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Bharti - Solid foundation - Views on News from Equitymaster
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  • Apr 24, 2003

    Bharti - Solid foundation

    Bharti Televentures Limited (BTVL), the market leader in the Indian cellular telephony segment, has posted an impressive performance for the fourth quarter and full year ended March 2003. While revenues have more than doubled in 4QFY03, the company has posted a net profit in the same period as compared to a net loss of Rs 640 m last year. This despite a competitive environment is commendable.

    (Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
    Net revenues 3,668 7,560 106.1% 12,171 24,133 98.3%
    Other Income 16 19 18.8% 54 56 3.7%
    Expenditure 2,594 4,845 86.8% 8,178 16,426 100.9%
    Operating Profit (EBDIT) 1,074 2,715 152.8% 3,993 7,707 93.0%
    Operating Profit Margin (%) 29.3% 35.9%   32.8% 31.9%  
    Interest (net) 387 676 74.7% 906 2,821 211.4%
    Depreciation 662 1,235 86.6% 2,172 4,438 104.3%
    Amortisation 484 546 12.8% 1,086 1,910 75.9%
    Profit before Tax (443) 277 - (117) (1,406) 1101.7%
    Extraordinary items (393) - - (922) (378) -
    Tax (196) 21 - 177 (3) -
    Profit after Tax/(Loss) (640) 256 - (1,216) (1,781) 46.5%
    Net profit margin (%) -17.4% 3.4% - -10.0% -7.4%  
    No. of Shares (m) 1,853.0 1,853.0   1,853.0 1,853.0  
    Diluted earnings per share* (1.4) 0.6   (2.6) (3.8)  
    (* annualised)            

    BTVL provides mobile, basic, long distance telephony and broadband services in the country. While it has presence in 15 circles out of the total 21 in the mobile segment, the number of basic circles under coverage has been increased to 6 in FY03 (2 last year). The cellular division still accounts for the bulk of revenues (86% in FY03). As compared to less than 1.4 m mobile subscribers in FY02, the figure has crossed 3 m in FY03 thus taking its market share to 24% from 21% last year.

    A snapshot
    (Nos) FY02 FY03 change (times)
    Mobile 1,350,960 3,071,463 1.3
    Fixed 163,975 371,973 1.3
    Customers 1,514,935 3,443,436 1.3
    Mobile 675,955 1,720,503 1.5
    Fixed 56,860 207,998 2.7
    Net additions 732,815 1,928,501 1.6
    Market share-Mobile 21.0% 24.2%  

    BTVL holds a commanding market share in circles like Delhi, Himachal Pradesh, Chennai and Karnataka, which were a part of its existing mobile operations. In other circles, which the company entered into in FY03, subscriber additions has gained pace (minimum market share of 9% in circles like Gujarat and Madhya Pradesh). In one were analyse in terms of market share of BTVL with respect to net additions, it stands at 25% for FY03. This despite a stiff competition from not only private players but also from BSNL is a big positive. In FY03, basic telephony subscribers have also doubled during the same period thus taking the combined subscriber base to 3.4 m primarily due to expansion of presence in southern region. We expect the smaller circles like Gujarat to be the growth driver in FY04.

    Gross revenue mix...
    (Rs m) 4QFY03 FY03 EBDITA-FY03
    Existing 4,527 16,772  
    New 1,617 4,072  
    (A) Mobile 6,144 20,844 27.6%
    Existing 512 1,986  
    New 693 1,564  
    (B) Fixed 1,205 3,550 10.8%
    (C) ILD and others (new) 3,796 8,524 20.2%
    (D) Eliminations (748) (2,089)  
    Total (A)+(B)+(C)-(D) 10,397 30,829 25.0%
    % from new operations 58.7% 45.9%  

    With competitive pressure increasing from not only its peers but also from Wireless in Local Loop (WiLL) service providers, there has been a considerable readjustment in mobile tariffs during FY03, especially long distance rates. In January 2003, cellular players (excluding some BSNL, MTNL and Reliance) announced a cut in national long distance tariffs from the earlier peak of Rs 9 per minute down to a flat rate of Rs 3 per minute for all mobile-to-mobile calls of 50 kms and above. The tariff fall has been significant especially after the entry of BSNL in the cellular segment. This is reflected in BTVL's average revenue per user (ARPU) for its mobile services. Blended rates i.e. average of prepaid and postpaid, is lower by 10% in a single quarter. At the same time, paid minute calls has increased by 11% in the same period.

    In the telecom sector, as capacity utilisation increases on the back of more subscriber being added, fixed cost is spread over a wider base. This fuels profits at the operating level. Though operating margins has declined for the company on the first look, this has come despite significant expansion in operations. To put things in perspective, MTNL's nine months operating margin was at 35% despite having a concentrated operation in Mumbai and Delhi alone. A more than 100% rise in depreciation is due to additional investment (gross capital expenditure for FY03 is estimated at Rs 19 bn).

    The stock currently trades Rs 35 implying a market capitalisation to sales of 2.7x. This is at a premium when compared with Hughes Tele and MTNL. However, both the other players operate in one or two circles and have a different revenue mix (MTNL derives 90% of its revenues from basic services and Hughes Tele is largely a basic-cum-broadband service provider). The premium valuation for Bharti could also be attributed to its end-to-end presence i.e. basic, cellular, long distance and broadband, which gives a competitive edge (in terms of economies of scale and lesser revenue share expenses).

    Comparative view...
    Parameter BTVL Hughes Tele* MTNL*
    Market cap/revenues (x) 2.7 2.0 1.0
    Market cap/subscriber (Rs) 18,834 35,133 12,765
    *9mFY03 annualised

    Prior to the full year results, the stock had run up significantly. Though the company's strategy is well in place, further downward revision in tariffs (free incoming calls and 50 paise per minute for domestic long distance calls) could impact operating margins. The positive is that the interconnect regime is largely in place (basic operator will have to shell out interconnect charges to cellular players once the new system comes into ploy). This should add to the operating profit growth. Overall, amidst positives, the risk profile of the stock is on the higher side.



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