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Edited Transcript of BHARTIARTL.NSE earnings conference call or presentation 2-Aug-19 9:00am GMT

Q1 2020 Bharti Airtel Ltd Earnings Call

New Delhi Aug 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Bharti Airtel Ltd earnings conference call or presentation Friday, August 2, 2019 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Badal Bagri

Bharti Airtel Limited - CFO

* Gopal Vittal

Bharti Airtel Limited - MD, CEO of India & South Asia and Executive Director

* Nakul Sehgal

Bharti Airtel Limited - Corporate CFO

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Conference Call Participants

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* G. V. Giri

IIFL Research - VP of Telecom

* Kunal Vora

BNP Paribas, Research Division - Analyst

* Parag Gupta

Morgan Stanley, Research Division - Executive Director

* Pranav Kshatriya

Edelweiss Securities Ltd., Research Division - Research Analyst

* Rajiv Sharma

SBICAP Securities Ltd., Research Division - Co-Head of Institutional Research

* Ravi Menon

Elara Securities (India) Private Limited, Research Division - VP of IT Services & Internet and Analyst

* Sachin Shrikant Salgaonkar

BofA Merrill Lynch, Research Division - Director

* Sanjay Chawla

JM Financial Institutional Securities Limited, Research Division - Research Director

* Vivekanand Subbaraman

AMBIT Capital Private Limited, Research Division - Media Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. I'm the moderator for this conference. Welcome to the Bharti Airtel Limited First Quarter ended June 30th 2019 Earnings Call (Operator Instructions) 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 risks that we face.

I now hand over the call to our first speaker of the day, Mr. Badal Bagri. Thank you, and over to you, Mr. Bagri.

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Badal Bagri, Bharti Airtel Limited - CFO [2]

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Good afternoon, ladies and gentlemen. Thank you for joining us today for this earnings call to discuss our results for the first quarter ended 30th June 2019, which we announced yesterday.

Present with me on the call is today are Gopal, Nakul and Komal.

Before we proceed further into the call, I wanted to highlight that as you would be aware Airtel Africa has been admitted to the premium listing segment of the London Stock Exchange, along with the parallel admission on the Nigerian Stock Exchange. Consequent to the dual listing, Airtel Africa has now assumed an independent status having its own empowered Board and management, which will be responsible to its shareholders for the performance and the governance of the company. While Airtel Africa continues to remain a subsidiary for Bharti Airtel Limited, henceforth, our earnings call will be limited to India and South Asia. Airtel Africa will conduct its own earnings call for the benefit of its investors as was done this time. The transcript of the same is available on the website, airtel.africa.com.

As you are aware, the Ministry of Corporate Affairs notified the leasing standard Ind AS 116, which replaces the existing standard Ind AS 17. Ind AS 116 is applicable to all companies with effect from 1st of April 2019, and our financial statement have been prepared in accordance with the same.

Under the earlier standard, operating leases were treated as expenses, whereas under Ind AS 116, all long-term leases, whether operating or finance, are required to be recorded in the balance sheet. Thus, our leasing agreements with network sites -- for network sites, bandwidth, transponders, offices, retail stores, et cetera, which were being expensed until the last quarter will now be capitalized resulting in depreciation cost and interest expense on the lease liability. This has impacted our margins and key financial ratios and therefore, they are not comparable to prior periods. However, in line with our standards of highest corporate governance, we have also provided a pro forma on the underlying financials.

Another key reporting change implemented this quarter is our DTH segment. Subsequent to the implementation of the new tariff order, the services -- service providers are responsible largely for retransmission and not in a position to control the pricing of the content being distributed. Recording only the margin earned from the broadcasters for distribution of the content is considered as revenue.

Moving on to business and performance. Let's talk about our wireless business first. The broader industry, having now consolidated to 3 large players, continues to see some semblance of stability. Continuing on the 4.3% sequential growth that we witnessed last quarter, this quarter, mobile revenues grew by 2.2%, led by our focus on quality customers, prudent tariff tweaks and up trading on account of Airtel Thanks. While we have witnessed revenue growth despite any outright tariff increase, we continue to believe that prices need to move up in the long term to ensure industry viability. You will recollect that last quarter, mobile margins benefited from certain one-offs and the underlying margins were close to 22%. Underlying EBITDA margin for the mobile segment stood at 23.2% for this quarter.

Our 4G base continues to grow, and we added almost 8.4 million customers during the quarter. With this now, we have 120 million data customers of which more than 95 million are on 4G. We do believe that this 4G handset penetration still has a significant headroom to grow and therefore, for the foreseeable future, India will be largely a 4G market. However, the pace of handset adoption has remained stagnant rather slowed down in the last few quarters due to high prices of the handset and adverse currency fluctuations impacting the cost, we are hopeful that the pace of 4G adoption will accelerate, and this mix change will be a positive catalyst for us.

Our focus on quality customers is also evident from the best-in-class operational parameter. Our ARPU are now at INR 129, with our customer base as 99% plus, and the monthly average data usage of data from the customer base is at 11.7 GB per month. Within mobile posted businesses, we also witnessed a strong performance on the back of simplified pricing architecture, our strong brand, network and the trust that customers place on us.

In order to cater to the -- this quality customer base, we are continuously realigning our strategy to win decisively in the market and be a truly differentiated player. An average Indian smartphone customer is spending approximately 4 hours on their smartphones, and devices are moving away from being pure connectivity to lifestyle. Hence, there is a need to offer something more to these customers. Airtel Thanks, our biggest initiative, allows us to be the tether of this digital lifestyle of our consumers.

While originally Airtel Thanks was launched in August 2018, it was revamped this quarter to add more value to our customers and provide a differentiated experience using technology, data and partnership. We further increased the gamut of our initiatives to include innovative offerings such as insurance, online courses from leading global academies while expanding the scope to include home broadband customers as well. With more than 140 million customers under the program and diverse customer benefits available at each tier, the program affords an ability for customers to move up the value chain, and we are beginning to see some early signs of this upgrading. All of these customer interventions need strong networks, and I'm delighted to add that we continued our quest for network excellence this quarter as well.

Talking of some noteworthy developments. We added more than 26,000 mobile broad-based band-based stations. Alongside network expansion, we also further added capacities across the network through additional sectorization and Massive MIMOs. Our VoLTE adoption of 4G smartphone continues to grow, and a very significant portion of smartphone traffic now runs on VoLTE. In line with ramping up our 4G network, we completed reforming of our 900 megahertz sector to 4G in all the 10 circles where it is liberalized. This has improved indoor coverage for our 4G customers.

Airtel became the first operator in India to shutdown 3G network layer in Kolkata. This is one of the starting points for us, the learnings from which would be used for shutdown of 3G networks in other circles. This makes the network simpler, besides ensuring better coverage and capacity for 4G customers. With the excellent network deployment, such an upgrade has been realized through software upgrades on loan, implying minimal additional investment. To cater to the exponential traffic growth, we further expanded our fiber footprint to more than 2 lakh 80,000 route kilometers with most of the sites either single hub or 2 hubs from the fiber port.

We continue to work with partners like Google, Facebook, Netflix, Amazon for deeper and distributed content caching. This has helped us to serve our customers with significantly lower latency, helping them to have lower buffering, better gaming experience and faster transactions. Airtel has been the first operator across the globe to commercialize Google EPC, which will further help in hosting content and latency-sensitive applications at the edge, translating into superior customer experience. Our efforts have shown results. As per Ookla, Airtel has the best download speed in 16 out of 20 circles, with latency being lowest in 12 out of 20 networks compared to all other networks in May 2019.

Talking briefly about the other businesses. Continuing on the positive momentum of last quarter, homes business continues to see positive revenue momentum. Our investments in FTTH post deployment are now reaping benefits with an expansion in the base and an increase in ARPU after 10 consecutive quarters of decline. We continue to be optimistic on the overall market opportunity and focus on expansion of our fiber presence and efforts to offer superior propositions to our customers. The customer base stood at 2.34 million as at the end of 30th June 2019.

Digital TV services business continues to grow on the back of a strong customer additions and increasing upgrades to premium plans. This quarter, we added 634,000 customers, almost double of our usual run rate. The total base now stands a little over 16 million as at the end of June '19. Due to the change in reporting mechanisms as mentioned earlier, the first quarter '20 numbers are not comparable with prior periods. On an underlying basis, the business saw a 9.3% quarter-over-quarter growth in earnings.

Airtel business after marginal degrowth last quarter has reported revenues of INR 32 billion, which is a 6.8% sequential growth. Net revenues grew profit at 7.3%, sequentially. The business continues to grow, led by the demand for connectivity and solutions across the spectrum. Overall, trends in the other lines of business remain intact.

Moving on quickly to other noteworthy areas and significant events for this quarter. As mentioned previously, Airtel Africa completed its IPO this quarter. The issue received strong response from mainly high-quality investors from around the world. Airtel Africa is now the first telecom company to simultaneously list on the premium segment of the London Stock Exchange and Nigerian Stock Exchange through an IPO. Following completion of the offer, Airtel Africa is also expecting to be eligible for inclusion in the FTSE U.K. indices besides the Nigerian indices.

Moving on to M&A. Following the TDSAT's order directing the DOT to take the merger on record and approval of the schemes of arrangement by Delhi and Mumbai bench of NCLT, the scheme of arrangements of the merger of Airtel with consumer mobile business of Tata has become effective from July 1st 2019. Consequently, all customer's assets, spectrum and agreed liabilities of these businesses stand merged with Airtel effective July 1st 2019. Airtel and Hughes Communications have entered into an agreement to combine their VSAT operations in India. The combined entity will benefit from the enhanced scale, improved operational efficiencies and wider market reach.

Moving on to our consolidated financials. Consolidated revenues for the quarter stood at $207 billion, up 4.7% on a reported basis and 6.8% on a comparable basis. Growth continues to be broad-based, all segments across India and Africa. Consolidated EBITDA of INR 85 billion during the quarter increased by 24.2% compared to INR 68 billion in the corresponding quarter last year. EBITDA margins for the quarter was at 41% as compared to 34.5% in the corresponding quarter last year. Adjusting for the Ind AS 116 impact, EBITDA for the quarter stood at $69 billion, up 1.5% year-over-year, and the consequent EBITDA margin is at 33.7 percentage points.

Depreciation and amortization expenses were at INR 68 billion versus INR 51 billion in the corresponding quarter last year, up 31.4% year-over-year, primarily due to the impact of Ind AS 116 and sustained CapEx spent aimed at enhancing our 4G capacity. Net finance cost for the quarter was at INR 32 billion, higher by INR 11 billion as compared to the corresponding quarter last year. Increase is largely on account of reporting changes and higher interest on borrowings and derivative and forex losses. The resultant loss before tax exceptional and exceptional items for the quarter ended 30th June 2019 was INR 15 billion as compared to the loss of INR 3 billion in the corresponding quarter last year.

The company recognized a net exceptional loss of the INR 14 billion during the quarter, mainly on account of derivative liabilities pertaining to customary indemnities provided to a class of investors of Airtel Africa Plc, and expenses relating to its listing besides charges on account of accelerated depreciation of 3G equipment and certain other items. Net loss post exceptional items came at INR 28.6 billion. CapEx for the quarter was at INR 50 billion as compared to INR 82 billion in the corresponding quarter last year.

Consolidated net debt of the company stood at INR 1,166 billion, primarily on account of increase in lease liabilities in line with Ind AS 116. On a comparable basis, consolidated net debt was INR 920 billion. The sequential decline resulted from the repayment of debt from the rights issue proceeds. The proceeds from the Africa IPO were realized in July and therefore, you will see the impact of the net debt reduction from these proceeds in second quarter of the financial year. The finance these obligation added on account of adoption of Ind AS 116 is INR 240 billion.

To sum up, the telecom industry in India continues to witness a huge expansion in data and voice. Our nonmobile business continues to expand at a healthy rate, and Africa remains on its profitable growth journey. With our superior investments, quality customer base, strong brand and innovative product portfolio, we are well poised for future growth.

With that, I hand over -- hand you over to the moderator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Sachin Salgaonkar from Bank of America, Mumbai.

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Sachin Shrikant Salgaonkar, BofA Merrill Lynch, Research Division - Director [2]

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Congratulations for the good set of numbers. I have 2 questions. First question, in the last couple of quarters, we did see a mix bit change between your subscribers and ARPU, where the subscriber numbers were reducing and the ARPU was improving. Now with most of this entire low-end subscriber rationalization behind us, the question is could we see that trend continuing? I.e., ARPU continues to inch up and your subscriber number, more or less, grows at a relatively slower pace? So that's first question.

Second question, just wanted to understand EBITDA margin improvement levers for cellular business going forward. I understand there could be a bit of pressure on IUC in net revenue going down and perhaps a bit from Tata consolidation. But what are some positive levers we are seeing actually?

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Gopal Vittal, Bharti Airtel Limited - MD, CEO of India & South Asia and Executive Director [3]

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Sachin, this is Gopal. Yes, we did see last quarter, which is quarter 4, an erosion of about 45 million customers and consequent bump up in ARPU. That is kind of bottomed out now. So we saw an erosion of about 1.5 million customers, INR 4 increase in ARPU. I would say that the -- as far as minimum recharge plans are concerned, whatever had to be done is now done. The intrinsic movement or improvement in ARPU will now be a function of upgrading from 2G to 4G, and our program on Airtel Thanks, which will drive some upgrading. Having said that, we are entering into a seasonal quarter, as you know. If you look back over the last few years, you'll always find quarter 2 is a seasonal dip in -- over time.

As far as the EBITDA margin is concerned, levers continue to be our -- I think the biggest lever will be revenue growth, clearly. At the same time, we are driving a strong program on water and waste, and we'll continue to do whatever it takes on -- all of the up cost items that we can look at to try and see what we can get to get efficiency out of it.

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Sachin Shrikant Salgaonkar, BofA Merrill Lynch, Research Division - Director [4]

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Okay, Gopal. We do see in there clearly, your revenue appears to have bottomed out. But can we say the same thing about EBITDA that EBITDA has also bottomed out?

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Gopal Vittal, Bharti Airtel Limited - MD, CEO of India & South Asia and Executive Director [5]

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I think the incremental revenue that we have generated over this quarter as well as the last quarter pretty much flowed through into EBITDA to the extent of, I would say, probably about 60-odd percent. Once you adjust for the one-off that Badal spoke about, if you recall, we had said that there's a INR 200-crore one-off in the last quarter, which, once you adjust for all of that, you'll see a flow-through EBITDA. So yes, as the revenue grows, our effort is to try and see how we can keep up cost lower than the growth of revenue.

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Sachin Shrikant Salgaonkar, BofA Merrill Lynch, Research Division - Director [6]

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Got it. And one small follow-up. Do we see any residual CapEx given the fact that traffic on your network continues to rise steadily?

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Gopal Vittal, Bharti Airtel Limited - MD, CEO of India & South Asia and Executive Director [7]

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No. I think this is what Badal referred in his opening comments to the fact that we are in the process of shutting down our 3G networks. We have experimented quite boldly in Calcutta to really shut off the 3G network altogether, refound the 900 megahertz, which is adding on 3G on LTE. That worked very well for us. That's given us a lot of confidence. We now have a plan to pretty much shut the 3G networks across the country by December. So you will see a lot of action in this quarter. Don't forget that we have anywhere between 10 and 15 megahertz of 2,100 band spectrum in most circles. It's a very, very good mid-band spectrum. And once you are able to get 10-megahertz going, and that see-through capacity for a period of time. So our CapEx will continue to look at deployments of new sites wherever it's required in a very smart and clever way. And the second part of the CapEx will continue to be some loading on the 2,300 band because 1,800 band is pretty much deployed all across the country.

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Operator [8]

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The next question comes from Mr. Parag Gupta. Mumbai.

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Parag Gupta, Morgan Stanley, Research Division - Executive Director [9]

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So Gopal, I just had 2 questions. Firstly, when I look at the 4G subscriber base across the country, I guess the focus of every telco, obviously, is to drive that part of the bucket. Just wanted to understand, based on your own 4G subscriber base, I wanted to get some understanding of how the trends are out there, primarily with respect to all of these subscribers using Airtel as a primary SIM bulk of the time for the data usage? And how do you see that trending? Like do you see people increasing data usage over a period of time from another network to yours? Or do you see that relatively consistent trend? So just trying to understand your SIM versus your competitors SIM.

And the second question I had was on Airtel Thanks. All these apps that you're now providing and including, the music app of Wynk. Could you give us some sense of what kind of usage patterns are you seeing out there? Are you seeing higher engagement times? What's the daily active user base? And how do you see that trending, which is giving you some confidence that this could lead to our ARPU upgradation over a period of time?

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Gopal Vittal, Bharti Airtel Limited - MD, CEO of India & South Asia and Executive Director [10]

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So on the 4G base, we have about 95 million customers, which is what we reported in quarter 1. That's a growth of about 9 million customers. When we report this customer base, by and large, most of these customers have the 4G slot on the primary SIM because one of the things that you find on devices in India is that most devices operate -- have a data bearer only the first SIM slot. So if you're on the second SIM slot, you can fundamentally use only voice. Now when a customer buys a bundle of, let's say, INR 160, INR 170 with lots of data, chances are that he will put it on the primary slot, and that's exactly what we're seeing.

So to the second question, which is on the shifts between us and competition, that's difficult to say. I think our focus is to see what can we do to grow market share. We've had, I would say, probably 4 quarters of kind of steady market share. This quarter, our expectation is that we would pick up some market share, which will be satisfactory from our perspective given the competitive context. On Airtel Thanks, Wynk Music has done exceedingly well in this quarter. We launched the feature of actually setting a ring tone through the music app, which has actually gone very well, and that is, in a way, creating a lot of stickiness for our service. We -- I can give you a quick sense of our monthly active users. We have breached the 30 million mark. But if you take a slightly, maybe a definition of 90-day users, then that gets to a much higher number, but the monthly active user is about a 30 million mark. Airtel TV is, again, similar. And between these 2 apps, we have a base of almost 50 million customers engaged on a monthly basis. We've set up a platform at the back, I think, I referred to it some time ago, called Customer 360, which is really looking at the intelligence by plotting the usage and the understanding of this customer all through this platform of Customer 360, which is helping us to drive greater engagement and greater stickiness.

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Parag Gupta, Morgan Stanley, Research Division - Executive Director [11]

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And Gopal, with what you're providing in Airtel Thanks today, do you think that this can keep getting richer at the same price points? Or do you think this is good enough for the prices that are currently being offered?

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Gopal Vittal, Bharti Airtel Limited - MD, CEO of India & South Asia and Executive Director [12]

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I think our effort is always to raise ARPU. We do believe that the pricing today, and we've mentioned -- we made this clear over many, many quarters now. So the pricing levels in India are unsustainably low. It's -- you get, for 45 gigs of data, unlimited calling for about INR 150, which is clearly very, very low. That needs to rise. But that is a function of the competitive dynamic in the market. So yes, we will keep adding value. But we will try and clear this up so that we throw in more value as people upgrade. As we are doing this, we're also getting increasing confidence that we could also use Airtel Thanks in a way to drive other streams of revenue, such as carrier billing and perhaps some early signs of -- that is early, early ways to monetize this through advertising. But that is something that we are assessing right now. As of now, our effort will be to try and upgrade.

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Operator [13]

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The next question comes from Mr. GV Giri from IIFL Capital, Mumbai.

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G. V. Giri, IIFL Research - VP of Telecom [14]

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This is a question on the derivative loss. You have some agreements with the pre-IPO investors in Africa. I just wanted to know how long does this work? Then is there a limit on the total exposure on this? And since you paid in cash terms also, is the protection correspondingly reduced? And is it dependent on the stock price? And since in July, the Airtel Africa stock has fallen a little bit more from the June closing level. Will there be another hit in 2Q? Those are my questions.

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Nakul Sehgal, Bharti Airtel Limited - Corporate CFO [15]

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GV Giri, I'll answer this question. This is Nakul. Just to give you bit brief of -- from what Badal had actually alluded to. So just to give you a background, a clutch of investors in Airtel Africa and a subsidiary of Bharti Airtel actually had entered into an agreement for investor protection. This protection is really a pursuant to customary indemnities and warranties, which is pertaining to their investment in equity shares of Airtel Africa. The arrangement to settle that you see in this quarter was part of the process to facilitate Airtel Africa's admission to the premium listing of the London Stock Exchange. And in this quarter, as you rightly pointed out, the expected charge that you see is pursuant to this derivative liabilities along with other listing expenses, which have been transparently recorded as an exceptional item in this quarter. These liabilities, you will note, are quite customary in nature because such protections are given to investors to give them comfort and which can only be crystallized as when the event occurs, which in this case, is obviously the IPO. And since the IPO has happened, some of it has been crystallized, and a large part of it is already being paid out. Some of the big items that you see is, of course, pertaining to tax demand, which includes Tanzania litigation that you would have heard out, the IPO obligations and some minority adjustments, which are now being crystallized and resolved by way of an arrangement is already recorded in the books. I hope that answers your question.

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G. V. Giri, IIFL Research - VP of Telecom [16]

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So my question is, I think, in June end the stock closed at $0.80, and now it's $0.69 as of today. So is that movement going to trigger another payout? That was the main question.

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Nakul Sehgal, Bharti Airtel Limited - Corporate CFO [17]

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So the amount that we've recorded is actually based on a derivative liability or a derivative financial instrument, which is based on a balance sheet date of 30th of June. And that's the best estimate of the liability that we've recorded for now.

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G. V. Giri, IIFL Research - VP of Telecom [18]

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Yes. But if the stock moves down, is there going to be more payout in the future. So how should we even forecast this? Or is there a limit beyond which there won't be a payout?

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Nakul Sehgal, Bharti Airtel Limited - Corporate CFO [19]

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Quite honestly, these derivative instruments run on complex pricing models, and we've used a complex pricing model to determine the amount of liability that we should record and based on which a payout has already happened as of date.

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G. V. Giri, IIFL Research - VP of Telecom [20]

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Yes. But my question is on the future payout. I'm not really asking you for an estimate of the amount. I just want to know if the stock falls, will there be more payouts?

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Nakul Sehgal, Bharti Airtel Limited - Corporate CFO [21]

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It's -- honestly, it's very hard to speculate and give you an amount of what is going to be the future payout. But what we've recorded is what has transparently been disclosed.

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Operator [22]

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The next question comes from Mr. Ravi Menon from Elara Securities, Mumbai.

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Ravi Menon, Elara Securities (India) Private Limited, Research Division - VP of IT Services & Internet and Analyst [23]

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Congrats on a good set of numbers. My first question is how many of the 140 million customers that are so worked out by Airtel Thanks have taken advantage of at least one of the offers of the program?

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Gopal Vittal, Bharti Airtel Limited - MD, CEO of India & South Asia and Executive Director [24]

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And what's your second question?

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Ravi Menon, Elara Securities (India) Private Limited, Research Division - VP of IT Services & Internet and Analyst [25]

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The second is how long do you think it will take to completely shut down 3G. So you said December, you had covered most of the country, and what would be the likely coverage from that? And how much of the lease obligations should we say relates to 3G?

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Gopal Vittal, Bharti Airtel Limited - MD, CEO of India & South Asia and Executive Director [26]

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On Airtel Thanks, we don't quite report how many customers have taken any one service. But I would say that, we have -- all of these customers on Airtel Thanks, some of them are not digitally -- most of the benefits on Airtel Thanks just -- let me just pull back. All the benefits in Airtel Thanks are delivered through a digital layer. So to that extent, it's not that 100% of them have taken it, but a very large portion have taken it. And many of them have taken actually 2 services.

On the 3G question, we are, like I said, I think, this quarter, we shut down Calcutta. We will, by September, I think, there will be another 6 or 7 circle that will get shut down. And between December and March, pretty much, the entire 3G network should be shut down.

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Ravi Menon, Elara Securities (India) Private Limited, Research Division - VP of IT Services & Internet and Analyst [27]

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And how much cost savings do you expect from the 3G shutdown?

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Gopal Vittal, Bharti Airtel Limited - MD, CEO of India & South Asia and Executive Director [28]

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How much what?

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Badal Bagri, Bharti Airtel Limited - CFO [29]

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Cost savings.

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Ravi Menon, Elara Securities (India) Private Limited, Research Division - VP of IT Services & Internet and Analyst [30]

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The cost savings?

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Badal Bagri, Bharti Airtel Limited - CFO [31]

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Cost savings. So Ravi, the cost savings won't be enough because most of the places -- we had already migrated to SRAN. So we'll be using the same equipment to deliver 4G. So there won't be significant cost saving from a network perspective, except for the AMC and other benefit. AMC and the managed services is where we'll have some benefit.

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Ravi Menon, Elara Securities (India) Private Limited, Research Division - VP of IT Services & Internet and Analyst [32]

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All right. Great. So I guess there will be really no changes in lease obligations as well. Right.

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Badal Bagri, Bharti Airtel Limited - CFO [33]

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No. Lease obligations will not have any changes. There will be marginal impact on managed services and EMCs, but they will be not large.

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Ravi Menon, Elara Securities (India) Private Limited, Research Division - VP of IT Services & Internet and Analyst [34]

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And one last question, if I may. You seem to have done far better compared to Vodafone Idea in terms of how you maintain your 2G subscriber base from -- through this chart. What do you think you would attribute that to? Is it because you think you have now more published coverage compared to them or better quality network? What would you say is the main reason?

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Gopal Vittal, Bharti Airtel Limited - MD, CEO of India & South Asia and Executive Director [35]

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I can't speculate on what comparing ourselves to our competition. I think what we would see is that the factors that we've still lost 1.5 million customers and our effort will be how do we sort of make sure that we don't lose customers. Secondly, I think the second thing that our obsession is to see how do we get really active customers. Our VLR percentages are close to 99.6%, so our active customers are very, very strong, which means anybody who is engaged in our network is actually giving us revenue, and that's important for us.

And the third part, which is really our focus, whether it's 2G or 4G is, really how do we upgrade our customers. We're happy to lose customers who won't -- don’t pay us money, which is why we did the minimum ARPU plan. And from here onwards, really how do we upgrade these customers and drive greater ARPU. I think that's really the focus. And the entire system is really geared towards looking at about 670 districts at a district level. We've identified around 244 districts that are really the most critical districts for us where the bulk of industries. Those are districts where we put a significant amount of resource, the right investment, the metrics attract at that level. So those are the parts about execution, which I think we take very seriously as well.

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Operator [36]

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The next question comes from Mr. Rajiv Sharma from SBICAP Securities, Mumbai.

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Rajiv Sharma, SBICAP Securities Ltd., Research Division - Co-Head of Institutional Research [37]

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Just a couple of questions from my side. So firstly, Gopal, we still continue to lose subscribers. Is it all related to the low-end subs, which is, which could be related to Jio Phone or weak churning because they're not paying us, or there is some movement in the high end as well?

Secondly, Jio is not offering any kind of postpaid or they don’t seem to be very serious about postpaid today. Vodafone and Idea are struggling. Do you think next 2 to 3 quarters, with your Airtel Thanks, with your investments in network, we could see some spike in your postpaid additions and ARPU improvement following that?

Lastly, I just want to understand, what -- how many services like, you said, 2 services people have taken in this Airtel Thanks. How many services one will have to take for your ARPUs to improve? And currently, how much of this Airtel Thanks subscribers have resulted in ARPU improvement? Because I'm also trying to understand there are a lot of these wallets like Paytm and PhonePe, which are giving a lot of cashback and similar discount. So how do you differentiate among them? That's it.

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Gopal Vittal, Bharti Airtel Limited - MD, CEO of India & South Asia and Executive Director [38]

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So I think just to step back, when we did the minimum ARPU plans, before we did that, I think we had 320 million customers -- or was it -- 332 million customers, and our estimate was that we would have probably have lost, which is what we had kind of indicated at that time, about 65 million to 70 million customers. So to that extent, I think we have been surprised -- pleasantly surprised that we have not lost as many, and we have kind of held it now at about 281. From here on, our foot will be to try and see how do we not lose any customer and continue to see some growth. But it will be modest growth given the -- what's happening in the marketplace.

Postpaid, you're right, is an opportunity. And we have we rearchitected the pricing on postpaid. Historically, our -- going back in time over the last decade, the acquisition pricing was always lower than pricing for existing customers, which led to an arbitrage. And given the significant premium that postpaid has over prepaid, we have rearchitected pricing to fit in line with existing customers, which has led to no further downgrades. And this is the reason that you're seeing an ARPU upside. Secondly, the acquisition continues to remain as it was and is also giving us an ARPU upside on the acquisition.

Our third focus on postpaid is to see how do we actually give a better service and better experience. A lot of focus on the network to try and make sure the network quality is better, making sure that we are sort of wiring up and getting the big resident welfare associations, the big tech parks. We identified 10,000 to 12,000 buildings, over 4,000, 5,000 tech parks across the country or when I say tech parks, it's office, complexes, which are all really focused on to actually give a better network experience.

And finally, we are looking at how do we segment on our postpaid offer to deliver better value, whether it's in content, whether it's in terms of experience, no waiting at the call center, no waiting at the store and so on and so forth. So those are the reasons that we think that the postpaid business is holding up. We're not happy with the way our postpaid is. It should be much bigger. In fact, if you compare a market like Brazil, for example, you'll find postpaid is about 60%, 65% of revenues. Philippines, which is not much richer than India, is about 40%, 45%. So India should be much bigger in postpaid, and the only reason this has not yet happened is because prepaid is so underpriced when compared to postpaid.

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Badal Bagri, Bharti Airtel Limited - CFO [39]

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I think that was -- the question was how many services one has to take to put ARPU at (inaudible).

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Gopal Vittal, Bharti Airtel Limited - MD, CEO of India & South Asia and Executive Director [40]

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No. I don't think we look at it is how many services we have to take. I think that if you look at, for example -- just to give you an example, if you look at the gold tier, where you have to spend about INR 200 or more. Then what you get access to is a lot of exclusive content through a partnership with Zee5. We also give you exclusive content on English through our partnership with HOOQ and so on. So that, in itself, is a reason to upgrade. We're also trying to look at what can we do to find more hooks to upgrade. Airtel Thanks will see a very big refresh in the next 3 to 4 months as we put those hooks in place. I don't want to talk a little bit about it because it's premature, but we're putting some very strong hooks to try and get upgrades going in the next 3 to 4 months.

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Rajiv Sharma, SBICAP Securities Ltd., Research Division - Co-Head of Institutional Research [41]

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And as I talked about Paytm, PhonePe, so how do you differentiate with them apart from your content bundling?

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Gopal Vittal, Bharti Airtel Limited - MD, CEO of India & South Asia and Executive Director [42]

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I don't think we are looking to differentiate with them. As far as, we are concerned we see them as a channel. There also distribute our recharges. They are just a wallet. In the case of Paytm, it's a wallet, or in the case of PhonePe, it's just a kind of a UPI platform, which the app sits on top of the UPI platform with an underlying bank account. So we don’t see that as a competition. Think of it as a storefront. You go to that retail shop and actually recharge. You recharge on PhonePe. You might recharge on Flipkart. You might recharge on Amazon or in Paytm. These are kind of storefronters, as we see it. Some of them are wallets, but they're kind of masquerading as storefronts, which is fine. For us, we want to partner with everybody to make sure that we are getting recharges and payments through all of those. We are also focused on driving recharges and payments through our own properties, which is our own website as well as our own app, Airtel Thanks, and that is also growing smartly. By the way, when we get incremental business coming from these online platforms, you do see a reduction in cost because there is a lower channel commission online, then happens off-line because it's a distribution infrastructure with the distributor and a retailer and so on.

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Rajiv Sharma, SBICAP Securities Ltd., Research Division - Co-Head of Institutional Research [43]

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So it will be fair to say that every quarter, INR 3 to INR 4 of ARPU at least could improve for the next 3 to 4 quarters?

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Gopal Vittal, Bharti Airtel Limited - MD, CEO of India & South Asia and Executive Director [44]

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Well, I can't give you a guidance on that. So what I can tell you is that we've entered into a seasonal quarter.

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Operator [45]

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The next question comes from Mr. Kunal Vora from BNP Paribas, Mumbai.

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Kunal Vora, BNP Paribas, Research Division - Analyst [46]

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First one is you mentioned seasonal quarter like with large portion of revenue now coming from customers on bundled plans, should we still expect the seasonal weakness in second quarter? Or it's a lead by general consumer spending slowdown? Second is can you share -- sorry. Okay, you can just go ahead.

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Gopal Vittal, Bharti Airtel Limited - MD, CEO of India & South Asia and Executive Director [47]

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Yes. It's a good question that you asked because, I mean, that is the same question that we've been asking ourselves. But we still have a very large number of customers who are outside of bundled plans. So therefore -- and also, I think what happens is that when we look at the purchase pattern, it's not necessary that every customer buys a bundle every month. We have a metric, which we track internally to look at the continuity of the bundle purchases on a monthly basis. And that number is certainly not 100%. It's lower by at least 10% to 15%. And therefore, the question is what do customers do, and I think they kind of balance their budget, so sometimes they'll buy a bundle, sometimes they might buy a basic plan. So that kind of thing happens, and that's something that we see.

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Kunal Vora, BNP Paribas, Research Division - Analyst [48]

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Sure, sure. So you are like -- are you indicating that the growth has like slowed down compared to the last quarter? Or are you indicating that the second leg, we should all be expecting the kind of growth that you see in this quarter?

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Gopal Vittal, Bharti Airtel Limited - MD, CEO of India & South Asia and Executive Director [49]

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I'm not indicating anything. I'm just telling you that we've entered a seasonal quarter.

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Kunal Vora, BNP Paribas, Research Division - Analyst [50]

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Okay. Second question, can you share your longer-term plans for the Digital TV business? Can we see further consolidation in the industry and whether you're willing to commit more capital to the business?

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Gopal Vittal, Bharti Airtel Limited - MD, CEO of India & South Asia and Executive Director [51]

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That business is self-funding. It -- we're committing as much capital as that business needs. It's a good, neat little business, which is growing very well, and after the recent changes in the regulatory framework, I think we've been able to pick up almost 630,000 customers net additions in last quarter, which is a very, very big increase, a lot of it coming from the cable side. So we are pleased with how that business has progressed. One of the things we are looking at is to bring in a box, which will kind of offer a full-converged entertainment as well as the capacity to deliver broadband. This will happen soon, and we're already excited that once we do that, then it's a full-converged play that we can potentially deliver across multiple space. There have been some concerns about cord cutting in the urban areas and metros. We haven't seen any evidence of that yet.

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Kunal Vora, BNP Paribas, Research Division - Analyst [52]

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I wanted to check really what's executing on the -- like on any plans for acquisition? Would you be willing to be a competitor in the market? There have been talks that DishTV is looking regarding Airtel-DishTV building. So just want to check on that.

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Gopal Vittal, Bharti Airtel Limited - MD, CEO of India & South Asia and Executive Director [53]

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Yes. I think those are newspaper reports, so that is something that we can't comment on.

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Kunal Vora, BNP Paribas, Research Division - Analyst [54]

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Sure. And lastly, just on the status of litigations that are like [global] litigations, the point of interconnect like Jio and license fees and excess spectrum charges, what's the status? And when do you see resolutions and whether you see any risk of payments.

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Gopal Vittal, Bharti Airtel Limited - MD, CEO of India & South Asia and Executive Director [55]

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The cases is in court. The hearings have been concluded. The order now is reserved. So as soon as the orders come, we'll know. And that's the -- we're talking about the AGR case.

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Operator [56]

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The next question comes from Mr. Sanjay Chawla from JM Financial, Mumbai.

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Sanjay Chawla, JM Financial Institutional Securities Limited, Research Division - Research Director [57]

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My first question is on your enterprise -- sorry on the CapEx front. What sort of a CapEx we should expect ex Africa and particularly in India mobile? Is INR 50 billion going to be the run rate or we see a pickup going ahead in the third and fourth's quarter? That is the first question. And second question, Gopal, just a question on the -- there's obviously a lot of talk of price hike happening in the future, which will happen. But on the construct of price hike over the long term, from an industry point of view, customers are already getting 1, 1.5 GB per day for INR 122 a month. So my question is how difficult do you think it's going to be to get subscribers to shift to, let's say, more data for more higher amounts? Or do you think we'll also have to do, basically, cut down -- basically get them to on a less for same kind of a platform where you have to cut the data allowance at INR 122 price point to get some of those guys to move up. So just wanted your thoughts on the construct of price hikes that you see over the long term.

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Gopal Vittal, Bharti Airtel Limited - MD, CEO of India & South Asia and Executive Director [58]

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On the CapEx front, we have stopped giving guidance as we mentioned in the beginning of the quarter. But we also did indicate that this is going to be a lower CapEx year than last year. Typically, we see a higher upfront CapEx the first half of the year, it tends to be higher than the second half. But by and large, the CapEx will be moderated compared to last year. So that is the first point. On the second point, I think -- I mean I'll answer the question in theory and probably then in practice. In theory, in a market like India, which is so stratified and where people -- there are the rich, the middle as well as the poor. And I'm probably oversimplifying. There are people who can easily pay INR 1,000 for a mobile telephony. And at the same time, there are people who probably can't pay you more than INR 50 to INR 70 for mobile telephony. So the problem with pricing at INR 120 for everything is that the one with the INR 1,000 will crash down there. And so somebody who is at INR 50 is not necessarily going to up to INR 120. So I think that from a theoretical perspective, the architecture on pricing must be such that it invites upgrading, which is your point about what you called it, which is less for more or more for more whatever phrase that you used. So that's the way the theory should work.

Having said that, we are where we are. We are at a situation where for INR 130, you get everything. And here, I would imagine that the elasticity, if given the amount of data that's getting consumed on the network, 11.9 GB, as Badal mentioned, people spending 4 hours a day on the mobile device. Lifting this by INR 20, INR 30, INR 40 is something that can easily be done. That said, like I said, this is a competitive situation. We're not expecting any pricing to move up. We're prepared for it to not move up even though it's unsustainable at this stage.

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Sanjay Chawla, JM Financial Institutional Securities Limited, Research Division - Research Director [59]

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So you're pointing to the difficulty of raising the pricing in this market with so much stratification...

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Gopal Vittal, Bharti Airtel Limited - MD, CEO of India & South Asia and Executive Director [60]

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No. I'm not saying it's difficult to raise. I think it will go through very easily. The question is will it? And if so, when? That's the only question.

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Sanjay Chawla, JM Financial Institutional Securities Limited, Research Division - Research Director [61]

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Okay. And if I could just squeeze in one little question on the depreciation expense. It seems to have gone up quite a lot. And I'm just looking at the depreciation without the 116 impact. We've seen INR 500 crore, $5 billion quarter-on-quarter increase. So what exactly is driving that this quarter? We haven't seen this type of increase ever.

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Nakul Sehgal, Bharti Airtel Limited - Corporate CFO [62]

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Sanjay, the increase is primarily driven by the investments which we have made. Firstly, we have an average CapEx of close to INR 4,500 crores to INR 5,000 crores every quarter, and it's a proof of depreciation on account of that.

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Sanjay Chawla, JM Financial Institutional Securities Limited, Research Division - Research Director [63]

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There is no accelerated depreciation or anything which is reflecting here.

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Nakul Sehgal, Bharti Airtel Limited - Corporate CFO [64]

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No. No. Accelerated depreciation is deemed, as I pointed out earlier, Sanjay, is reflected in the exceptional items.

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Operator [65]

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The next question comes from Mr. Pranav Kshatriya from Edelweiss, Mumbai.

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Pranav Kshatriya, Edelweiss Securities Ltd., Research Division - Research Analyst [66]

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I have just 2 very small questions. Firstly, regarding this exceptional item of 15-odd billion. So can you please tell us that what is the underlying asset of the derivatives for which this expense have been done? Second question is can you throw some color on fiber monetization where we are and how do you see it panning out?

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Nakul Sehgal, Bharti Airtel Limited - Corporate CFO [67]

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I'll take the first part of your question, Sanjay. I think we did discuss it in a good amount of detail, but just to explain a little bit more. So there are a few items when you look at the exceptional and the indemnities, and which I have mentioned earlier. It's a tax demand, which includes Tanzania, some minority adjustments, IPO obligations and so on and so forth. And whatever was an estimate, some -- I mean most of them have been resolved by way of an arrangement and an amount for which has been determined at all. Already accounted for in the books, and most of it has been paid as well. This is what I can mention about this. Nothing further than this side. Yes, and if you have any follow-up, we can take it subsequently.

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Badal Bagri, Bharti Airtel Limited - CFO [68]

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Pranav, as mentioned in our earlier calls, we had moved all our fiber assets to a 100% subsidiary, and we have all approvals in place right now, and that's going to be affected in this current quarter. Regarding monetization, we'll continue to reevaluate opportunities and at the right time, we may choose to see what could be the potential structure at that particular point in time. We continue to evaluate opportunities every -- which comes in front of us.

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Operator [69]

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The last question comes from Mr. Vivekanand Subbaraman from AMBIT Capital, Mumbai.

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Vivekanand Subbaraman, AMBIT Capital Private Limited, Research Division - Media Analyst [70]

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I have 2 questions. One is you mentioned that you are shifting your 3G spectrum and reallocating it to 4G. Is it possible for you to share the proportion of spectrum that is allocated across technologies? A ballpark number is also good. And how has this changed over the last year? And where do you see this going, let's say, by March '20?

Second question is with respect to the voice customers to data ARPU or voice customers migration to data, the ARPU uplift. Last time, you had indicated that it was around 2x ARPU uplift. Is that the trend that you see even in the current quarter? Or is it any different?

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Gopal Vittal, Bharti Airtel Limited - MD, CEO of India & South Asia and Executive Director [71]

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I think on the second question, yes, we do see an upgrade when somebody moves from 2G to 4G. And the increase is along the lines of what you indicated. We haven't seen any change in that. The second part is on the 3G spectrum -- I'm sorry, on the overall spectrum. I would suggest the way you should look at it is look forward, let's say, probably April 2020. We will really have only 2G and 4G. So all our spectrum will sit on 4G other than the administered spectrum, which is on 2G, and that can be easily worked out based on the spectrum holding that we have, plus a small slug of spectrum that we require to run our 2G networks, which will be anywhere between 5 and 7 to 8 megahertz. Everything else will really be sitting with the -- on the 4G band.

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Vivekanand Subbaraman, AMBIT Capital Private Limited, Research Division - Media Analyst [72]

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All right. So Gopal, the small slug 5 and 7 to 8 megahertz, that's in the 1,800 megahertz band, right? None of the 900?

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Gopal Vittal, Bharti Airtel Limited - MD, CEO of India & South Asia and Executive Director [73]

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It's mostly in 1,800 band. In some circles, it's also in the 900 band where we have enough 900 bands spectrum.

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Operator [74]

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At this moment, I would like to hand over the call proceedings to Mr. Badal Bagri for the final remarks.

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Badal Bagri, Bharti Airtel Limited - CFO [75]

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Thank you all for joining and look forward to talking to all of you in the coming quarters.

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Operator [76]

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Ladies and gentlemen, this concludes the conference call. You may now disconnect your lines. Thank you for connecting to audio conference service from Airtel, and have a pleasant evening.