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Bharti Airtel: Pressing all levers - Views on News from Equitymaster
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Bharti Airtel: Pressing all levers
Jul 24, 2008

Performance summary
  • Topline (based on Indian GAAP consolidated numbers) grows by 45% YoY during 1QFY09 - growth led by a robust 62% YoY rise in the mobile subscriber base, which crossed the 69 m mark by the end of June 2008; adds 7.5 m mobile subscribers during the quarter itself.
  • Operating margins remain stable on a YoY basis. Rise in network operating expenses countered by decline in employee and marketing costs (all as percentage of sales).

  • Net profits grow by 52% YoY, aided by a strong topline growth and lower taxes. Growth would have been higher but for decline in interest and other income.

Consolidated financial performance snapshot (Indian GAAP)
(Rs m) 1QFY08 1QFY09 Change
Sales 58,735 85,060 44.8%
Expenditure 34,743 50,375 45.0%
Operating profit (EBDIT) 23,992 34,685 44.6%
Operating profit margin (%) 40.8% 40.8%  
Other income 837 616 -26.4%
Interest expense/(income) (2,649) (945) -64.3%
Depreciation 7,889 9,972 26.4%
Profit before tax 19,590 26,275 34.1%
Minority interest 187 433  
Tax 5,161 4,175 -19.1%
Profit after tax/(loss) 14,242 21,667 52.1%
Net profit margin (%) 24.2% 25.5%  
No. of shares 1,896.9 1,898.2  
Diluted Earnings per share (Rs)*   37.6  
P/E ratio (x)*   21.0  

What has driven growth in 1QFY09?
  • While all its business segments raked in strong growth during 1QFY09, the mobile services business remained the lead growth driver on account of its large share in total revenues. This business recorded a sales growth of 47% YoY during the quarter led by a strong growth in mobile subscriber base. The company added almost 7.5 m subscribers during the quarter, thus taking its base to nearly 70 m by the end of June 2008. On a YoY basis, the subscribe base has grown by a whopping 62%. The company currently holds 24.2% of India’s mobile services market (in terms of subscribers) and has a 29% 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 364,000 non-census towns and villages by the end of June 2008, against a presence in 243,000 such locations in June 2007.

    Aggressive focus on these locations (non-census towns and villages) has however meant that the company continues to record declining average revenue per user (ARPU). The same has declined by 10% YoY. From Rs 390 per subscriber per months in 1QFY08, ARPU has declined to Rs 350 in 1QFY09. 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 almost 98% of the total number of subscribers that Bharti added during the past three months.

    The decline in ARPU was also a result of the 20% fall in Bharti’s average revenue per minute from mobile subscribers, with the same coming off from 82 paise in 1QFY08 to 66 paise in 1QFY09. The management has attributed this to the passing on of the benefit of lower ADC (access deficit charge, which mobile companies pay to BSNL for the latter’s subsidised telecom services in rural areas).

    The decline in ARPU, however, has been made up to an extent by the 12% YoY increase in minutes of usage. From 478 minutes of usage per subscriber during 1QFY08, the number increased to 534 during 1QFY09.

    Segment-wise performance*

      1QFY08 1QFY09 Change
    Mobile Services      
    Revenue (Rs m) 47,036 69,205 47.1%
    % of total revenues 71.3% 64.2%  
    Minutes billed (m) 57,125 105,217 84.2%
    Revenue per minute (Rs) 0.82 0.66 -20.1%
    EBIT margin 28.0% 22.5%  
    EBIT per minute (Rs) 0.23 0.15 -35.6%
    Telemedia Services#      
    Revenue (Rs m) 6,537 7,974 22.0%
    % of total revenues 9.9% 7.4%  
    Minutes billed (m) 4,454 4,842 8.7%
    Revenue per minute (Rs) 1.47 1.65 12.2%
    EBIT margin 14.3% 24.7%  
    EBIT per minute (Rs) 0.21 0.41 93.6%
    Long Distance Services      
    Revenue (Rs m) 9,677 15,751 62.8%
    % of total revenues 14.7% 14.6%  
    Minutes billed (m) 7,099 12,370 74.2%
    Revenue per minute (Rs) 1.36 1.27 -6.6%
    EBIT margin 28.6% 37.3%  
    EBIT per minute (Rs) 0.39 0.48 21.9%
    Enterprise Services      
    Revenue (Rs m) 2,685 4,258 58.6%
    % of total revenues 4.1% 4.0%  
    EBIT margin 32.3% 35.2%  
    Passive Infra. Services^      
    Revenue (Rs m) NA 10,558 NA
    % of total revenues NA 9.8%  
    EBIT margin NA 14.0%  
    * 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 22% YoY, 63% YoY and 59% YoY respectively. In the Telemedia business, Bharti increased its subscriber base to nearly 2.4 m (2 m at the end of 1QFY08). It earned an ARPU of Rs 1,138 per month in this business, which was an increase of a marginal 1.5% YoY.

    This quarter, for the second time, Bharti recorded revenue from its telecom tower subsidiary (Bharti Infratel), which was demerged effective January 31, 2008. Revenue from this business formed around 10% of the company’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 58,000 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 stable operating margins during 1QFY09. Based on business segments, while mobile services recorded operating margin improvement to 40.6% (30.7% in 1QFY08), the Telemedia Services segment reported a 10% contraction in its operating margins.

  • On the back of a robust topline growth and stable operating margin expansion, Bharti recorded a 52% YoY growth in its bottomline during 1QFY09. This growth would have been higher but for 26% YoY and 64% YoY decline in other income and interest income respectively. The decline in effective tax rate (from 26% to 16%) though aided the profit growth to an extent.

What to expect?
At the current price of Rs 791, the stock is trading at a multiple of 11.3 times our estimated FY11 earnings, which we believe makes it fairly attractive for long term investors. Bharti has recorded yet another quarter of strong overall performance and robust addition in the mobile services space. While ARPU will remain under pressure on account of the intensive competition that the company faces, the fact that it has been able to growth its minutes of usage per subscriber now on a base of almost 70 m is really commendable. This also indicates the strong elasticity that mobile usage has with respect to the decline in calling tariff.

The management has reiterated its confidence of a continued growth momentum in mobile subscriber base going forward. It is also looking at niche businesses in the Telemedia and Enterprise segments and expects its DTH (direct to home) foray to take the company to the next level of growth. Overall, we maintain our positive view on the company from a 2 to 3 years perspective.

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