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Bharti Airtel: Rock solid - Views on News from Equitymaster
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Bharti Airtel: Rock solid
Jan 30, 2008

Performance summary
  • Topline (based on Indian GAAP consolidated numbers) grows 41% YoY in 3QFY08, 47% YoY in 9mY08. Growth led by 73% YoY growth in subscriber base and marginally higher minutes of usage per month per subscriber; average revenue per user per month lower by 16% YoY.
  • Adds 6.3 m mobile subscribers during the quarter, 23.2 m during the last 12 months – crosses the 55 m subscriber mark.

  • Operating margins expand by 1.5% owing to lower access charges and employee costs.

  • Net profit grows by 38% YoY during 3QFY08. Growth lower than topline due to substantial rise in interest expenses. Effective tax rate lower at 2.8% during 3QFY08 compared to 14.3% in 3QFY07.

Consolidated financial performance snapshot (Indian GAAP)
(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Sales 49,141 69,501 41.4% 130,589 191,486 46.6%
Expenditure 29,337 40,448 37.9% 79,891 111,868 40.0%
Operating profit (EBDIT) 19,804 29,053 46.7% 50,698 79,618 57.0%
Operating profit margin (%) 40.3% 41.8%   38.8% 41.6%  
Other income 141 678 381.3% 745 2,133 186.4%
Interest 590 4,961 740.9% 2,066 2,234 8.1%
Depreciation 7,155 9,862 37.8% 17,494 26,564 51.8%
Profit before tax 12,201 14,909 22.2% 31,882 52,954 66.1%
Minority interest 118 209 76.2% 286 588 105.5%
Tax 1,749 415 -76.3% 4,160 7,400 77.9%
Profit after tax/(loss) 10,333 14,286 38.2% 27,436 44,965 63.9%
Net profit margin (%) 21.0% 20.6%   21.0% 23.5%  
No. of shares         1,897.7  
Diluted Earnings per share (Rs)*         30.6  
P/E ratio (x)*         28.1  
* On a trailing 12-months basis

What has driven performance in 3QFY08?
  • Bharti added a record 6.3 m new GSM subscribers during the October to December 2007 period, thus ending the quarter with a total base of above 55 m. As compared to the base at the end of December 2007, the growth was 73% YoY. As a consequence, the company improved its share in India’s wireless market (inclusive of GSM and CDMA subscribers) to 23.6%, from 21.8% at the end of 3QFY07. Bharti has been duly helped by a faster penetration into the non-census towns and rural market. It increased its presence to over 320,000 non-census towns and villages by the end of December 2007, against a presence in 176,000 such locations in December 2006.

    While this ramp up in coverage has helped the company in terms of adding to its base, this continues to impact its average revenue per user, or ARPU. These have declined by 16% YoY for mobile services during 3QFY08. Against Rs 427 per month that Bharti earned from each of its subscribers in 3QFY07, it earned Rs 358 in 3QFY08 (2% decline over 2QFY08). This lower ARPU is directly a result of the fact that a deeper penetration into low-income areas (B and C circles) would mean that that the company increases the share of prepaid subscribers in its total base. And considering that prepaid subscribers spend anywhere between 60% and 70% less than postpaid subscribers, ARPU is bound to get hit.

    Segment-wise performance*
      3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
    Mobile Services            
    Revenue (Rs m) 37,568 56,501 50.4% 98,767 154,377 56.3%
    % of total revenues 67.8% 71.9%   67.3% 71.5%  
    Minutes billed (m) 41,305 73,840   103,343 195,340 89.0%
    Revenue per minute (Rs) 0.91 0.77 -15.9% 0.96 0.79 -17.3%
    EBIDTA margin 37.6% 40.8%   37.0% 40.8%  
    EBIDTA per minute (Rs) 0.34 0.31 -8.7% 0.35 0.32 -8.8%
    Telemedia Services#            
    Revenue (Rs m) 6,001 7,299 21.6% 16,422 20,959 27.6%
    % of total revenues 10.8% 9.3%   11.2% 9.7%  
    Minutes billed (m) 4,055 4,604 13.5% 11,915 13,654 14.6%
    Revenue per minute (Rs) 1.48 1.59 7.1% 1.38 1.54 11.4%
    EBIDTA margin 27.0% 43.4%   23.6% 38.7%  
    EBIDTA per minute (Rs) 0.40 0.69 72.2% 0.33 0.59 82.6%
    Long Distance Services            
    Revenue (Rs m) 9,324 11,421 22.5% 24,836 31,189 25.6%
    % of total revenues 16.8% 14.5%   16.9% 14.4%  
    Minutes billed (m) 5,488 9,489 72.9% 13,633 24,617 80.6%
    Revenue per minute (Rs) 1.70 1.20 -29.2% 1.82 1.27 -30.5%
    EBIDTA margin 43.0% 32.2%   40.9% 33.6%  
    EBIDTA per minute (Rs) 0.73 0.39 -47.0% 0.75 0.43 -42.9%
    Enterprise Services            
    Revenue (Rs m) 2,544 3,343 31.4% 6,712 9,509 41.7%
    % of total revenues 4.6% 4.3%   4.6% 4.4%  
    EBIDTA margin 45.1% 41.9%   44.9% 42.1%  
    * As per Indian GAAP numbers. Excluding inter-segment eliminations;
    # Broadband & Telephone services have been renamed as Telemedia Services

    The other services lines of the company – Broadband & Telephone Services (these have been renamed as Telemedia Services, given the company’s foray into IPTV and DTH spaces), Long Distance Services (LDS) and Enterprise Services (ES) – also reported strong growth during the quarter, with their sales growing by 22% YoY, 23% YoY and 31% YoY respectively. In the Telemedia business, Bharti increased its subscriber base to nearly 2.2 m (1.7 m at the end of 3QFY07) in 94 cities in India. It earned ARPUs of Rs 1,140 per month in this business, which was a decline of 5% YoY.

  • Bharti recorded a 1.5% expansion in its operating margins during 3QFY08. This was a result of lower access charges and staff costs (both as percentage of sales). Based on business segments, mobile services continued to lead the way, recording operating margin improvement to 40.8% (37.6% in 3QFY07). Also, while the Telemedia Services segment reported a 16% expansion in its operating margins, those for the LDS and ES segments contracted (see table above). The management had indicated of some medium term pressures on operating profitability due to the conversion of capex to opex (operating expenditure) on transfer of passive infrastructure (telecom towers) to its subsidiary, Bharti Infratel.

  • The company has also recently formed an independent tower company – Indus Towers – in joint venture with Vodafone and Idea. This company will provide passive infrastructure services to other telecom operators in a non-discriminatory basis. While Bharti and Vodafone will hold 42% stake apiece in Indus Towers, Idea will own the remaining 16%. As indicated by the management, these initiatives in the passive infrastructure segments (Bharti Infratel and Indus Towers) shall enable a faster expansion of coverage, especially into the rural areas. The company has also reported that 3QFY08 saw a group of investors agreeing to invest US$ 1 bn in Bharti Infratel, bring its enterprise value to US$ 10 to 12.5 bn.

  • Despite the expansion in operating margins and a substantial rise in other income, Bharti’s net profits growth (at 38% YoY in 3QFY08) was lower than the growth in topline. This was owing to a significant rise in interest expenses (up 750% YoY). The bottomline growth would have been lower though, but for the decline in tax expenses. The company’s effective tax rate declined from 14.3% in 3QFY07 to 2.8% in 3QFY08, owing to a large deferred tax write-back.

    What to expect?
    At the current price of Rs 860, the stock is trading at a multiple of 14.2 times our estimated FY10 earnings, which we believe makes it an attractive long-term proposition. The fact that the company is focusing aggressively on a faster rollout in the semi-urban and rural areas over the next few quarters by way of floating an independent tower company as also attracting investments for its own tower subsidiary is a positive. The management has indicated of a nation-wide rollout of DTH (direct to home) and IPTV services by the first half of FY09, which shall further aid the growth of its Telemedia business. Overall, we maintain our positive view on the stock.

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