Fortunately for Vittal, there has been some improvement in both the operating metrics as well as the policy environment, whether they hold and what he can do to improve things is the question. As far as the policy environment is concerned, the lack of bidders in the last auctions has forced the government to reduce the base price for 2G auctions by around a third already (as compared to what Trai had recommended)a reduction of this nature means the drag on Bhartis share price for the extra spectrum, going by the Kotak estimates, could reduce by around R7. There is some rethinking on re-farming, but not much. Vittals, or Sunil Mittals, big call here will be whether to take the government to court on this, and then it depends on how things turn out.
On the operating metrics, while per user revenues continue to decline, monthly churn fell from 8.8% in Q1FY13 to 8.5% in Q2FY13 and, combined with overall consolidation in the industry after the Supreme Court cancelled 122 licences, selling expenses for Bharti Airtel fell more than 100 bpsas a result, Q2 ebitda margins rose 110 bps. The data piece looks much stronger with the share of such revenues in overall mobile revenues rising from 3.1% in Q2FY12 to 5.2% in Q2FY13. Rollout of Aadhar-based payments and money transfers within the country are a good source for bottom line enhancement, something Vittal will no doubt focus on. The niggardly 5 MHz of 3G spectrum is a dampener for data usage but Bhartis BWA spectrum will make up for this.
The 800 pound gorilla will continue to be the regulatory overhang since Bharti can ill afford the costs of refarming given its debt-to-ebitda is already a high 2.8 times projected FY13 earnings. While markets may still give Bharti Airtel more debt if they see more consolidation in the market, the killer will be the governments decision to charge high upfront auction-based entry fees while keeping unchanged the current 9-10% annual licence/spectrum chargesthis means a 25-30% cut in current ebitda margins as the new system takes root over the next 5-7 years. Lobbying the government to change this will be Vittal/Mittals biggest challenge.