Bharti Tele: Epic proportions! - Views on News from Equitymaster

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Bharti Tele: Epic proportions!

Apr 28, 2005

Performance Summary
India's leading cellular services provider, Bharti Tele, has announced strong results for the quarter and fiscal ending March 2005. Notably, the company has more than doubled its profits in FY05 over the previous fiscal. Operating margins have also improved for both the periods. Bharti is nearing the 11 m customer mark for its mobile services, and has cornered a share of around 27% of all-India GSM mobile subscriber base.

Consolidated financial performance (IFR Standards): A snapshot…
(Rs m) 4QFY04 4QFY05 Change FY04 FY05 Change
Sales 15,533 23,172 49.2% 50,025 80,346 60.6%
Expenditure 10,233 14,212 38.9% 33,341 50,752 52.2%
Operating profit (EBDIT) 5,300 8,961 69.1% 16,684 29,594 77.4%
Operating profit margin (%) 34.1% 38.7%   33.4% 36.8%  
Other income 241 117 -51.5% 346 321 -7.4%
Interest 343 860 150.9% 2,410 2,249 -6.7%
Depreciation 2,428 3,365 38.6% 8,760 11,186 27.7%
Profit before tax 2,770 4,852 75.2% 5,860 16,479 181.2%
Miscellaneous income/(expenditure) (13) (12)   284 (58)  
Minority interest 2 88 4777.8% 12 140 1048.4%
Tax (283) 384   (63) 1,889  
Profit after tax/(loss) 3,038 4,368 43.8% 6,195 14,393 132.3%
Net profit margin (%) 19.6% 18.9%   12.4% 17.9%  
No. of shares 1,853.0 1,853.0   1,853.0 1,853.0  
Diluted Earnings per share* (Rs) 6.6 9.4   3.3 7.8  
P/E ratio (x)         26.5  
(* 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 a 27% market share (nearly 10.9 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. 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 FY05?
Mobile services lead the charge: Bharti's mobile services segment (61% of total revenues) has yet again led the strong growth in the company's topline during both 4QFY05 and FY05. This has been made possible by a strong addition to the subscriber base (66% YoY growth over FY04) and a 19% YoY growth in average minutes of use per user. However, the strong addition in the subscriber base and the industry-wide pressure on tariffs has led to the company reporting a 5% YoY and 3% QoQ decline in the average revenue per user (ARPU). What is also important here is to note that the voluntary churn (customers leaving Bharti as % of total customers) for both pre-paid and post-paid subscribers has declined in FY05 and this is indicative of the company's ability of retaining its customers despite the intensifying competition in the industry. Lower tariffs, attractive offers and a growing usage of mobile services have led to the growth in the mobile services business.

Combining the mobile base with the broadband and telephone base, Bharti has crossed the 11 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 broadband and telephony business has increased by 0.5% YoY during FY05, and this combined with a 35% growth in the customer base, has led to revenues from this segment grow by 45% YoY.

Segment-wise performance…
FY04 % of total FY05 % of total Change
Mobile Services
Revenue 32,608 59.2% 54,356 60.6% 66.7%
EBIDTA 10,477 62.6% 18,465 60.9% 76.2%
EBIDTA margin 32.1%   34.0%    
Broadband & Telephone Services
Revenue 7,758 14.1% 11,270 12.6% 45.3%
EBIDTA 1,657 9.9% 3,270 10.8% 97.4%
EBIDTA margin 21.4%   29.0%    
Long Distance Services
Revenue 12,095 22.0% 18,661 20.8% 54.3%
EBIDTA 3,499 20.9% 6,035 19.9% 72.5%
EBIDTA margin 28.9%   32.3%    
Enterprise Services
Revenue 2,620 4.8% 5,381 6.0% 105.4%
EBIDTA 1,114 6.7% 2,544 8.4% 128.3%
EBIDTA margin 42.5%   47.3%    
Total
Revenue 55,080   89,668   62.8%
EBIDTA 16,747   30,313   81.0%
EBIDTA margin 30.4%   33.8%    
* Excluding inter-segment adjustments

All-round growth aids margin expansion: Apart from the strong growth in topline, the decline in key expenses (as % of sales) has led to Bharti reporting a 450 and 350 basis points expansion in operating margins for 4QFY05 and FY05 respectively. Especially, while interconnect charges have declined from 22.9% of sales in FY04 to 20.9% in FY05, license fee payments have reduced by 150 basis points, to 9.6% in FY05. 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 further going forward.

Based on segments, as the table above shows, the company has managed to improve operating margins all across, especially for the mobile services business, where the company is facing its biggest competition from other private and public sector players. However, readers should note that telecom is a high operating leverage play where, after covering the fixed costs on network and equipment setup, a large part of revenues flow straight to the bottomline, thus aiding margin expansion. Bharti is in a similar phase currently and thus benefits from the leverage.

It boils down to the bottomline: During FY05, apart from the strong growth in topline and expansion in operating margins, a lower interest outgo has helped Bharti report a robust 132% YoY growth in net profits. This is despite a reduction in other income and a sharp increase in tax payments.

What to expect?
At the current price of Rs 206, the stock is trading at a price to earnings multiple of 26.5 times FY05 earnings. While current valuations are at the higher end of the spectrum, there are reasons for the same, the foremost being the company's consistent and strong performance in the mobile telephony business, whereby it has emerged as the largest player in the country with a base of nearly 11 m customers. Also, with the launch of its mobile services in Assam, Bihar and the Northeastern region during the quarter, Bharti has emerged as the first company to have a mobile footprint across all the 23 telecom circles in the country. Moreover, Bharti is planning to increase its coverage to 5,000 towns by the end of this year, from the 2,100 currently. We believe that this is likely to give Bharti a greater leverage to grow faster into the future as, with the near saturation in the metros with respect to growth in the mobile customer base, ‘A' and ‘B' class towns and cities are likely to play an increasing role in the company's business.

We will soon update our research report on the company.

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