Introduction to results

Bharti Televentures, has reported strong earnings in the June quarter. For 1QFY05, the company has reported a 64% YoY rise in topline while the bottomline has seen 861% YoY growth, albeit on a smaller base. Topline growth as well as strong improvement in its operating margins have led to the improvement in bottomline. Margins have improved by 800 basis points in 1QFY05. The company continues to aggressively add customers for its mobile telephony services, driving topline as well as profitability.

Rs m	1QFY04	1QFY05	Change
Sales	10,361	17,047	64.5%
Other Income	8	55	584.0%
Expenditure	7,471	10,929	46.3%
Operating Profit (EBDIT)	2,890	6,117	111.7%
Operating Profit Margin (%)	27.9%	35.9%
Interest	632	794	25.8%
Depreciation	1,956	2,296	17.3%
Profit before Tax	310	3,083	894.8%
Extraordinary items	-	(5)
Minority interest	(1)	2
Tax	0	115
Profit after Tax/(Loss)	309	2,966	861.3%
Net profit margin (%)	3.0%	17.4%
No. of Shares	1,853.0	1,853.0
Diluted Earnings per share* (Rs)	0.7	6.4
P/E Ratio (x)		23.9
(* annualised)

What is the company’s business?

Bharti Televentures, is one of the largest telecom service providers in the country. It is the largest mobile service provider in the country with an over 26% market share (nearly 7.5 m customers) in the total mobile subscriber base in the country. The company also provides fixed line and long distance telephony services to its customers. The company also provides other allied telecom services like voice and data services and integrated services to corporates. It is one of the fastest growing companies in the Indian telecom sector.

What has driven the performance in 1QFY05?

Sales:  There continues to be significant additions to the customer base of the company, both for the mobile as well as fixed line services leading to the strong rise in the company's topline. The table below indicates the level of additions in both these segments. Though customer base has improved, average revenue per user (ARPU) for both mobile and fixed line services have fallen. The company has stopped giving the post-paid and pre-paid break up of ARPUs. The blended ARPUs have fallen by 18% in 1QFY05 on a YoY basis. While this may indicate the competitive pressure in the sector, the company has done well to compensate for the fall in realizations by aggressively adding subscribers for its services.

Operating margins:  Control over operational costs has significantly helped the company improve upon its operating margins. During FY04, Bharti had entered into agreements with IBM and Siemens in order to outsource the management of its IT infrastructure and telecom networks respectively. This is likely to further rationalise costs for the company and we may witness further improvement in operating margins due to this. As for the revenue streams, the company continues to witness growth across all its segments. The improvement is seen in the operating margins of the individual segments also. The company continues to witness improvement in its non-mobile business segments. This is significant as this segment (enterprise business) has better operating margins.

Net Profits:  Interest costs have risen in the June quarter mainly on account of recognition of forex losses. Due to the strong cash flows Bharti is able to generate, we believe that internal accruals will be able to fund most of the its future expansion initiatives. Thus interest expenses may stabilize going forward. Depreciation costs however, will continue to grow going forward, as the company continues to invest in infrastructure. For FY05, the company has estimated capex in the region of US$ 700 m - 750 m. The bottomline has grown despite the interest and depreciation burden. However, it has shown a marginal decline in bottomline on a QoQ basis.

What to expect?

At the current price of Rs 153, the stock is trading at a P/E multiple of 24x annualised 1QFY05 earnings. Bharti Tele continues to gain market share. More importantly, it has actually managed to increase its share in the incremental additions in the mobile segment. The company has improved (albeit marginally) upon its market share in incremental additions (from 28% in June quarter last year to 30% currently). Going forward, with its entry in five new circles, subscriber additions will continue to remain healthy in FY05. While realisations are likely to come under pressure, we believe that this will be more than compensated by higher subscriber numbers.