exceptional items for the quarter came in at Rs million, a decrease of 22% year-on-year. Our initial CapEx guidance for the full year was $ 3 billion, which we upped to $3.2 to $3.4 billion subject to doability. With cumulative CapEx for the first nine months at $2.2 billion, we should end the year between $3 and $3.2 billion. On the balance sheet front, the net debt excluding FLO for the Company was at $11.9 billion including $1.5 billion of DoT spectrum liability recognized during the quarter and finally approximately $700 million, which will get recognized in the quarter ahead. Net debt excluding FLO and deferred payment liability to the DoT has reduced to $7,350 million compared to $7,689 in previous quarter In conclusion, the third quarter in India signals continuing momentum, sustained efficiencies and margin expansion on an underlying basis. Africa revenues and EBITDA are improving on constant currency basis. The tower disposals in Africa and sale of two operations to Orange are materializing. On this note, I would like to hand back to the moderator for conducting the Q&A part of the earnings call. Thank you very much Sir. We will now begin the question and answer interactive session for all the participants who are connected to the Audio Conference Service from Airtel. Due to time constraints, we would request if you could limit the number of questions to two to enable more participation. Hence management will take only two questions to ensure maximum participation. Participants who wish to ask questions, may press * 1 on their touchtone enabled telephone keypad. On pressing * 1 participants will get a chance to present their questions on a first-in-line basis. To ask a question, participants may please press * 1 now. The first question comes from Mr. Sachin Salgaonkar from Bank of America, Mumbai. Mr. Salgaonkar, you may ask your question now. Sachin Salgaonkar - Bank of America - Mumbai Thank you, for the opportunity. I have two questions. First question, I want to understand your future data spectrum needs. Clearly, currently in India you have the best 3G and 4G spectrums. Is there a material need for further spectrum, especially at some of the spectrum prices what TRAI came up? In particular, want to know your view on the need of a sub-one gigahertz 4G spectrum, when someone like a Jio already has access to 850 megahertz. That is question number one. Question two, I want to understand your thoughts on price competition in voice market. We did see impact on voice RPM in this quarter. Is this a trend, which might continue, which is a pressure on voice RPM, which might continue to be seen in future as well? Thanks. This is Gopal. Let me take your first question on the spectrum needs. I think firstly we are pleased to see the regulators proposal on putting three to four blocks of 2100 MHz spectrum, I think it is the right move to propose putting the entire 2100 MHz spectrum there. This will decongest networks as well as improve voice quality and the problem that we have in some cities on call drops. So, I think that is the first thing. We are also pleased to see the 2300 MHz, some spectrum coming in, 2500 MHz, some spectrum coming in. This is good capacity spectrum and we have some experience with managing the spectrum and we do have gaps in eight circles, which we will be keen to fill at some point in time. We believe that the price that has been set or proposed for 700 MHz just makes it very, very expensive for us to buy any of that spectrum, so we believe we cannot afford to buy that spectrum at that price. Now, sub-gigahertz spectrum, as you know, is always valuable. We have good sub-gigahertz spectrum in several circles with 900 MHz, which today runs 2G in many circles. We have refarmed into 3G, and overtime, this spectrum can also run LTE. So, we believe that we are well covered in probably around 9 or 10 circles, where we have got 900 MHz spectrum that we have. But, the point on the 700-MHz spectrum, which you asked I think, makes it unaffordable for us to purchase. Coming to your second question on price competition in voice. I think the fact is that as we have been saying repeatedly over several quarters, our goals are to really drive revenue growth margin as well as market shares, that is our stated goal and we are unwavering on that. We also believe that the rates that there are today in terms of voice pricing are unsustainably low and need to move up. We are actually quite disappointed at the fact that voice pricing has eroded this quarter. It is a competitive market, in the past we had fierce competition from some of the smaller players. I think in the last quarter, we also saw significant competition from the leading players and that has led to some decline in voice pricing which as I said, is a source of disappointment. We have seen good volume growth coming in, but it does not compensate for the decline that we saw. We are very keen that as a leader we are very responsible in the market, which is why Nilanjan referred to our churn rates being substantially lower than the rest of the industry. We will continue to look for opportunities to raise voice pricing and we are hopeful that the rest of the players also see some sanity in the way voice pricing today is being played. Sachin Salgaonkar - Bank of America - Mumbai Gopal, this is very helpful. Thank you. One small follow-up about the network quality and you did touch on that topic. Versus compared to last six months, any thoughts on how the network quality on your network is there, and how do you look at this entire issue getting resolved about I know, as an industry, what was proposed is you guys could compensate in terms of minutes, but clearly the issue is in court. So just want to know your thoughts on that? - 5 - I think that matter as far as the proposed regulation is clearly subjudice, so I am not going to
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