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Bharti Airtel: Revised estimates - Views on News from Equitymaster
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Bharti Airtel: Revised estimates
Aug 6, 2007

Bharti Airtel had recently reported a strong overall performance fore the first quarter of this fiscal, wherein it recorded topline and bottomline growth of 54% YoY and 71% YoY (as per Indian GAAP numbers). What is more, on the back of improved profitability of its mobile services business, operating margins expanded by 260 basis points (2.6%). Topline growth was a result of surging user base, as the company added a net of 5.6 m new mobile subscribers to take the total count to 42.7 m. We had recommended a ‘Sell’ on the stock in May 2007 at Rs 814, as we believed that valuations were ripe and the stock price had factored in growth for the next 2 to 3 years. Our concerns also stemmed from the intensifying competition that the company was expected to face from the likes of Reliance Communications and Vodafone. While the business landscape remains competitive and is expected to become more so in the future, we believe that there is some more steam left in the stock as far as valuations are concerned. Taking into account the first quarter performance as also the management’s plans for the next 12 to 18 months, we have marginally revised upwards our estimates for subscriber base, sales, and profitability. Here are the tables representing the same.

Bharti Airtel: Our estimates
  FY08E FY09E FY10E
GSM subscriber base (m)
Earlier estimates      
Bharti 54.5 73.1 91.9
India 178.0 239.4 299.1
Current estimates      
Bharti 57.3 76.9 100.1
India 177.8 239.1 298.5
Change      
Bharti 5.3% 5.3% 8.9%
India -0.1% -0.1% -0.2%
Financial performance (Rs bn)
Net sales      
Earlier estimates 277.0 341.1 460.6
Current estimates 274.2 372.2 477.4
Change -1.0% 9.1% 3.7%
Operating profits      
Earlier estimates 109.3 145.1 178.6
Current estimates 114.1 155.4 201.2
Change 4.4% 7.1% 12.6%
Diluted EPS (Rs)      
Earlier estimates 30.5 42.2 53.4
Current estimates 32.6 44.5 60.4
Change 7.1% 5.5% 13.0%

As far as the topline is concerned, we have revised numbers only for the mobile business, keeping estimates for other segments intact. We expect improved growth in the former on the back of a sustained strong growth in subscriber base and relatively lesser fall in ARPUs as compared to the past. Expansion in operating margins is expected on the back of lower access charges and marketing costs (both as percentage of sales). The company’s outsourcing deals with some of the leading multinational companies like IBM, Ericsson and Nokia are also likely to stand it in good stead as far as profitability is concerned. As a result, operating expenditure per subscriber per month is likely to decline from US$ 5.8 in FY07 to US$ 5.5 by FY10.

What to expect?
At the current price of Rs 860, the stock is trading at a multiple of 14.2 times our revised estimated FY10 earnings. We upgrade our view on the stock from ‘Sell’ to ‘Hold’, but strictly from a March 2010 perspective. Our March 2010 target price for the stock now stands at Rs 1,207, which is higher by 13% from our earlier target of Rs 1,068. By this recommendation of ‘Hold’, what we mean is that existing shareholders would be better off holding onto the stock from a March 2010 perspective. However, if an investor would like to ‘Buy’ this stock, then the upside from the current levels is around 40% point to point (14% on a compounded annual basis). Investors could take their decision based on this premise.

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. Spectrum related issues, however, remain the downside risks to our assumptions for the company.

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