Bharti Airtel – BUY: Who says elephants can’t dance?: IIFL

Based on our recent interaction with Bharti, industry interactions,
media reports, and survey of prepaid and post-paid plans, we
observe that Bharti has taken a number of measures in the past
few months. These include: 1) launching Airtel Store to accelerate
seeding of the data market; 2) launching Airtel myPlan for more
effective targeting of post-paid subs; and 3) capex productivity
improvements (minutes per BTS being still lower than historical
high, data traffic moving from 2G to 3G network and improving
handset mix are levers). Moreover, telcos have continued discount
reductions by lowering the validity period and the SMS and 2G
data limit by 20-30% across circles. In our view, part of this has
manifested through Bharti’s strong 1HFY14 results and more of
this should be visible going forward. But in the near term, the
stock could be driven by news-flow around RIL’s likely bidding for
1800MHz in the upcoming auction due to contiguous (4G suitable)
spectrum availability. BUY (TP Rs414).
Yield improvement measures have continued: Bharti’s voice RPM in
2QFY14 was 7% above 4QFY13 levels and discount reductions have
continued even in the past three months. Our tariff surveys indicate that
Bharti and Idea have cut validity period/SMS limit/2G data limit in certain
plans by 30%/20%/25% across circles.
Faster seeding of data market through Airtel Store: On data,
messaging to customers has been simplified; for instance, “99 retro
Bollywood songs for Rs99” is easier for the subscriber to understand, in
our view. Airtel Store allows users 3MB free data for Re1 for a day (in the
form of games, videos, and social media browsing). Such a low
denomination should encourage more users to try out data, resulting in
faster seeding of the market by Bharti.
Post-paid offering simplified and made more flexible through
myPlan; improved capex productivity: Bharti has simplified its postpaid
offering from multiple plans to a single myPlan. This allows
subscribers the flexibility of choosing (and changing once a month) from
equally priced bundles, each offering local minutes, STD minutes, SMS,
2G/3G data, etc, with discounts increasing with the number of bundles
chosen. Minutes per BTS being still lower than historical highs, data traffic
moving from 2G to 3G, freeing up 2G network capacity, and better
handset mix, are the medium-term capacity levers.

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survey of tariff plans, we observe that the recent measures taken by
Bharti focus on (a) improving yield (b) growing data revenues (c)
improving post paid offerings and (d) implementing capex productivity
improvements. We believe these have a high chance of helping achieve
faster revenue growth, drive market share gains, control costs and
hence improve margins.
Yield improvement measures continue
Bharti’s voice RPM increased by 7% over 4QFY13-2QFY14. Discount and
validity reductions have continued happening in the last three months
(as shown below).
Figure􀀃1: Examples􀀃of􀀃yield􀀃improvement􀀃measures􀀃since􀀃September􀀃2013􀀃􀀃
Telco􀀃􀀃 Circle􀀃􀀃 Plan􀀃MRP􀀃
(Rs)􀀃􀀃
Attribute􀀃􀀃 Change􀀃􀀃
Bharti􀀃􀀃 Karnataka􀀃 15􀀃 Data􀀃limit,􀀃validity􀀃 Data􀀃limit􀀃cut􀀃by􀀃30%􀀃and􀀃
validity􀀃cut􀀃by􀀃25%􀀃
Bharti􀀃􀀃 Delhi􀀃 59􀀃 2G􀀃data􀀃limit􀀃 Cut􀀃by􀀃25%􀀃
Bharti􀀃􀀃 Mumbai􀀃 48􀀃 Local􀀃rate􀀃per􀀃minute􀀃 Increased􀀃by􀀃17%􀀃
Bharti􀀃􀀃 Kerala􀀃 15􀀃 SMS􀀃limit􀀃 Cut􀀃by􀀃25%􀀃
Bharti􀀃􀀃 AP􀀃 13􀀃 SMS􀀃limit􀀃􀀃 Cut􀀃by􀀃20%􀀃
Idea􀀃􀀃 Maharashtra􀀃 16􀀃 Validity􀀃period􀀃􀀃 Cut􀀃by􀀃50%􀀃
Idea􀀃􀀃 UP􀀃(W)􀀃 11􀀃 SMS􀀃limit􀀃 Cut􀀃by􀀃17%􀀃􀀃
Idea􀀃􀀃 Mumbai􀀃􀀃 22􀀃 2G􀀃data􀀃limit􀀃 Cut􀀃by􀀃22%􀀃􀀃
Idea􀀃􀀃 AP􀀃􀀃 62􀀃 SMS􀀃limit􀀃 Cut􀀃by􀀃17%􀀃
Idea􀀃􀀃 TN􀀃􀀃 28􀀃 Validity􀀃period􀀃􀀃 Cut􀀃by􀀃33%􀀃
Source:􀀃Companies,􀀃IIFL􀀃Research;􀀃􀀃
We believe that until such time that voice realizations correct upwards
appropriately, voice revenue may accelerate, but then will slip towards a
steady state which will be impacted by other dynamics including VoIP
etc.
Airtel Store to improve seeding of the data market
The key measures taken on the data front are
• Bharti has simplified communication to customers. For instance,
Bharti now sells data using phrases such as “99 retro Bollywood
songs for Rs99”. We believe this is much more user-friendly than the
earlier references to MB/GB, etc.
• A key innovation is the Airtel store that has 300k+ downloadable
items (video, sings, photos), each for Re1, and can be accessed by
dialling 56789. It also includes internet surfing for a day. (Refer box
below for details).
Anecdotal evidence suggests that this is taking off fast. We believe this
has the potential to improve realization relative to the current average
of Rs0.31/MB since usage beyond 3MB is charged at the significantly
higher pay-as-you-go rates (6-7x higher).
Increasing smartphone penetration should continue to drive data usage
growth.