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Bharti Airtel: Lively at 60! - Views on News from Equitymaster

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Bharti Airtel: Lively at 60!
Apr 25, 2008

Performance summary
  • Topline (based on Indian GAAP consolidated numbers) grows 47% YoY in FY08; Similar growth recorded for the fourth quarter as well. Actual sales figure for the fiscal just 1% lower than our estimates.

  • Growth led by a whopping 67% YoY growth in the mobile subscriber base, which crossed the 60 m mark during the fourth quarter; Adds 6.8 m mobile subscribers during the quarter, 25 m during the full year. Leads the mobile service market with a share of 23.8% (22.4% at the end of FY07).

  • Operating margins expand by 1.9% YoY for the fiscal, largely owing to lower access charges and employee costs (both as percentage of sales).

  • Aided by a strong topline growth, expansion in operating margins and a substantial rise in other income, net profits record a 57% YoY growth during FY08. Actual net profit figure higher by 3% as compared to our estimates.

Consolidated financial performance snapshot (Indian GAAP)
(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Sales 53,614 78,637 46.7% 184,202 270,122 46.6%
Expenditure 31,671 46,743 47.6% 111,563 158,610 42.2%
Operating profit (EBDIT) 21,942 31,894 45.4% 72,640 111,512 53.5%
Operating profit margin (%) 40.9% 40.6%   39.4% 41.3%  
Other income 374 663 77.2% 1,119 2,796 149.9%
Interest 423 3,045 620.7% 2,489 5,279 112.1%
Depreciation 6,993 9,350 33.7% 24,487 35,914 46.7%
Profit before tax 14,902 20,162 35.3% 46,783 73,116 56.3%
Minority interest 196 412 110.3% 482 1,000 107.5%
Tax 1,520 761 -49.9% 5,681 8,162 43.7%
Profit after tax/(loss) 13,186 18,989 44.0% 40,620 63,954 57.4%
Net profit margin (%) 24.6% 24.1%   22.1% 23.7%  
No. of shares       1,896.2 1,897.9  
Diluted Earnings per share (Rs)       21.4 33.7  
P/E ratio (x)         26.7  

What has driven growth in FY08?
  • The 47% YoY growth in Bharti’s net sales during FY08 was largely a result of a strong growth in mobile subscriber base. Mobile services sales grew by 55% YoY during the fiscal. The company added almost 25 m subscribers during the year, thus taking its base to over 60 m at the end of March 2008. Bharti currently holds almost 24% of India’s mobile services market (in terms of subscribers) and has a 25% share of incremental additions. In this strong expansion in subscriber base, Bharti has been duly helped by a faster penetration into the non-census towns and rural market. It increased its presence to over 342,000 non-census towns and villages by the end of March 2008, against a presence in 207,000 such locations in March 2007.

    While aggressive focus in these locations (non-census towns and villages) has meant that Bharti maintains its lead in the race for subscribers, it continues to dent the company’s average revenue per user, or ARPU. This has declined by 12% YoY for mobile services during FY08. Against Rs 406 per month that Bharti earned from each of its subscribers in 4QFY08, it earned Rs 357 in 4QFY08 (ARPU remained at almost same levels as 3QFY08). This lower ARPU is directly a result of the fact that a deeper penetration into areas with low purchasing power (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. As a matter of fact, prepaid subscribers were over 96% of the total number of subscribers that Bharti added during 4QFY08.

    Segment-wise performance*
      4QFY07 4QFY08 Change FY07 FY08 Change
    Mobile Services            
    Revenue (Rs m) 42,422 64,321 51.6% 141,189 218,697 54.9%
    % of total revenues 69.3% 67.7%   67.9% 70.3%  
    Minutes billed (m) 49,240 89,058   152,583 284,398 86.4%
    Revenue per minute (Rs) 0.86 0.72 -16.2% 0.93 0.77 -16.9%
    EBIDTA margin 39.1% 35.5%   37.7% 39.2%  
    EBIDTA per minute (Rs) 0.34 0.26 -23.9% 0.35 0.30 -13.6%
    Telemedia Services#            
    Revenue (Rs m) 6,070 7,656 26.1% 22,492 28,615 27.2%
    % of total revenues 9.9% 8.1%   10.8% 9.2%  
    Minutes billed (m) 4,241 4,736 11.7% 16,156 18,390 13.8%
    Revenue per minute (Rs) 1.43 1.62 13.0% 1.39 1.56 11.8%
    EBIDTA margin 28.6% 43.8%   24.9% 40.0%  
    EBIDTA per minute (Rs) 0.41 0.71 73.0% 0.35 0.62 79.5%
    Long Distance Services            
    Revenue (Rs m) 10,114 12,609 24.7% 34,950 43,798 25.3%
    % of total revenues 16.5% 13.3%   16.8% 14.1%  
    Minutes billed (m) 6,198 11,248 81.5% 19,831 35,865 80.9%
    Revenue per minute (Rs) 1.63 1.12 -31.3% 1.76 1.22 -30.7%
    EBIDTA margin 35.8% 32.0%   39.4% 33.1%  
    EBIDTA per minute (Rs) 0.58 0.36 -38.6% 0.69 0.40 -41.8%
    Enterprise Services            
    Revenue (Rs m) 2,593 4,376 68.8% 9,304 13,885 49.2%
    % of total revenues 4.2% 4.6%   4.5% 4.5%  
    EBIDTA margin 50.1% 57.0%   46.3% 46.3%  
    Passive Infra. Services^            
    Revenue (Rs m) NA 6,023 NA NA 6,023 NA
    % of total revenues NA 6.3%   NA 1.9%  
    EBIDTA margin   37.1%     37.1%  
    * As per Indian GAAP numbers. Excluding inter-segment eliminations; # Broadband & Telephone services have been renamed as Telemedia Services; ^ Share of revenue in the demerged tower subsidiary - Bharti Infratel Ltd.

    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 fiscal, with their sales growing by 27% YoY, 25% YoY and 49% YoY respectively. In the Telemedia business, Bharti increased its subscriber base to nearly 2.3 m (1.9 m at the end of FY07) in 94 cities in India. It earned ARPUs of Rs 1,137 per month in this business, which was an increase of 2% YoY.

    This quarter, for the first time, Bharti also recorded revenue from its telecom tower subsidiary (Bharti Infratel), which was demerged effective January 31, 2008. Revenue from this business formed just around 6% of Bharti’s consolidated revenue during the quarter, and also included rentals that the company received from other mobile operators. As a matter of fact, Bharti Infratel deploys, owns and manages passive infrastructure pertaining to telecom operations. The company has over 52,000 towers currently. Out of this, around 30,000 towers are would be transferred to Indus Towers Ltd., a joint venture company (JVC) between Bharti Infratel, Vodafone and Idea. Bharti Infratel owns 42% in this JVC. As a matter of fact, Bharti had sold off around 8% to 10% stake in Bharti Infratel in December 2007 for a consideration of US$ 1 bn, thus valuing the tower subsidiary at around US$ 10 to 12.5 bn.

  • Bharti recorded a 1.9% YoY expansion in its operating margins during FY08. This was a result of lower access charges and staff costs (both as percentage of sales). Based on business segments, while mobile services recorded operating margin improvement to 39.2% (37.7% in FY07), the Telemedia Services segment reported a 15% expansion in its operating margins. These performances need to be seen in light of the management’s expectation of medium term pressure on operating profitability due to the conversion of capex to opex (operating expenditure) on transfer of passive infrastructure (telecom towers) to Bharti Infratel.

  • On the back of a robust topline growth and operating margin expansion, Bharti recorded a 57% YoY growth in its bottomline during FY08. A 150% YoY growth in other income also aided this growth. Against our estimates, the net profit figure was higher by 3% for the fiscal.

What to expect?
At the current price of Rs 920, the stock is trading at a multiple of 15.2 times our estimated FY10 earnings, which we believe makes it fairly attractive for long term investors. The management has reiterated its confidence of a continued growth momentum in mobile subscriber base going forward. It has cited factors like easing of spectrum issues, removal of access deficit charge and proposed active infrastructure sharing as key growth drivers for the sector over the next few years. As far as Bharti is concerned, it expects to spend US$ 2.5 bn as capex during FY09 (excluding the capex of Bharti Infratel, where it plans to add around 30,000 towers during the fiscal). Overall, we maintain our positive stance on the company. We shall soon update our research report on the company with FY08 actual performance and estimates for FY11.

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