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Bharti Airtel: Rock-n-roll! - Views on News from Equitymaster
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Bharti Airtel: Rock-n-roll!
Oct 27, 2006

Performance summary
Bharti Airtel (erstwhile Bharti Televentures) has reported yet another quarter of strong performance (as per US GAAP consolidated numbers), with revenues and net profits growing by 61% YoY and 79% YoY respectively for 2QFY07. The quarter saw the company cross the 27 m GSM mobile subscriber mark, and increase its market share to 29.7% of the total GSM mobile base in the country. Strong rate of subscriber addition combined with robust rate of volume growth has aided Bharti’s overall performance during the quarter.

Consolidated financial performance (US GAAP): A snapshot…
(Rs m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Sales 27,281 43,293 58.7% 52,417 81,448 55.4%
Expenditure 17,109 26,414 54.4% 32,836 49,587 51.0%
Operating profit (EBDIT) 10,172 16,879 65.9% 19,581 31,861 62.7%
Operating profit margin (%) 37.3% 39.0%   37.4% 39.1%  
Other income 146 338 131.2% 284 604 112.5%
Interest 596 834 40.0% 1,153 1,476 28.1%
Depreciation 3,856 6,100 58.2% 7,370 11,244 52.6%
Profit before tax 5,866 10,283 75.3% 11,342 19,744 74.1%
Miscellaneous income/(expenditure) (7) (33)   (14) (4)  
Minority interest 72 56 -22.6% 140 168 19.8%
Tax 716 1,406 96.5% 1,412 2,470 75.0%
Profit after tax/(loss) 5,072 8,788 73.3% 9,776 17,102 74.9%
Net profit margin (%) 18.6% 20.3%   18.7% 21.0%  
No. of shares       1,884.1 1,895.5  
Diluted Earnings per share (Rs)*         14.6  
P/E ratio (x)*         36.4  
* On a trailing 12-months basis

Performance summary
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 21.4% (at the end of September 2006), catering to over 27 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 2QFY07?
Casting its net wider: Bharti increased its presence to 330 additional census towns and 53,000 additional non-census towns and villages during 2QFY07. This helped it grow its GSM subscriber base by 92% YoY (industry growth of 79% YoY), crossing the 27 m mark at the end of September 2006. Based on categories, the metros, A-circle, B-circle and C-circle regions have witnessed growth of 54% YoY, 109% YoY, 79% YoY and 195% YoY respectively for the company. Stronger growth in non-metro regions has also led to the prepaid mobile base increasing its share in total base to 86%, from 78% at the end of September 2005. This is because growth in mobile subscribers in relatively untapped and ‘less-wealthy’ regions (non-metros) largely depends on the affordability factor and the company’s low-cost prepaid recharge vouchers have seemingly done their job in this regard. Also, as markets mature and disposable incomes increase, the demand shifts to the postpaid category as the customer vouches for a greater value for money. It must be noted that despite higher ARPUs from postpaid connection, mobile service providers like Bharti make less revenues per minute as tariffs are more competitive and volumes are higher in postpaid.

Bharti’s mobile business contributed to nearly 68% of the total revenues in 2QFY07 (64% in 2QFY06). Growth in the business has been brought about by strong growth in subscriber base (as mentioned above) and higher volumes per subscriber (minutes of usage), which has more than made up for the lower average revenue per user (ARPU). As a matter of fact, while ARPUs declined by 8% YoY during 2QFY07, minutes of usage per month increased by 16% YoY. The decline in ARPU during the quarter, apart from the overall competitive pressure on tariffs in the mobile industry, can also be attributed to increase in the proportion of prepaid subscribers to the total subscriber base of the company. We estimate Bharti’s blended mobile ARPU to decline by 9% during FY07, to Rs 403 per month. As for the mobile subscriber base, considering the better than expected monthly addition to the subscriber base, we shall have to upgrade our numbers for the company and for the industry as a whole.

Segment-wise performance*
  2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Mobile Services            
Revenue (Rs m) 19,052 33,032 73.4% 36,516 61,342 68.0%
% of total revenues 63.6% 67.7%   63.3% 67.2%  
Minutes billed (m) 15,281 33,844 121.5% 28,602 62,038 116.9%
Revenue per minute (Rs) 1.25 0.98 -21.7% 1.28 0.99 -22.6%
EBIDTA margin 36.5% 36.9%   35.7% 36.7%  
EBIDTA per minute (Rs) 0.46 0.36 -20.9% 0.46 0.36 -20.4%
Broadband & Telephone Services            
Revenue (Rs m) 3,656 5,244 43.4% 7,059 10,426 47.7%
% of total revenues 12.2% 10.7%   12.2% 11.4%  
Minutes billed (m) 3,171 4,080 28.7% 6,168 7,860 27.4%
Revenue per minute (Rs) 1.15 1.29 11.5% 1.14 1.33 15.9%
EBIDTA margin 22.2% 20.4%   25.4% 21.7%  
EBIDTA per minute (Rs) 0.26 0.26 2.4% 0.29 0.29 -1.0%
Long Distance Services            
Revenue (Rs m) 5,563 8,362 50.3% 10,771 15,426 43.2%
% of total revenues 18.6% 17.1%   18.7% 16.9%  
Minutes billed (m) 1,959 4,510 130.2% 3,783 8,145 115.3%
Revenue per minute (Rs) 2.84 1.85 -34.7% 2.85 1.89 -33.5%
EBIDTA margin 36.3% 40.3%   36.1% 39.7%  
EBIDTA per minute (Rs) 1.03 0.75 -27.5% 1.03 0.75 -26.8%
Enterprise Services            
Revenue (Rs m) 1,708 2,148 25.8% 3,319 4,116 24.0%
% of total revenues 5.7% 4.4%   5.8% 4.5%  
EBIDTA margin 40.6% 42.2%   40.9% 44.8%  
* 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 2QFY07, with their sales growing by 43% YoY, 50% YoY and 26% YoY respectively. In the broadband business, Bharti has increased its subscriber base to over 1.6 m (1 m in 2QFY06) in 94 cities in India (75 in 2QFY06). It earned ARPU of Rs 1,115 per month in the broadband business, which represents a decline of 7% YoY.

Leverage benefits aid margins: Bharti continues to benefit from the operating leverage in the mobile business, as seen from the improvement in operating margins from 36.5% in 2QFY06 to 36.9% in 2QFY07. Even the long distance and enterprise services have reported margin expansion during the quarter. Broadband services have, however, reported a 1.8% contraction in operating margins, and this is seemingly due to the investments that are being made towards rapid expansion into new cities.

It boils down to the bottomline: Strong topline growth and expansion in operating margins, alongwith higher other income and lower interest expenses, have aided Bharti’s net profits, which have ballooned by 79% YoY during 2QFY07. But for the increase in effective tax rate to 12.7% (8.9% in 2QFY06), the growth would have been higher still.

What to expect?
At the current price of Rs 530, the stock is trading at a price to earnings multiple of 34.4 times its trailing 12-month earnings and EV/EBIDTA of 16 times. Bharti, with this superlative performance during 2QFY07, has yet again surprised us on the positive. Considering this, we shall be upgrading our numbers, especially those on the mobile subscriber front that has been adding up at a far superior rate than estimated. The company estimates to spend over US$ 2 bn as capex during this fiscal (US$ 1.2 bn already incurred during 1HFY07) and assuming that it is able to maintain its capital productivity levels, there might be a further fillip to profitability and return ratios going forward. Overall, we maintain our positive stand on the company from a long-term perspective.

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