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Bharti Airtel: No more a ‘venture’! - Views on News from Equitymaster
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Bharti Airtel: No more a ‘venture’!
Apr 28, 2006

Introduction to results
Bharti Airtel (erstwhile Bharti Televentures), has reported strong results for the fourth quarter and fiscal ended March 2006. For FY06, revenues and net profits have grown by 44% YoY and 67% YoY respectively (as per Indian GAAP consolidated numbers), very much in line with what we had estimated. Growth for the company has been led by a strong addition to the mobile subscriber base (at 19.6 m, an over 78% YoY growth). Operating margins have, however declined, supposedly due to lesser average realisations on the back of company’s foray into semi-urban and rural markets with lower denomination recharge vouchers.

Consolidated financial performance (Indian GAAP): A snapshot…
(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Sales 23,288 33,957 45.8% 81,123 116,641 43.8%
Expenditure 14,073 23,064 63.9% 50,900 75,005 47.4%
Operating profit (EBDIT) 9,214 10,893 18.2% 30,223 41,636 37.8%
Operating profit margin (%) 39.6% 32.1%   37.3% 35.7%  
Other income 52 146 179.1% 435 614 41.2%
Interest 525 371 -29.4% 2,439 2,244 -8.0%
Depreciation 3,012 4,820 60.0% 11,882 16,419 38.2%
Profit before tax 5,729 5,848 2.1% 16,337 23,587 44.4%
Miscellaneous income/(expenditure) (105) (102)   (505) (132)  
Minority interest 55 60 9.8% 121 267 120.4%
Tax 1,956 617 -68.4% 3,595 2,909 -19.1%
Profit after tax/(loss) 3,614 5,068 40.2% 12,116 20,280 67.4%
Net profit margin (%) 15.5% 14.9%   14.9% 17.4%  
No. of shares 1,853.4 1,893.9   1,853.4 1,893.9  
Diluted Earnings per share (Rs)         10.7  
P/E ratio (x)         38.1  

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. 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 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) 4QFY05 4QFY06 Change FY05 FY06 Change
Sales 23,255 34,113 46.7% 80,028 116,633 45.7%
Expenditure 17,595 26,039 48.0% 61,838 88,890 43.7%
PBIT 5,660 8,074 42.7% 18,190 27,743 52.5%
PBIT margin (%) 24.3% 23.7%   22.7% 23.8%  
Other income 275 166 -39.6% 479 590 23.2%
Interest 798 733 -8.1% 1,995 2,650 32.8%
Profit before tax 5,137 7,507 46.1% 16,674 25,683 54.0%
Miscellaneous income/(expenditure) (12) (92)   (31) (103)  
Minority interest 71 41 -42.3% 99 254 156.6%
Share of profits in associates/JVs 3 (2)   (38) (5)  
Tax 467 549 17.6% 1,528 2,736 79.1%
Profit after tax/(loss) 4,590 6,823 48.6% 14,978 22,585 50.8%
Net profit margin (%) 19.7% 20.0%   18.7% 19.4%  
No. of shares 1,853.4 1,893.9   1,853.4 1,893.9  
Diluted Earnings per share (Rs)         11.9  
P/E ratio (x)         34.2  

All-round growth: Bharti’s mobility business, which contributes to a lion’s share of total revenues (64% share in FY06), continues to lead the company’s topline growth. The segment has reported a revenue growth of 53% YoY during the fiscal, a rate 4% higher than what we had estimated for the company. This segment has benefited from a strong addition to the subscriber base, especially during the fourth quarter when the company added a net of 3.3 m subscribers (almost 38% of the total net additions during the full year). Bharti’s GSM mobile base stood at 19.6 m subscribers, which is bang on target vis-à-vis our estimates. The growth in the subscriber has been brought about by increasing affordability of telecommunication services (as seen from lower ARPUs) and greater penetration in the relatively untapped semi-urban and rural areas. As a matter of fact, Bharti’s ARPUs stood at Rs 442 during 4QFY06, which is an almost 12% YoY decline over the ARPUs of Rs 505 that were earned in the corresponding quarter of the previous fiscal. We had estimated Bharti’s ARPUs to touch Rs 444 in FY06, thus being almost near to the actual reported figure.

The launch of the lifetime validity coupons and ‘One India’ plan has seeming helped the company garner record subscribers during the fourth quarter. Also, rapid penetration in the semi-urban and rural markets, though being realisation dilutive, has helped the company ramp up fast on the volumes front. We continue to believe that, going forward, a further reduction in tariffs and cost of handsets, which essentially makes the service very affordable for the user, is likely to supplement the growth of the Indian telecom sector in general and Bharti in particular.

Segment-wise performance*
  4QFY05 4QFY06 Change FY05 FY06 Change
Mobile Services
Revenue 16,165 24,134 49.3% 54,015 82,391 52.5%
% of total revenues 62.5% 64.0%   60.5% 63.8%  
EBIDTA margin 35.0% 36.2%   34.3% 36.1%  
Broadband & Telephone Services
Revenue 3,095 4,102 32.5% 11,209 15,015 34.0%
% of total revenues 12.0% 10.9%   12.6% 11.6%  
EBIDTA margin 27.4% 22.8%   25.5% 24.5%  
Long Distance Services
Revenue 5,066 7,463 47.3% 18,614 24,556 31.9%
% of total revenues 19.6% 19.8%   20.8% 19.0%  
EBIDTA margin 40.1% 27.1%   34.0% 35.8%  
Enterprise Services
Revenue 1,545 2,005 29.8% 5,441 7,185 32.1%
% of total revenues 6.0% 5.3%   6.1% 5.6%  
EBIDTA margin 43.9% 35.6%   49.5% 37.6%  
* As per US GAAP numbers            
* As per US GAAP numbers

Apart from the mobile business, all the other businesses of the company, viz. Broadband & Telephone Services (BTS), Long Distance Services (LDS) and Enterprise Services (ES) have also shown strong growth during the fiscal. Bharti has crossed the 20 m total subscriber mark if one were to add the broadband and long distance services subscribers to the mobility subscriber base.

The BTS business has been another star performer for Bharti during the fiscal, growth revenues by 34% YoY. This has been the result of a 57% YoY growth in the subscriber base. The growth has, however, been pared due to a 14% YoY decline in BTS ARPUs, which were Rs 1,063 in 4QFY06. The year-end BTS subscriber base has outperformed our estimates by 11%.

In offering pan-India services to its customers, Bharti has also managed to reduce churn in its pre-paid subscriber base, from 6.7% in 4QFY05 to 5.2% in 4QFY06. Pre-paid subscribers from around 83% of the company’s total mobile subscriber base, and consequently the reduction in churn is a positive. A higher proportion of prepaid customers is also the reason for pressure on average mobile ARPUs for the company.

ES led pressure on margins: While Bharti continue to benefit from the operating leverage that the mobile business provides (as seen from the improvement in operating margins from 34.3% in FY05 to 36.1% in FY06), pressure on ES margins have led to the overall decline in operating margins for the company during the fiscal. We believe that the contraction in ES operating margins might be largely due to intense pressure on tariffs, where the industry is witnessing oversupply of bandwidth capacity. As per the Indian GAAP numbers, the company’s reported operating margins of 35.7% are 270 basis points lower than our estimates of 38.4% for the fiscal. However, we believe that the company shall be able to maintain margins near the current levels over the long term. We estimate operating margins at 36.9% in FY08.

It boils down to the bottomline: Despite the contraction in operating margins, Bharti’s net profit growth has outpaced the growth in topline during the fiscal. Lower interest and tax expenses have helped the bottomline growth. As a matter of fact, the FY06 bottomline has outperformed our estimates by less then 4%.

What to expect?
At the current price of Rs 408, the stock is trading at a price to earnings multiple of 16.3 times our estimated FY08 earnings (as per Indian GAAP consolidated numbers). During FY06, Bharti has performed in line with our estimates and we expect the strong growth to continue going forward. We expect the company’s foray into the lesser-penetrated markets with lower recharge cards to lead the overall growth in the future. The new integrated organisation structure shall only aid this process. While the increase in number of listed options in the sector (currently Reliance Communications and later Hutch) shall dilute some of the ‘scarcity premium’ for the company, fundamentals shall more than adequately take care of the same.

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