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Bharti Tele: India calling! - Views on News from Equitymaster
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Bharti Tele: India calling!
Jan 24, 2006

Performance Summary
Bharti Tele, has reported yet another quarter of strong performance, with revenues and net profits growing by 40% and 71% YoY, as per Indian GAAP consolidated numbers. The company continues to lead the Indian GSM mobile market with a share of 27.9% (21.6% of the overall wireless market, which includes CDMA). Having grown its mobile subscriber base to 16.3 m (73% YoY growth), the company stands ready to capitalise on the potential that the semi-urban and rural markets present to the Indian mobile telecom industry.

Consolidated financial performance (Indian GAAP): A snapshot…
(Rs m) 3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Sales 21,583 30,267 40.2% 57,835 82,684 43.0%
Expenditure 13,721 19,105 39.2% 36,827 51,941 41.0%
Operating profit (EBDIT) 7,862 11,163 42.0% 21,009 30,743 46.3%
Operating profit margin (%) 36.4% 36.9%   36.3% 37.2%  
Other income 133 184 39.1% 383 469 22.5%
Interest 220 721 227.8% 1,914 1,873 -2.1%
Depreciation 3,371 4,229 25.4% 8,870 11,599 30.8%
Profit before tax 4,404 6,397 45.3% 10,608 17,739 67.2%
Miscellaneous income/(expenditure) (169) (16)   (400) (30)  
Minority interest 43 66 54.1% 66 206 213.1%
Tax 1,017 880 -13.4% 1,640 2,292 39.7%
Profit after tax/(loss) 3,176 5,435 71.2% 8,501 15,212 78.9%
Net profit margin (%) 14.7% 18.0%   14.7% 18.4%  
No. of shares 1,853.0 1,892.9   1,853.0 1,892.9  
Diluted Earnings per share* (Rs)         10.3  
P/E ratio* (x)         33.6  
* On a trailing 12-month basis            

What is the company’s business?
Bharti is one of the largest telecom service providers in the country, and leads the Indian GSM mobile market with a share of 27.9% (at the end of December 2005), catering to nearly 16.3 m customers. 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. It is one of the fastest growing companies in the Indian telecom sector and has grown its revenues at a compounded rate of 80% during the period FY00 and FY05.

What has driven performance in 3QFY06?
Note: The under-mentioned analysis is primarily based on US GAAP numbers, as the company has not reported consolidated Indian GAAP segment-wise performance.

Mobile’s name of the game: Bharti’s mobile telephony business, which contributed to over 64% of 3QFY06 revenues, led the growth in the company’s topline in 3QFY06 as well. Strong addition to the subscriber base has aided the growth of this segment during the quarter. As a matter of fact, the company’s mobile subscriber base currently stands at 16.3 m, which is a 73% YoY growth over the base that was reported at the end of December 2004. Against the 73% YoY growth in Bharti’s mobile subscriber base as at the end of December 2005, the all-India GSM base increased by a much lower 57% YoY, thus signifying the company’s increasing clout in the sector. We had estimated Bharti’s mobile subscriber base to grow to 16.7 m by the end of FY06. Considering that the company has already achieved 97% of our estimated base, we will have to revise our numbers upwards.

But for a 9% YoY decline in average revenue per user (ARPU), the growth for the mobile telephony business would have been higher. However, as we have gathered from our interaction with company sources in the past, Bharti, like most of the other mobile companies, is primarily focusing on growing on the volumes (subscribers) front, giving lesser heed to the decline in ARPUs, which are mainly driven by competitive and regulatory aspects. As such, the decline in ARPU, unless of a large magnitude, should not be a worry for investors. In fact, as the company increases its penetration in the semi-urban and rural areas of the country where affordability is still of prime importance, ARPUs ‘will’ decline further, as the company launches lower denomination prepaid recharge coupons. The company has reported a blended (postpaid and prepaid) ARPU of Rs 470, which is almost 3% higher than the Rs 456 blended ARPU that we have estimated for FY06.

What is of prime importance is that the company continues to show rapid strides in growing its subscriber base. We believe that, going forward, a further reduction in tariffs and cost of handsets, which essentially makes the service very affordable for the user, is likely to supplement the growth of the Indian telecom sector in general and Bharti in particular. We expect the Indian GSM market to grow at a CAGR of 39% between FY05 to FY08 to reach a size of 111 m subscribers. Further, Bharti is expected to grow its base at a CAGR of 49%, connecting over 36 m GSM subscribers by the end of this period and also increasing its market share to 32.5% from the current levels of 27.9%.

Segment-wise performance*
  3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Mobile Services
Revenue 14,697 21,742 47.9% 37,850 58,258 53.9%
% of total revenues 61.4% 64.4%   59.7% 63.7%  
EBIDTA margin 33.6% 36.5%   34.0% 36.0%  
Broadband & Telephone Services
Revenue 2,930 3,854 31.5% 8,115 10,913 34.5%
% of total revenues 12.2% 11.4%   12.8% 11.9%  
EBIDTA margin 27.3% 24.6%   24.7% 25.1%  
Long Distance Services
Revenue 4,889 6,322 29.3% 13,548 17,094 26.2%
% of total revenues 20.4% 18.7%   21.4% 18.7%  
EBIDTA margin 31.0% 33.7%   31.7% 35.2%  
Enterprise Services
Revenue 1,428 1,861 30.3% 3,896 5,180 33.0%
% of total revenues 6.0% 5.5%   6.1% 5.7%  
EBIDTA margin 52.5% 33.8%   51.8% 38.3%  
* As per US GAAP numbers

Apart from the mobile business, all the other businesses of the company, viz. Broadband & Telephone Services (BTS), Long Distance Services (LDS) and Enterprise Services (ES) have also shown traction during 3QFY06 (see table above). Combining the mobile base (16.3 m) with the broadband and telephone base (1.2 m), Bharti has crossed the 17.5 m subscriber mark, which seems to have benefited the company in the form of utilizing its pan-India network and thus achieving economies of scale. The company has reported a 49% YoY growth in the subscriber base for its broadband and telephone services, with ARPU for the segment declining by 8% YoY to Rs 1,136 in 3QFY06.

In offering pan-India services to its customers, Bharti has also managed to reduce churn in its pre-paid subscriber base, from 8.5% in 3QFY05 to 5.5% in 3QFY06. Pre-paid subscribers from around 75% of the company’s total mobile subscriber base, and consequently the reduction in churn is a positive.

All-round growth aids margin expansion: Telecom is a high operating leverage business. This is to say that once the fixed costs of creating and managing networks, marketing and branding of telecom services are recovered, the additional revenues almost directly flow through to the bottomline. This is what is being witnessed with respect to Bharti’s operating margins, which have witnessed a 50 basis points expansion during 3QFY06. Of the company’s business segments, while mobile telephony and LDS have witnessed margin expansion, the same have contracted for BTS and ES. Increase in the share of non-voice services from 8.6% of mobile revenues in 3QFY05 to 9.7% in 3QFY06 has aided margin expansion in Bharti’s mobile telephony business. A large fall in ES operating margins might be largely due to intense pressure on tariffs, where the industry is witnessing oversupply of bandwidth capacity.

It boils down to the bottomline: Due to the expansion in operating margins and reduction in tax liabilities, and despite higher interest expenses, Bharti’s bottomline has outpaced the topline growth during 3QFY06. The performance has been similar for the nine-month period.

What to expect?
At the current price of Rs 348, the stock is trading at a price to earnings multiple of 14.6 times our estimated FY08 earnings, as per Indian GAAP consolidated numbers. Considering the continuance in strong growth, we would have to take a re-look at the numbers, which entail an upgrade. Considering this, the stock seems attractively valued from a long-term perspective. Bharti is gradually moving on its path of increasing coverage to 5,000 towns from just over 3,000 currently, where we expect lower priced recharge coupons and cost of handsets to be amongst the biggest growth drivers. We believe that this is likely to give the company a greater leverage to grow faster into the future as, with the near-saturation in the metros, ‘A’ and ‘B’ class towns and cities are likely to play an increasing role in the company’s business going forward. Schemes like the recently launched ‘Rs 999 lifetime prepaid’ are likely to further boost the company’s growth.

We had re-iterated a 'Buy' on the stock in December 2005, at Rs 345 with a target price of Rs 480 from a two-year perspective. Considering the growth prospects of the sector and the company over the next three to five years, we believe that Bharti should be a part of the portfolio of long-term investors.

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