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Bharti Airtel FY07: Pacemaker - Views on News from Equitymaster
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Bharti Airtel FY07: Pacemaker
Apr 27, 2007

Introduction to results
Bharti Airtel has announced astounding results for the fourth quarter and full year ended March 2007. Led by strong accretion to the overall subscriber base (90% YoY), the company has recorded a robust 58% YoY growth in topline (as per Indian GAAP financials) during FY07. Over that, the company has reported an exceptionally strong expansion in its operating margins, which when combined with a substantial rise in other income, has propelled the bottomline to a growth of 166% YoY for the quarter ended March 2007.

Consolidated financial performance (Indian GAAP): A snapshot…
(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change
Sales 33,957 53,614 57.9% 116,641 184,202 57.9%
Expenditure 23,064 31,231 -3.0% 75,005 109,796 -0.8%
Operating profit (EBDITA) 10,893 22,383 105.5% 41,636 74,407 78.7%
Operating profit margin (%) 32.1% 41.7%   35.7% 40.4%  
Other income 146 374 156.8% 614 1,119 82.2%
Interest 371 423 14.0% 2,244 2,489 10.9%
Depreciation 4,820 7,434 54.2% 16,419 26,191 59.5%
Profit before tax 5,848 14,900 154.8% 23,587 46,846 98.6%
Miscellaneous (income)/expenditure 102.4 2 -98.5% 132 63 -52.3%
Minority interest 60 196 225.0% 267 482 80.9%
Tax 617 1,520 146.3% 2,909 5,681 95.3%
Profit after tax/(loss) 5,068 13,186 160.1% 20,280 40,620 100.3%
Net profit margin (%) 14.9% 24.6%   17.4% 22.1%  
No. of shares         1,896.0  
Diluted Earnings per share (Rs)         21.4  
P/E ratio (x)         38.5  

What is the company’s business?
Bharti is one of the largest telecom service providers in the country, and leads the Indian wireless market (inclusive of GSM and CDMA subscribers) with a share of 21.8% (at the end of March 2006), catering to nearly 19.6 m subscribers. The company also provides fixed line and long distance telephony services to its customers. In addition, Bharti 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 69% during the period FY01 and FY06.

What has driven performance in FY06?
Note: The under-mentioned analysis is primarily based on US GAAP numbers, as the company has not reported consolidated Indian GAAP segment-wise performance.

Consolidated financial performance (US GAAP): A snapshot…
(Rs m) 4QFY06 4QFY07 Change FY06 FY07 Change
Sales 34,113 53,932 58.1% 116,215 185,196 59.4%
Expenditure 21,341 31,522 47.7% 72,901 110,697 51.8%
Operating profit (EBDIT) 12,772 22,410 75.5% 43,314 74,499 72.0%
Operating profit margin (%) 37.4% 41.6%   37.3% 40.2%  
Other income 166 587 253.6% 945 2,670 182.5%
Interest 733 688 -6.1% 2,958 3,044 2.9%
Depreciation 4,698 7,239 248.2% 15,829 25,208 59.3%
Profit before tax 7,507 15,070 100.7% 25,472 48,917 92.0%
Miscellaneous income/(expenditure) (92) (1)   (103) (54)  
Minority interest 41 184 348.8% 260 467 79.6%
Share of profits in associates/JVs 2 1 -50.0% 5 2 -60.0%
Tax 549 1,353 146.4% 2,540 5,822 129.2%
Profit after tax/(loss) 6,823 13,531 98.3% 22,564 42,572 88.7%
Net profit margin (%) 20.0% 25.1%   19.4% 23.0%  
No. of shares (m)         1,896.0  
Diluted Earnings per share (Rs)         22.5  
P/E ratio (x)         37.8  

Multi pronged performance: Bharti Airtel has clocked an appreciable performance in terms of both subscriber base and MOUs (minutes of usage) in this fiscal.

  • Subscriber growth: For the past year Bharti Airtel has not only been the fastest growing company in the Indian telephony market (in terms of subscribers) it has also significantly outpaced the growth of the wireless market in India. The company has over this time managed to gain a lead (in terms of market share) and consolidated its position and has hence increased the gap between it and its peers. The scorching pace at which the company has grown, is evident from the increase in its market share, which has increased by 2.5% over the year, accounting for 23% of the mobile market in India. Its revenues have grown by 58% YoY and 59% YoY for the quarter and full year ended March 2007. The operating margins (as per US GAAP) have also expanded by 9.7% and 4.9% for 4QFY07 and FY07 respectively.

    Subscriber growth and market share
    Particulars Mar-07 Mar-06 Change
    All India wireless subscribers (m) 162 96 66
    Bharti Airtel's wireless subscribers (m) 37 20 18
    Bharti's mobile market share 22.9% 20.4% 2.5%
    Bharti's market share of net additions 32.6% 24.7% 7.9%

  • Upsurge in traffic: Bharti Airtel witnessed a sharp upsurge in traffic across all it segments. This has been the fallout of macro factors as also the concerted marketing efforts of the company. The mobile services that form the largest chunk of the company’s overall revenues have seen a tremendous growth in minutes of usage as they grew by 112% YoY and 117% YoY for the quarter and FY07 respectively. The increasing affordability of mobile services on account of drop in tariffs has caused this increased usage. The minutes billed for its long distance services segment have also shown a similar performance as they surged by 114% YoY and 122% YoY for the fourth quarter and FY07.

Operating Leverage: While the revenues of the company have had a good run backed by the strong growth in its subscriber base, the operating expenses (according to Indian GAAP) have actually registered a drop of 3% YoY and 0.8% YoY for the said quarter and full year ended March 07. The operating expenses (as reported under US GAAP) although have increased on a YoY basis both for the quarter and full year, the growth has however been lower than the rise in revenues over the same period giving a fillip to the company’s operating margins.

Bottomline swells: The strong performance of the company both in terms of a robust topline growth and a control on its operating costs have culminated in a rise in its bottomline. The same has also been aided by a significant increase in other income both for the quarter as also in FY07. While the company continues to have a significant depreciation expense, the impact of it on its bottomline has been mitigated by the increase in its topline and other income.

Segmentwise performance
  4QFY06 4QFY07 Change FY06 FY07 Change
Mobile Services
Revenue (Rs m) 24,134 42,431 75.8% 82,390 141,442 71.7%
% of total revenues 64.0% 69.4%   63.8% 68.1%  
Minutes billed (m) 23,187 49,240 112.4% 70,425 152,583 116.7%
Revenue per minute (Rs) 1.04 0.86 -17.2% 1.17 0.93 -20.8%
EBIDTA margin 36.2% 39.1%   36.0% 37.7%  
EBIDTA per minute (Rs) 0.38 0.34 -10.6% 0.42 0.35 -17.1%
Broadband & Telephone Services
Revenue (Rs m) 4,102 6,044 47.3% 15,015 22,453 49.5%
% of total revenues 10.9% 9.9%   11.6% 10.8%  
Minutes billed (m) 3,549 4,241 19.5% 12,935 16,156 24.9%
Revenue per minute (Rs) 1.16 1.43 23.3% 1.16 1.39 19.7%
EBIDTA margin 32.6% 35.4%   32.0% 35.5%  
EBIDTA per minute (Rs) 0.38 0.50 34.0% 0.37 0.49 32.6%
Long Distance Services
Revenue (Rs m) 7,463 10,156 36.1% 24,557 34,888 42.1%
% of total revenues 19.8% 16.6%   19.0% 16.8%  
Minutes billed (m) 2,892 6,198 114.3% 8,936 19,831 121.9%
Revenue per minute (Rs) 2.58 1.64 -36.5% 2.75 1.76 -36.0%
EBIDTA margin 37.1% 35.8%   35.7% 38.9%  
EBIDTA per minute (Rs) 0.96 0.59 -38.7% 0.98 0.68 -30.3%
Enterprise Services
Revenue (Rs m) 2,005 2,511 25.2% 7,076 9,049 27.9%
% of total revenues 5.3% 4.1%   5.5% 4.4%  
EBIDTA margin 35.6% 50.1%   36.4% 46.3%  
* As per US GAAP numbers. Excluding inter-segment eliminations

Mobile services: Despite it forming the largest chunk of the company’s revenues, the revenues have surged for the quarter as also the fiscal not withstanding the base effect. The company has also performed well on various key performance indicators namely churn rate, wireless market share, market share of net adds etc. The good performance of the company was driven by an increase in its coverage area (it currently has 59% of the country’s population under coverage as against 42% in March 2006), a growth in the market share of net additions and a concerted effort to reduce churn rates both across the pre-paid and post-paid segments. The innovative recharge schemes launched by the company, and the ‘lifetime value card’ scheme have also contributed in bringing down the churn rates which has helped it to consolidate its position in this segment.

Broadband and telephone services: The segment forms a smaller part of the company’s overall revenues and while its performance here in terms of revenue has increased, its contribution to the company’s EBIDTA still remains low at 8%. The segment looks promising owing to the fact that while the minutes billed have registered a modest growth (vis-ŕ-vis the other segments) its per minute realisations have been up both for 4QFY07 as also FY07.

Long distance services: The long distance services of the company have seen a significant surge in volumes mainly on account of a drop in tariffs, which has caused the revenue per minute to fall by 37% YoY and 36% YoY for the quarter and full year ended March 2007. However, the growth in the minutes billed has ensured that the revenues from this segment continue to rise.

Looking forward: The company has targeted a capex of US$ 3.3 to US$ 3.5 bn in FY08, a large part of which will be spent on expanding the company’s cellular infrastructure (it plans to add another 30,000 base stations/towers in FY08). It also has plans to role out its DTH over the next few months as the convergence of voice, video and data seem to be the way going forward. This is also good for the company as it can better harness its resources so as to utilise them optimally creating synergies that will ultimately result in better operating leverage and increased profitability. The Sri Lankan foray of the company is also expected to come through during the current fiscal year

What to expect?
Bharti Airtel is currently trading at a price to earnings multiple of 38 times it last year’s earnings. These valuations seem fairly expensive a the moment taking into account the fact that the growth in its subscriber additions in future may be clipped owing to the aggressive stance being taken by other major cellular operators in the country. However, having consolidated its market share during the fiscal year FY07 we do not perceive this to be a major risk to the overall performance of the company.

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