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Bharti Tele: This number’s right! - Views on News from Equitymaster
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Bharti Tele: This number’s right!
Jul 26, 2005

Performance summary
Bharti Tele (Research: BTVL), India’s leading cellular services provider, has announced yet another quarter of strong performance. The company has reported robust growth in both the topline and the bottomline during 1QFY06. Operating margins have also improved for the quarter. Bharti has crossed the 12 m customer mark for its mobile services, and has cornered a share of around 22% of all-India wireless subscriber base, which includes both the GSM and CDMA segments of the mobile telephony market.

Consolidated financial performance (Indian GAAP): A snapshot…
(Rs m) 1QFY05 1QFY06 Change
Sales 17,276 25,136 45.5%
Expenditure 10,982 15,727 43.2%
Operating profit (EBDIT) 6,294 9,409 49.5%
Operating profit margin (%) 36.4% 37.4%  
Other income 56 138 147.8%
Interest 1,067 557 -47.8%
Depreciation 2,647 3,514 32.8%
Profit before tax 2,636 5,476 107.7%
Miscellaneous income/(expenditure) (84) (7)  
Minority interest 18 68 274.2%
Tax 142 696 389.7%
Profit after tax/(loss) 2,391 4,705 96.8%
Net profit margin (%) 13.8% 18.7%  
No. of shares 1,853.0 1,853.0  
Diluted Earnings per share* (Rs) 5.2 10.2  
P/E ratio (x)   27.2  
(* 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 over 27% market share (nearly 12.3 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 and has grown its revenues at a compounded rate of 80% during the period FY00 and FY05.

What has driven performance in 1QFY06?
Note:  The segmental analysis, as shown in the table below, is done on the basis of International Financial Reporting Standards (IFRS), as these details as per the Indian GAAP are not available.

Mobile services lead the charge:  With a YoY revenue growth of 59%, Bharti’s mobile services segment (63% of total revenues) has yet again led the strong growth in Bharti’s topline during 1QFY06. This has been made possible by a strong 60% YoY growth in the subscriber base and a 19% YoY growth in average minutes of usage per user. However, intensifying competition and the consequent industry-wide pressure on tariffs (leading to reduction in roaming tariffs and local rates being effective between inter-circle calling) has taken its toll on the average revenue per user (ARPU) of the mobile segment, which has declined by 4% during the quarter. ARPU has also been affected by the launch of Rs 200 prepaid recharge coupon.

Bharti has managed to reduce the churn of subscribers in the mobile business (both for prepaid and postpaid segments) and this indicates the company’s ability of retaining customers despite the intensifying competition in the industry. Overall, we believe that lower tariffs, attractive offers and a growing usage of mobile services have led to the growth in the mobile services business. 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. We expect the Indian GSM market to grow at a CAGR of 38% during FY05 to FY08, to reach a size of 107 m subscribers. Further, Bharti is expected to grow its base at a CAGR of 43%, connecting nearly 32 m GSM subscribers by the end of this period and also increasing its market share to 29.7% from the FY05 level of 26.8%.

Combining the mobile base with the broadband and telephone base, Bharti has crossed the 13 m subscriber base mark, which seems to have benefited the company in the 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 a strong 7% YoY during 1QFY06, and this combined with a 33% growth in the customer base, has led to revenues from this segment grow by nearly 42% YoY.

Segment-wise performance…
  1QFY05 % of total 1QFY06 % of total Change
Mobile Services
Revenue 10,988 58.3% 17,508 63.1% 59.3%
EBIDTA 3,852 62.0% 6,073 63.2% 57.7%
EBIDTA margin 35.1%   34.7%    
Broadband & Telephone Services
Revenue 2,406 12.8% 3,409 12.3% 41.7%
EBIDTA 642 10.3% 989 10.3% 54.0%
EBIDTA margin 26.7%   29.0%    
Long Distance Services
Revenue 4,294 22.8% 5,207 18.8% 21.3%
EBIDTA 1,184 19.0% 1,856 19.3% 56.8%
EBIDTA margin 27.6%   35.6%    
Enterprise Services
Revenue 1,163 6.2% 1,639 5.9% 40.9%
EBIDTA 539 8.7% 689 7.2% 27.8%
EBIDTA margin 46.3%   42.0%    
* As per IFR Standards; Excluding inter-segment adjustments

All-round growth aids margin expansion:  While the company has not reported the break-up of expenditure as per key heads, we believe that expansion in margins of the broadband and telephone services segments (including long-distance services) has aided the overall margin improvement during 1QFY06. The revised ADC (access deficit charge) guidelines, which are expected to reduce burden on mobile service providers by reducing their payment to BSNL, have also seemingly helped the company in expanding its margins during the quarter under consideration.

Investors should also note that telecom is a high operating leverage play wherein, 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:  Apart from the expansion in operating margins, reduced interest outgo has helped Bharti report a superlative profit growth during 1QFY06, up 97% YoY. The effective tax rate has, however, increased from 5.4% in 1QFY05 to 12.7% in 1QFY06 and has capped the growth in bottomline.

What to expect?
At the current price of Rs 280, the stock is trading at a price to earnings multiple of 26.6 times our estimated FY06 earnings, as per Indian GAAP consolidated numbers. With the kind of growth strategy that the company has put in place, these valuations might not look that expensive. As indicated in the conference call, the company is planning to increase its coverage to 5,000 towns from 2,700 currently. We believe that this is likely to give the company 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 expect the faster rollout of networks and lower priced (read affordable) recharge coupons to be amongst the biggest growth drivers for the company in the future.

We had recommended a ‘Buy’ on the stock at the beginning of this month, at Rs 245 with a target price of Rs 320 in the medium to long-term. Considering the growth prospects of the sector and the company over the next three to five years, we believe that Bharti should be a part of the portfolio of long-term investors.

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