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Bharti Airtel: One India–One Airtel! - Views on News from Equitymaster

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Bharti Airtel: One India–One Airtel!
Jul 26, 2006

Performance summary
Bharti Airtel (erstwhile Bharti Televentures) reported yet another quarter of strong performance (as per Indian GAAP consolidated numbers). Continued strong addition to the mobile subscriber base and growth in volumes (minutes of usage) has aided the company’s topline during the quarter. Benefits of operating leverage are seen in the expansion in operating margins during the quarter.

Consolidated financial performance (Indian GAAP): A snapshot…
(Rs m) 1QFY06 1QFY07 Change
Sales 25,136 38,155 51.8%
Expenditure 15,727 23,173 47.3%
Operating profit (EBDIT) 9,409 14,982 59.2%
Operating profit margin (%) 37.4% 39.3%  
Other income 138 266 92.9%
Interest 557 642 15.3%
Depreciation 3,514 5,144 46.4%
Profit before tax 5,476 9,461 72.8%
Miscellaneous income/(expenditure) (7) (9)  
Minority interest 68 112 64.6%
Tax 696 1,026 47.5%
Profit after tax/(loss) 4,705 8,314 76.7%
Net profit margin (%) 18.7% 21.8%  
No. of shares 1,873.5 1,893.9  
Diluted Earnings per share (Rs)*   12.6  
P/E ratio (x)*   30.3  
* On a trailing 12-months basis      

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 22.5% (at the end of June 2006), catering to nearly 23.1 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. The company also has a submarine cable landing station at Chennai, which connects the submarine cable (owned by an associate company) connecting Chennai and Singapore. The company is a part of the consortium, which jointly owns and has developed the next generation undersea cable system SEA-ME-WE-4. 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 1QFY07?
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) 1QFY06 1QFY07 Change
Sales 25,173 38,564 53.2%
Expenditure 15,772 23,551 49.3%
Operating profit (EBDIT) 9,401 15,013 59.7%
Operating profit margin (%) 37.3% 38.9%  
Other income 451 1,007 123.3%
Interest 466 2,449 425.5%
Depreciation 3,403 4,972 46.1%
Profit before tax 5,983 8,599 43.7%
Miscellaneous income/(expenditure) - -  
Minority interest 66 96 45.5%
Share of profits in associates/JVs (3) -  
Tax 815 952 16.8%
Profit after tax/(loss) 5,099 7,551 48.1%
Net profit margin (%) 20.3% 19.6%  
No. of shares 1,873.5 1,893.9  
Diluted Earnings per share (Rs)*   13.2  
P/E ratio (x)*   28.9  
* On a trailing 12-months basis

23 X 23 performance: The strong 88% YoY growth in the GSM mobile subscriber base has led Bharti’s superlative growth in this quarter. The company now serves a subscriber base of over 23 m in its mobile business, which spans all the 23 telecom circles in the country. The company’s mobile business contributed to nearly 67% of the total revenues in 1QFY07 (63% in 1QFY06). While the company has seen its average revenue per user (ARPU) decline by 10% YoY (to Rs 441 per month) for the mobile business, robust addition to the subscriber base and higher average minutes of usage per subscriber (15% YoY growth) has more than made up for the YoY decline in ARPU. The decline in Bharti’s ARPU during 1QFY07, apart from due to the overall fall in tariffs in the industry, can also be attributed to increase in the proportion of prepaid subscribers (84.4%, from 75.7% in 1QFY06) to the total subscriber base of the company. Our estimates show that ARPU of prepaid is just around 25% of postpaid connections, thus justifying the fall in blended ARPU. We estimate Bharti’s blended mobile ARPU to decline by 9% during FY07, to Rs 403 per month. As for the mobile subscriber base, the company has already achieved 29% of our FY07 estimated addition to the base.

Going forward, rapid penetration into the semi-urban and rural markets, though being realisation dilutive, is likely to further help the company ramp up fast on the volumes front. Currently, the company covers regions with almost 46% of the country’s total population, by way of coverage in 4,026 census towns and 101,614 non-census towns and villages. In these regions, we believe that a continued 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. To that extent, we may have to revise upwards our subscriber estimates of the company for FY07 and beyond.

Segment-wise performance*
  1QFY06 1QFY07 Change
Mobile Services      
Revenue 17,464 28,411 62.7%
% of total revenues 63.1% 66.7%  
Minutes billed (m) 13,321 28,194 111.7%
Revenue per minute (Rs) 1.31 1.01 -23.1%
EBIDTA margin 34.8% 36.4%  
EBIDTA per minute (Rs) 0.46 0.37 -19.6%
Broadband & Telephone Services      
Revenue 3,404 5,182 52.2%
% of total revenues 12.3% 12.2%  
Minutes billed (m) 2,997 3,780 26.1%
Revenue per minute (Rs) 1.14 1.37 20.7%
EBIDTA margin 28.9% 23.0%  
EBIDTA per minute (Rs) 0.33 0.32 -3.9%
Long Distance Services      
Revenue 5,209 7,064 35.6%
% of total revenues 18.8% 16.6%  
Minutes billed (m) 1,824 3,635 99.3%
Revenue per minute (Rs) 2.86 1.94 -32.0%
EBIDTA margin 35.9% 38.9%  
EBIDTA per minute (Rs) 1.03 0.76 -26.3%
Enterprise Services      
Revenue 1,610 1,969 22.3%
% of total revenues 5.8% 4.6%  
EBIDTA margin 41.1% 47.5%  
* As per US GAAP numbers. Excluding inter-segment eliminations

Apart from the mobile business, all the other businesses of the company – Broadband & Telephone Services (BTS), Long Distance Services (LDS) and Enterprise Services (ES) – have also shown strong growth during 1QFY07, with revenue growth of 52% YoY, 36% YoY and 22% YoY respectively. Through its broadband services, Bharti connects almost 1.5 m subscribers (0.9 m in 1QFY06) in 92 (66 in 1QFY06) cities in India. It earns ARPU of Rs 1,202 per month in the broadband business, which represents a decline of 4% YoY.

Lower access and license charges aid margins: Bharti continues to benefit from the operating leverage in the mobile business, as seen from the improvement in operating margins from 34.8% in 1QFY06 to 36.4% in 1QFY07. Even the long distance and enterprise services have reported margin expansion during the quarter. Broadband services have, however, reported a 5.9% contraction in operating margins, and this is seemingly due to the investments that are being made towards rapid expansion into new cities. Based on cost heads, reduction in access charges and license fee, revenue share and spectrum charges (all as % of sales), the company, on a consolidated basis, has reported a 260 basis points expansion in operating margins during 1QFY07 (as per US GAAP numbers).

It boils down to the bottomline: Strong topline growth and expansion in operating margins, alongwith higher other income, have aided Bharti in reporting a robust 48% YoY growth in net profit during the quarter (as per US GAAP numbers). However, the growth would have been higher but for a substantial increase in interest costs (up 426% YoY). These costs have risen by way of increase in the total indebtedness of the company and the overall rise in interest rates.

What to expect?
At the current price of Rs 382, the stock is trading at a price to earnings multiple of 14.9 times our estimated FY08 earnings (as per Indian GAAP consolidated numbers). The ‘One Bharti’ integrated organisation structure that the company had implemented at the beginning of this fiscal is seen reaping dividends, and the strong performance in 1QFY07 is a clear testimony to the same. As for the future, the company’s foray into the lesser-penetrated markets with lower recharge cards shall lead the overall growth. We maintain our positive view on the stock.

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