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Bharti Tele: Wherever you are!

Jan 27, 2005

Performance summary
India's leading cellular services provider, Bharti Tele, has announced strong results for the quarter and nine-month period ending December 2004, reporting almost doubling of net profits on a YoY basis. Operating margins have also improved for both the periods. Bharti has crossed the 10 m customer mark in this quarter, cornering a share of over 26% of all-India GSM mobile subscriber base.

Consolidated financial performance (IFR Standards): A snapshot…
Rs m 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Sales 12,687 21,530 69.7% 34,492 57,174 65.8%
Expenditure 7,959 13,886 74.5% 23,110 36,540 58.1%
Operating profit (EBDIT) 4,728 7,644 61.7% 11,382 20,633 81.3%
Operating profit margin (%) 37.3% 35.5% 33.0% 36.1%
Other income 79 134 68.8% 105 204 93.4%
Interest 729 191 -73.8% 2,067 1,389 -32.8%
Depreciation 2,240 3,031 35.3% 6,332 7,821 23.5%
Profit before tax 1,838 4,555 147.9% 3,087 11,627 276.6%
Miscellaneous income/(expenditure) 300 (10) -103.4% 300 (46) -115.2%
Minority interest 6 51 801.8% 10 52 403.8%
Tax 219 768 250.3% 220 1,505 584.0%
Profit after tax/(loss) 1,913 3,726 94.8% 3,157 10,025 217.5%
Net profit margin (%) 15.1% 17.3% 9.2% 17.5%
No. of shares 1,853.0 1,853.0 1,853.0 1,853.0
Diluted Earnings per share* (Rs) 4.1 8.0 2.3 7.2
P/E ratio (x) 29.1
(* 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 9.8 m customers) in the all-India GSM mobile subscriber base in the country. The company also provides fixed line and long distance telephony services to its customers. 3QFY05 saw the company cross the 10 m customer mark. 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.

What has driven performance in 3QFY05?
Mobile services lead topline growth:  Bharti's mobile services segment (62% of consolidated revenues) has led the growth in topline in this quarter with a YoY growth of 73%. This has mainly been a result of a strong 79% YoY growth in the subscriber base. Bharti's all-India GSM subscriber base stands at 9.8 m at the end of December 2004, which is over 26% of the all-India base. What's more, the company has cornered around 30% of the net additions to the GSM base in the country in 3QFY05. Combining the mobile base with the broadband and telephone base, Bharti has crossed the 10 m subscriber base, which seems to have benefited the company in form of utilizing its pan-India network and thus achieving economies of scale. Average revenue per user (ARPU) for the company's mobile services has declined by 6% YoY. But this has been more than compensated by a 15% YoY growth in average minutes per user. Lower tariffs, attractive offers and a growing usage of mobile services have led to this growth in the same.

On the broadband and telephone front, Bharti's subscriber base has grown by 41% YoY. ARPU for this segment has declined by 2% YoY.

Segment-wise performance…
  3QFY04 % of total 3QFY05 % of total Change
Revenue 8,581 60.8% 14,826 61.6% 72.8%
PBIT 3,164 66.7% 4,836 61.5% 52.8%
PBIT margin 36.9%   32.6%    
Broadband & Telephone
Revenue 2,058 14.6% 2,942 12.2% 42.9%
PBIT 398 8.4% 846 10.8% 112.9%
PBIT margin 19.3%   28.8%    
Long Distance
Revenue 2,733 19.4% 4,907 20.4% 79.5%
PBIT 885 18.6% 1,497 19.0% 69.3%
PBIT margin 32.4%   30.5%    
Revenue 731 5.2% 1,407 5.8% 92.5%
PBIT 300 6.3% 681 8.7% 127.2%
PBIT margin 41.0%   48.4%    
Revenue 14,103   24,081   70.8%
PBIT 4,746   7,861   65.6%
PBIT margin 33.7%   32.6%    
* Excluding inter-segment adjustments

Higher interconnect charges dent margins:  Despite the strong growth in the topline, Bharti has reported a 180 basis points narrowing of its operating margins for 3QFY05. This has been mainly a result of a 170 basis points increase in access and interconnection charges. On the contrary, expenses under other major heads like employee costs and license fee have declined in the quarter. With the revised ADC (access deficit charge) guidelines, which are expected to reduce burden on mobile services providers by reducing their payment to BSNL and MTNL, we expect the pressure on account of interconnect charges is likely to decline for Bharti going forward.

Lower interest outgo aids net profits:  Despite a contraction in operating margins, a higher other income and lower interest charges have helped net profits growth outpace the growth in topline. Even a significant growth in tax outgo has failed to restrict the superior net profit growth.

What to expect?
At the current price of Rs 210, the stock is trading at a price to earnings multiple of 29.1 times annualised 9mFY05 earnings. Bharti has continued its dominance on the Indian GSM mobile market as has been clearly stated above. With a presence across 21 of the 23 circles in the country, including the recent additions of J&K, West Bengal, Orissa, Bihar and Jharkhand, Bharti is expected to reap scale advantages going forward. Growing competition on the tariff front has failed to cast pressure on the company's performance as it has been able to reach out to a wide subscriber base through its mobile and other value add services.

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