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Bharti Airtel: Good to great! - Views on News from Equitymaster
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Bharti Airtel: Good to great!
Jan 23, 2007

Performance summary
In leading the charge of the Indian telecom growth story, Bharti Airtel has yet again reported a superlative quarterly performance. For 3QFY07, as per US GAAP numbers, while revenues have grown by 62% YoY, net profits are up 123% YoY, led by a strong expansion in operating margins. The quarter saw the company cross the 31 m GSM mobile subscriber mark, and increase its share to 21.8% of the total wireless mobile base in the country (inclusive of GSM and CDMA subscribers). While the pressure on ARPUs continued, as these declined by 9% YoY during 3QFY07, it was more than compensated by the 14% YoY growth in volumes (minutes of usage). What is more, Bharti was able to reduce churn rates in both the prepaid and postpaid segments of its mobile business. The company also increased its network to cover 54% of India’s population, from 38% at the end of December 2005. The non-mobile businesses viz., broadband, telephone services (ILD and NLD) and enterprise services also raked in strong YoY growth during the quarter.

Consolidated financial performance (US GAAP): A snapshot…
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Sales 30,256 49,129 62.4% 82,520 131,264 59.1%
Expenditure 19,063 29,074 52.5% 51,720 79,174 53.1%
Operating profit (EBDIT) 11,193 20,055 79.2% 30,800 52,090 69.1%
Operating profit margin (%) 37.0% 40.8%   37.3% 39.7%  
Other income 661 725 9.7% 1,317 2,083 58.2%
Interest 1,433 (711)   2,810 2,356 -16.2%
Depreciation 4,026 7,072 75.7% 11,132 17,970 61.4%
Profit before tax 6,395 14,419 125.5% 18,175 33,847 86.2%
Miscellaneous income/(expenditure) (8) (1)   (10) (53)  
Minority interest 75 121 61.3% 212 283 33.5%
Share of profits in associates/JVs (1) (6) 500.0% (2) (2) 0.0%
Tax 858 2,139 149.3% 2,187 4,469 104.3%
Profit after tax/(loss) 5,453 12,152 122.8% 15,764 29,040 84.2%
Net profit margin (%) 18.0% 24.7%   19.1% 22.1%  
No. of shares       1,884.1 1,895.7  
Diluted Earnings per share (Rs)*         18.9  
P/E ratio (x)*         36.5  
* On a trailing 12-months basis            

What is the company’s business?
Bharti is one of the largest telecom service providers in the country, and leads the Indian wireless market (inclusive of GSM and CDMA subscribers) with a share of 21.8% (at the end of December 2006), catering to over 32 m subscribers. The company also provides fixed line and long distance telephony services to its customers. Bharti also provides other allied telecom services like voice and data services and integrated services to corporates. The company also has a submarine cable landing station at Chennai, which connects the submarine cable (owned by an associate company) connecting Chennai and Singapore. The company is a part of the consortium, which jointly owns and has developed the next generation undersea cable system SEA-ME-WE-4. It is one of the fastest growing companies in the Indian telecom sector and has grown its revenues at a compounded rate of 69% during the period FY01 and FY06.

What has driven performance in 3QFY07?
All-round performance: In casting its net wider across 224 additional census towns and 21,500 additional non-census towns and villages during 3QFY07, Bharti’s mobile services business clocked revenue growth of 73% YoY. The company added a net of 4.9 m and 15.6 m subscribers on a QoQ and YoY bases respectively. At the end of December 2006, the total mobile subscribers of the company’s network stood at nearly 32 m, implying a share of 21.8% of the all India wireless market (inclusive of GSM and CDMA subscribers). Based on categories, the B- and C-circles continue to see the maximum growth for the company in terms of net subscriber additions. It is because of superlative growth in these regions that the company’s prepaid mobile base increased its share in total base to over 87% at the end of December 2006, from 80% in December 2005. This is because growth in mobile subscribers in relatively untapped and ‘less-wealthy’ regions (non-metros) largely depends on the affordability factor and the company’s low-cost prepaid recharge vouchers have seemingly done their job in this regard. Also, as markets mature and disposable incomes increase across the strata, demand shifts to the postpaid category as the customer vouches for a greater value for money. It must be noted that despite higher ARPUs from postpaid connection, mobile service providers like Bharti make less revenues per minute as tariffs are more competitive and volumes are higher in this segment.

Growth in Bharti’s mobile business was yet again a factor of strong growth in volumes (minutes of usage per subscriber), as ARPUs (average revenue per user per month) continue to suffer due to fall in tariffs. While ARPUs declined by 9% YoY during 3QFY07, minutes of usage per month increased by 14% YoY, thus more than covering up the decline in the former. In 3QFY07, the company’s blended mobile ARPUs stood at Rs 427, which is still 6% higher than our FY07 estimated ARPUs of Rs 403 per month. Also, considering the strong ramp up in the mobile subscriber base, we shall have to marginally upgrade our FY07 numbers for the company and for the industry as a whole.

Within the mobile base, another positive factor that has emerged during 3QFY07 is the contraction in monthly churn rates for both the prepaid and postpaid categories. While the churn for postpaid declined from 4.2% in 3QFY06 to 3.5% in 3QFY07, the same for prepaid contracted from 5.5% to 4.8%, thus indicating the company’s subscriber retention capabilities (Bharti has one of the lowest churn rates in the industry). Also, non-voice (SMS, voice mail and other value added services) revenues increased their share in total mobile revenues to 10.4% in 3QFY07, from 9.7% in 3QFY06.

Segment-wise performance*
  3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Mobile Services
Revenue (Rs m) 21,742 37,579 72.8% 58,258 99,011 70.0%
% of total revenues 64.4% 68.0%   63.7% 67.5%  
Minutes billed (m) 18,636 41,305 121.6% 47,238 103,343 118.8%
Revenue per minute (Rs) 1.17 0.91 -22.0% 1.23 0.96 -22.3%
EBIDTA margin 36.5% 37.6%   36.0% 37.0%  
EBIDTA per minute (Rs) 0.43 0.34 -19.7% 0.44 0.35 -20.2%
Broadband & Telephone Services
Revenue (Rs m) 3,854 5,984 55.3% 10,913 16,409 50.4%
% of total revenues 11.4% 10.8%   11.9% 11.2%  
Minutes billed (m) 3,218 4,055 26.0% 9,386 11,915 26.9%
Revenue per minute (Rs) 1.20 1.48 23.2% 1.16 1.38 18.4%
EBIDTA margin 24.6% 27.0%   25.1% 23.6%  
EBIDTA per minute (Rs) 0.29 0.40 35.2% 0.29 0.33 11.4%
Long Distance Services
Revenue (Rs m) 6,322 9,306 47.2% 17,094 24,732 44.7%
% of total revenues 18.7% 16.8%   18.7% 16.9%  
Minutes billed (m) 2,261 5,488 142.7% 6,044 13,633 125.6%
Revenue per minute (Rs) 2.80 1.70 -39.4% 2.83 1.81 -35.9%
EBIDTA margin 33.7% 43.0%   35.2% 40.9%  
EBIDTA per minute (Rs) 0.94 0.73 -22.6% 1.00 0.74 -25.5%
Enterprise Services
Revenue (Rs m) 1,861 2,422 30.1% 5,180 6,538 26.2%
% of total revenues 5.5% 4.4%   5.7% 4.5%  
EBIDTA margin 33.8% 45.1%   38.3% 44.9%  
* As per US GAAP numbers. Excluding inter-segment eliminations

The other services lines of the company – Broadband & Telephone Services (BTS), Long Distance Services (LDS) and Enterprise Services (ES) – also reported strong growth during 3QFY07, with their sales growing by 55% YoY, 47% YoY and 30% YoY respectively. In the broadband business, Bharti has increased its subscriber base to over 1.7 m (1.6 m in 2QFY06) in 94 cities in India (79 in 3QFY06). It earned ARPUs of Rs 1,198 per month in the broadband business, which represents increase of 7% QoQ and 5% YoY.

Lower access and SG&A expenses aid margins: Bharti continues to benefit from the operating leverage in the mobile business, as seen from the improvement in the segment operating margins from 36.5% in 3QFY06 to 37.6% in 3QFY07. Even the broadband, long distance and enterprise services have reported margin expansion during the quarter. Based on cost heads, the benefits were derived from lower (as percentage of sales) access charges and sales, general & administrative (SG&A) expenses. While the former declined from 18.4% of sales in 3QFY06 to 16.8% in 3QFY07, the latter witnessed contraction from 17.5% to 14.7%.

It boils down to the bottomline: Strong topline growth and expansion in operating margins, alongwith negative interest expenses (due to derivatives and exchange rate fluctuations), have aided Bharti’s net profits, which have ballooned by 123% YoY during 3QFY07.

What to expect?
At the current price of Rs 690, the stock is trading at a multiple of 18.7 times our estimated FY09 earnings for the company. Bharti, with its superlative performances during the past three quarter, continues to impress us. Considering this, we shall be upgrading our subscriber base and profitability estimates for FY07. The company is progressing well towards its target of spending US$ 2.2 bn as capital expenditure during this fiscal, as gauged from the US$ 1.6 bn that it has already incurred during 9mFY07, and the consequent benefits derived from the same in terms of the superlative performances across business segments. Further, the management has outlined an expenditure of US$ 2.5 bn during FY08 towards capacity augmentation. Overall, we maintain our positive stand on the company from a long-term perspective.

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