SingTel profit dips on Bharti costs - Singapore-based operator surpasses 400m subs but its emerging-market assets are dampening profits

Singapore-based mobile giant SingTel surpassed the 400 million mobile connections mark in Q1 2011, an increase of 37 percent or 110 million from a year earlier. While customers at its two wholly-owned subsidiaries — SingTel in Singapore and Australia's Optus — only account for 12.4 million, the group's total was swelled by strong subscriber growth at many of its so-called 'regional associates' in which it owns minority stakes, notably Indian-based Bharti Airtel.

Mainly due to its 32.25 percent equity stake in Bharti, SingTel is now present in 25 countries following Bharti's expansion into Africa last year, which served to more than double the global market footprint of both operators. Bharti — also the market leader in India — had 211.9 million subscribers at end-Q1 (SingTel's fiscal Q4), accounting for over half of SingTel's 402.5 million total. Bharti's customer base rose 66 percent or 84.3 million from a year ago. Even on a proportionate basis (weighted to reflect SingTel's percentage ownership in each subsidiary) Bharti now accounts for 68.3 million of SingTel's 141.3 million total. SingTel's proportionate connections at Indonesia's Telkomsel (34.8 million) and Globe Telecom in the Philippines (12.9 million) also outnumber those in Singapore and Australia.

But despite this strong customer growth, SingTel's minority assets have to date failed to contribute significantly to its bottom line, and — in the case of Bharti — expansion costs are actually eating into profits. In Q1 2011, SingTel reported group revenue of SGD4.6 billion (US$3.7 billion), up 3.8 percent year-on-year, but net profit of SGD992 million was down 2.3 percent. The costs incurred via Bharti — due to both 3G rollout in India and the African acquisitions - was cited as a key reason for SingTel's Q1 profit slipping below SGD1 billion; the firm claimed that net profit would have increased 1 percent if these costs were excluded. Ordinary pre-tax earnings from SingTel's regional associates declined 12.3 percent to SGD479 million in the quarter, partly due to weakened regional currencies in relation to the Singapore Dollar. But the firm noted that the decline would have been just 8 percent if the costs at Bharti's African operations were excluded.

The regional associates accounted for 43 percent of SingTel's proportionate EBITDA in the quarter, compared to 34 percent from Australia and 22 percent from Singapore. Telkomsel in Indonesia — which has just surpassed 100 million subscribers — was the most profitable of SingTel's minority assets, contributing SGD190 million in pre-tax earnings in Q1 (down 7.2 percent year-on-year), followed by Bharti on SGD173 million (down 29.1 percent). The strong Singapore Dollar meant that all regional subsidiaries posted a lower contribution than a year earlier, with the exception of Thailand's AIS, which grew by a healthy 38 percent; Warid in Pakistan reported a narrowing loss.

Aside from the negative currency fluctuations, there were a myriad of other market dynamics that dampened results across SingTel's emerging markets footprint. In its earnings statement, SingTel itself noted the impact of "intense competition faced by our larger associates," likely a reference to markets such as India, Pakistan and Bangladesh that support a high number of market players. While it noted that India's fierce pricing war had stabilised in recent quarters, these markets are predominantly prepaid, remain highly price sensitive and have some of the lowest ARPUs in the world. The effective-price-per-minute (EPPM) in India, for example, has long since dipped under US$0.01, compared to US$0.12 for SingTel in Singapore. The situation is exacerbated by the fact that data services in many of SingTel's regional markets are still at an early stage due to 3G licences only just being issued (India) or not yet available at all (Pakistan, Bangladesh and Thailand). Nevertheless, SingTel has vowed to focus on mobile broadband in these markets in its current fiscal year in a bid to diversify away from voice revenue, which continues to erode in many markets due to pricing pressures.

For the time being, the weak contribution from the regional associates is being offset by ongoing strong performances at the two wholly-owned subsidiaries, especially Optus. The Australian operator reported a 10 percent year-on-year rise in EBITDA in Q1 to AUD672 million (US$724 million) driven by contributions from both its mobile and fixed-line segments. Operating revenue rose 4 percent to AUD2.32 billion, underpinned by continued mobile revenue growth, while net profit for the quarter grew 19 percent to AUD261 million. Optus' mobile subscriber base surpassed 9 million in the quarter, and included 5.09 million 3G subscribers (up 5 percent from Q4 2010) and 1.28 million mobile broadband subscribers. Blended ARPU remained stable at a high AUD47 (US$50.6).

In Singapore, SingTel reported only a 1 percent rise in revenue, while EBITDA dropped by 5 percent. However, its domestic mobile arm performed well with revenue growth of 9 percent (to SGD455 million), a record number of postpaid quarterly net additions (+51,000), and a 72 percent rise in mobile broadband subscribers (to 869,000).

Matt Ablott, Analyst, GSMA Intelligence:

In common with many multi-market operators, SingTel has deployed a dual strategy focusing on both high-value mature markets (Singapore and Australia) and low-value emerging markets (its regional associates). The nature of this footprint makes the group susceptible to forex movements and these were certainly a reason behind the dip in profit in its fiscal fourth quarter (though it also benefited from a strong Australian dollar at Optus). However, its exposure to Bharti Airtel was the real talking point: following its African expansion the Indian firm gives SingTel vast scale and influence, but little prospect of a significant return-on-investment in the short term. The ability to squeeze out a profit from new 3G services in India will be a challenge - even with Bharti's unrivalled expertise for operating on wafer-thin margins - while further investments in rebranding, marketing, networks and licences will be required to build the African businesses. With this is mind, Bharti-related costs could weigh heavily on SingTel's bottom line for some time. As with the rest of its emerging markets assets — where fixed-line broadband penetration is generally low — SingTel is banking on mobile broadband services to take-off and offset these costs. SingTel's wholly-owned subsidiaries in Singapore and Australia performed well in the last fiscal-year, though it is forecasting only low single-digit growth in revenue and earnings at these units for FY2012. This means that its emerging markets will at some stage soon need to start delivering profit as well as customer growth.

SingTel Group mobile data, Q1 2011
Source: GSMA Intelligence, company data

¹ Proportionate share of mobile customers based on group's percentage ownership
² India, Sri Lanka, Bangladesh
³ Share of associates pre-tax earnings