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Bharti Tele: Meeting expectations

Oct 28, 2004

Introduction to results
Bharti Televentures, the largest mobile telphony services provider in the country, continues to report strong financial performance in FY05. For 2QFY05, the company has reported a 63% YoY rise in topline while the bottomline growth stood at 257%, albeit on a smaller base. The improvement in bottomline continues as the company moves towards steady state after years of expansion in various circles. Topline growth as well as strong improvement in its operating margins have led to the improvement in bottomline. Margins have improved by 400 basis points in 2QFY05. The company continues to aggressively add customers for its mobile telephony services, driving topline as well as profitability.

(Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
Sales 11,445 18,598 62.5% 21,805 35,644 63.5%
Expenditure 7,679 11,734 52.8% 15,151 22,663 49.6%
Operating Profit (EBDIT) 3,766 6,864 82.3% 6,654 12,981 95.1%
Operating Profit Margin (%) 32.9% 36.9%   30.5% 36.4%  
Other Income 18 15 -18.1% 26 70 166.3%
Interest 707 404 -42.9% 1,338 1,198 -10.5%
Depreciation 2,138 2,494 16.7% 4,094 4,790 17.0%
Profit before Tax 940 3,981 323.5% 1,249 7,064 465.7%
Extraordinary items - (22)   - (27)  
Minority interest (6) 0   (5) (2)  
Tax 1 622   1 737  
Profit after Tax/(Loss) 934 3,337 257.3% 1,243 6,298 406.7%
Net profit margin (%) 8.2% 17.9%   5.7% 17.7%  
No. of Shares 1,853.4 1,853.4   1,853.4 1,853.4  
Diluted Earnings per share* (Rs) 2.0 7.2   1.3 6.8  
P/E Ratio (x)         23.1  
(* 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 an over 26% market share (nearly 8.7 m customers) in the total mobile subscriber base in the country. The company also provides fixed line and long distance telephony services to its customers. Other allied telecom services like voice and data services and integrated services to corporates are also provided by Bharti. It is one of the fastest growing companies in the Indian telecom sector.

What has driven the performance in 2QFY05?
Sales:  The growth in revenues is primarily driven by strong additions to the overall subscriber base of the company. It has 8.7 m mobile subscribers (88% YoY growth), while its telephony and broadband subscriber base stood at 0.76 m (54% growth YoY). The company continues to command a market share of over 20% in the wireless telephony segment (CDMA+GSM). Average revenue per user (ARPU), however, has taken a hit (12% fall YoY) as far as the mobile services segment is concerned. At the same time, the company has also witnessed a fall (9% growth YoY) in its ARPUs for the telephony (fixed line, DLD, ILD) and broadband segment. Despite this, agressive subscriber additions have more than compensated for the same.

Operating margins:  As indicated by the table below, the company continues to improve upon its operating margins for all its business segments. This indicates control over operational costs and going forward we believe, as the capacity utilisation of the network rises, we may see further improvement in the company's operating margins. However, we feel that operating margins may reach a steady state level of 38% in the long-term. The company's outsourcing contracts with IBM and Siemens, in order to outsource the management of its IT infrastructure and telecom networks respectively, is likely to help the company to reduce its operating costs further. As for the revenue streams, the company continues to witness growth across all its segments. The company continues to witness improvement in its non-mobile business segments. This is significant as this segment (enterprise business) has better operating margins.

Segment-wise performance
(Rs m) 2QFY04 2QFY05 Change
Revenues 7566 12,397 63.9%
OPM 32.0% 34.0%
Fixed line
Revenues 1,921 2,813 46.4%
OPM 23.0% 31.0%
Long distance
Revenues 2,710 4,387 61.9%
OPM 25.0% 33.0%
Enterprise business
Revenues 567 1,287 127.0%
OPM 44.0% 46.0%
Total *
Revenues 12,764 20,884 63.6%
OPM 29.5% 33.7%
* Excluding inter-segment adjustments

Net Profits:  Interest costs have fallen sharply in the September quarter. Due to strong cash flows that Bharti is able to generate, we believe that internal accruals will be able to fund most of its future expansion initiatives. Thus, interest expenses may stabilize going forward. Depreciation costs however, will continue to grow going forward, as the company continues to invest in infrastructure. For FY05, the company has estimated capex in the region of US$ 700 m - 750 m. The bottomline has grown despite the higher depreciation burden.

What to expect?
At the current price of Rs 157, the stock is trading at a P/E multiple of 23 times annualised 2QFY05 earnings. The company has managed to hold on to its mobile segment growth and is doing progressively well in the other business segments. However, we would like to say that the September quarter results are more or less in line with market expectations and hence the lack of activity in the stock price.

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