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Bharti Airtel: Rock steady - Views on News from Equitymaster

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Bharti Airtel: Rock steady
Jul 26, 2007

Performance summary
  • Topline (based on US GAAP consolidated numbers) grows 53% YoY in 1QFY08, led by strong accretion to subscriber base and increasing minutes of usage.

  • Adds 5.7 m subscribers during the quarter – base stands at 44.7 m (mobile and broadband included).

  • Operating margins expand by 250 basis points (2.5%) owing to improved profitability of mobile business.

  • Net profit doubles on the back of expansion in operating margins and higher other income.

Consolidated financial performance (US GAAP) snapshot
(Rs m) 1QFY07 1QFY08 Change
Sales 38,564 59,046 53.1%
Expenditure 23,552 34,580 46.8%
Operating profit (EBDIT) 15,012 24,466 63.0%
Operating profit margin (%) 38.9% 41.4%  
Other income 1,008 5,886 483.9%
Interest 2,449 3,325 35.8%
Depreciation 4,972 8,120 63.3%
Profit before tax 8,599 18,907 119.9%
Miscellaneous income/(expenditure) (1) (6)  
Minority interest 96 191 99.0%
Share of profits in associates/JVs - (1)  
Tax 952 3,594 277.5%
Profit after tax/(loss) 7,550 15,115 100.2%
Net profit margin (%) 19.6% 25.6%  
No. of shares   1,897.1  
Diluted Earnings per share (Rs)*   26.4  
P/E ratio (x)*   35.3  
* 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 21.8% (at the end of December 2006), catering to over 32 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 65% during the period FY02 and FY07.

What has driven performance in 1QFY08?
Subscriber addition, rural penetration drive growth: Bharti’s subscriber base (inclusive of mobile and broadband) crossed the 44 m mark in 1QFY08, recording a growth of 82% YoY. A faster growth was seen in mobile subscriber base, which grew by 85% YoY to near the 43 m mark. In this business, Bharti ramped up on its monthly addition figures, which grew from nearly 1.2 m in 1QFY07 to 1.8 m in 1QFY08. This was helped by a faster penetration into the non-census towns and rural market. As a matter of fact, Bharti increased its presence to over 243,000 non-census towns and villages by the end of June 2007, against a presence in 100,000 such locations in June 2006. However, moving into these relatively ‘less lucrative’ locations (in terms of revenue per subscriber) had its impact in the company’s mobile ARPUs (average revenue per user per month), which declined by 11% YoY to Rs 390. Higher proportion of prepaid subscribers was also an after effect of increased penetration into these markets, which ultimately impacted the company’s mobile ARPUs (prepaid ARPUs are lesser than postpaid ARPUs). The move is in line with out FY08 estimates, where we expect the prepaid contribution to touch the 90% mark. Our blended ARPU estimate for the fiscal stands at Rs 370, which is still 5.2% lower than the number reported by the company in 1QFY08.

On the back of declining tariffs, Bharti reported an 8% YoY growth in the minutes of usage (MoU) figure. Against an average MoU of 441 minutes in 1QFY07, a subscriber of Bharti used the service for 478 minutes in 1QFY08. As a matter of fact, the company earned 82 paise per minute from its mobile customers in 1QFY08, which was a decline of 18% over the revenue per customer that it earned in 1QFY07 (see table below). SMS services witnessed a decline in their share in total mobile revenues to 5% in 1QFY08, from 6.4% in 1QFY07.

Segment-wise performance*
  1QFY07 1QFY08 Change
Mobile Services      
Revenue (Rs m) 28,411 46,976 65.3%
% of total revenues 66.7% 71.8%  
Minutes billed (m) 28,194 57,125 102.6%
Revenue per minute (Rs) 1.01 0.82 -18.4%
EBIDTA margin 36.4% 40.6%  
EBIDTA per minute (Rs) 0.37 0.33 -9.0%
Broadband & Telephone Services      
Revenue (Rs m) 5,182 6,513 25.7%
% of total revenues 12.2% 10.0%  
Minutes billed (m) 3,780 4,454 17.8%
Revenue per minute (Rs) 1.37 1.46 6.7%
EBIDTA margin 23.0% 32.2%  
EBIDTA per minute (Rs) 0.32 0.47 49.3%
Long Distance Services      
Revenue (Rs m) 7,064 9,210 30.4%
% of total revenues 16.6% 14.1%  
Minutes billed (m) 3,635 7,099 95.3%
Revenue per minute (Rs) 1.94 1.30 -33.2%
EBIDTA margin 38.9% 34.4%  
EBIDTA per minute (Rs) 0.76 0.45 -41.0%
Enterprise Services      
Revenue (Rs m) 1,969 2,730 38.6%
% of total revenues 4.6% 4.2%  
EBIDTA margin 47.5% 42.5%  
* As per US GAAP numbers. Excluding inter-segment eliminations

The other services lines of the company – Broadband & Telephone Services (BTS), Long Distance Services (LDS) and Enterprise Services (ES) – also reported strong growth during the quarter, with their sales growing by 26% YoY, 30% YoY and 39% YoY respectively. In the broadband business, Bharti increased its subscriber base to over 1.9 m (1.5 m in 1QFY07) in 94 cities in India (92 in 1QFY07). It earned ARPUs of Rs 1,121 per month in the broadband business, which was a decline of 7% YoY.

Lower access, employee and SG&A expenses aid margins: Operating leverage continued to reap rewards for Bharti, as was seen by the improvement in the company’s profitability levels. The company recorded a 2.5% expansion in its operating margins during the quarter, which was led by lower access charges, employee costs and sales, general & administrative (SG&A) expenses (see graph). Based on business segments, mobile services remained the star performer, recoding operating margin improvement to 40.6% (from 36.4% in 1QFY08). Also, while the BTS segment reported a 9% expansion in its operating margins, those for the LDS and ES segments contracted by 4.5% and 5% respectively.

Operating margin expansion, higher other income boosts bottomline: Strong topline growth and expansion in operating margins, alongwith a substantial increase in other income, has aided Bharti’s net profits, which have doubled in 1QFY08. Considering that a part of the company’s borrowings is dollar-denominated, the spike in other income could have been brought about by forex gains owing to the rupee’s appreciation against the US dollar.

What to expect?
At the current price of Rs 933, the stock is trading at a multiple of 17.5 times our estimated FY10 earnings. Considering the strong performance from the company in the first quarter, both in terms of subscriber addition and profitability improvement, we will review our estimates for the company for this fiscal. Keeping aside the valuations, which look a tad expensive at current levels, Bharti remains on the top of our list from among the Indian telecom companies in terms of its business strength, given its market leadership, execution capabilities and management focus.

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