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Bharti Tele: The right tone… - Views on News from Equitymaster
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Bharti Tele: The right tone…
Oct 27, 2005

Performance Summary
Bharti Tele (Research:BTVL), India’s leading cellular services provider, has announced yet another quarter of strong performance. On the back of a robust growth in GSM subscriber base, the company has reported strong growth in both the topline and the bottomline during the quarter and the first half. Bharti crossed the 14 m customer mark for its mobile services in September 2005, and has cornered a share of 27.7% of all-India GSM subscriber base.

Consolidated financial performance (Indian GAAP): A snapshot…
(Rs m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Sales 18,976 27,281 43.8% 36,252 52,417 44.6%
Expenditure 12,123 17,109 41.1% 23,105 32,836 42.1%
Operating profit (EBDIT) 6,853 10,172 48.4% 13,147 19,581 48.9%
Operating profit margin (%) 36.1% 37.3%   36.3% 37.4%  
Other income 195 146 -24.9% 250 284 13.6%
Interest 627 596 -5.0% 1,694 1,153 -32.0%
Depreciation 2,852 3,856 35.2% 5,499 7,370 34.0%
Profit before tax 3,569 5,866 64.4% 6,204 11,342 82.8%
Miscellaneous income/(expenditure) (147) (7)   (232) (14)  
Minority interest 5 72 1371.4% 23 140 507.4%
Tax 481 716 48.7% 623 1,412 126.5%
Profit after tax/(loss) 2,935 5,072 72.8% 5,326 9,776 83.6%
Net profit margin (%) 15.5% 18.6%   14.7% 18.7%  
No. of shares 1,853 1,853   1,853 1,853  
Diluted Earnings per share* (Rs) 6.3 10.9   5.7 10.6  
P/E ratio (x)         31.3  
(* 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 around 28% market share (nearly 14.1 m customers) of 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 2QFY06?
Mobile services lead the charge: The mobile telephony business has again led the topline growth of Bharti, with the segment’s revenues growing at a strong 55% YoY. This segment now constitutes around 59% of the company’s total revenues. The robust growth of this segment has been made possible by a strong 124% YoY growth in the number of subscribers added during the quarter. As a matter of fact, Bharti added a net of 1.8 m subscribers in 2QFY06 against 0.8 m that were added in 2QFY05. Against this 124% growth in subscriber additions in the quarter, the all-India GSM base increased by a much lower 37% YoY, thus signifying the company’s increasing clout in the sector. 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 6% during the quarter. ARPUs have also been affected by the launch of Rs 200 prepaid recharge coupon.

We believe that, 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 39% between FY05 to FY08, to reach a size of 111 m subscribers. Further, Bharti is expected to grow its base at a CAGR of 49%, connecting nearly 36 m GSM subscribers by the end of this period and also increasing its market share to 32.5% from the FY05 levels of 26.8%.

Combining the mobile base with the broadband and telephone base, Bharti has crossed the 15 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, however, decreased by 4% YoY during 2QFY06.

Segment-wise performance…
  2QFY05 % of total 2QFY06 % of total Change
Mobile Services
Revenue 12,263 59.2% 19,052 63.6% 55.4%
EBIDTA 4,076 58.5% 6,949 66.3% 70.5%
EBIDTA margin 33.2%   36.5%    
Broadband & Telephone Services
Revenue 2,800 13.5% 3,656 12.2% 30.6%
EBIDTA 731 10.5% 811 7.7% 10.9%
EBIDTA margin 26.1%   22.2%    
Long Distance Services
Revenue 4,371 21.1% 5,563 18.6% 27.3%
EBIDTA 1,505 21.6% 2,021 19.3% 34.3%
EBIDTA margin 34.4%   36.3%    
Enterprise Services
Revenue 1,290 6.2% 1,708 5.7% 32.4%
EBIDTA 650 9.3% 694 6.6% 6.8%
EBIDTA margin 50.4%   40.6%    
* As per IFR Standards; Excluding inter-segment adjustments

All-round growth aids margin expansion: Bharti has reported a 120 basis points improvement in operating margins for the quarter over the corresponding quarter of the previous fiscal. The revised ADC (access deficit charge) guidelines, which are expected to reduce burden on mobile service providers by reducing their payment to BSNL, have 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: Despite the 25% decline in the other income component and a 35% rise in depreciation charges, the company managed to report a 49% YoY growth in bottomline. Interest charges were lower by about 5% during the quarter.

What to expect?
At the current price of Rs 330, the stock is trading at a price to earnings multiple of 13.6 times our estimated FY08 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. The company is planning to increase its coverage to 5,000 towns from 3,000 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 in July 2005, 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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