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Bharti Airtel: 50 m subs, and counting… - Views on News from Equitymaster
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Bharti Airtel: 50 m subs, and counting…
Oct 31, 2007

Performance summary
  • Topline (based on Indian GAAP consolidated numbers) grows 46% YoY in 2QFY08, 50% YoY in 1HFY08. Growth led by strong addition to subscriber base and higher minutes of usage; revenue per user lower by 16% YoY.
  • Adds 6.2 m mobile subscribers during the quarter, 21.8 m during the last 12 months – crosses the 50 m subscriber mark (including broadband).

  • Operating margins expand by a strong 4.2% owing to lower access charges and employee costs.

  • Net profit surges 87% YoY during 2QFY08 due to expansion in operating margins and absence of interest costs.

Consolidated financial performance snapshot (Indian GAAP)
(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Sales 43,293 63,249 46.1% 81,448 121,985 49.8%
Expenditure 26,919 36,676 36.2% 50,554 71,419 41.3%
Operating profit (EBDIT) 16,373 26,573 62.3% 30,893 50,565 63.7%
Operating profit margin (%) 37.8% 42.0%   37.9% 41.5%  
Other income 338 618 83.1% 604 1,455 141.0%
Interest 834 (78)   1,476 (2,727)  
Depreciation 5,647 8,813 56.1% 10,339 16,702 61.5%
Profit before tax 10,230 18,456 80.4% 19,682 38,045 93.3%
Minority interest 56 193 245.9% 168 380 126.0%
Tax 1,385 1,825 31.7% 2,412 6,986 189.7%
Profit after tax/(loss) 8,788 16,438 87.0% 17,102 30,680 79.4%
Net profit margin (%) 20.3% 26.0%   21.0% 25.2%  
No. of shares         1,897.1  
Diluted Earnings per share (Rs)*         28.6  
P/E ratio (x)*         35.6  
* 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 23.4% (at the end of September 2007), catering to nearly 50 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 2QFY08?
No slowing down the additions: Bharti recorded a 46% YoY growth in sales during 2QFY08, which was largely due to a 53% YoY growth in its mobile revenues (71% of total revenues). This growth in the mobile business was led by a strong addition to the subscriber base. By the end of September 2007, the company had crossed the 50 m mark, including 2 m broadband subscribers. The company now has a 23.4% share of the Indian mobile market (21.4% in 2QFY07) and continues to lead competitors in terms of incremental monthly additions – 2 m subscribers per month in 2QFY08 against 1.8 m in 1QFY08. The company has been duly helped by a faster penetration into the non-census towns and rural market. It increased its presence to over 290,000 non-census towns and villages by the end of September 2007, against a presence in 155,000 such locations in September 2006.

Now, while this ramp up in coverage has helped the company in terms of adding to its base, this continues to impact its average revenue per user, or ARPU. These have declined by 165 YoY for mobile services during 2QFY08. Against Rs 438 per subscriber that Bharti earned from each of its subscribers in 2QFY07, it earned Rs 366 in 2QFY08. This lower ARPU is directly a result of the fact that a deeper penetration into low-income areas would mean that that the company increases the share of prepaid subscribers in its total base. And considering that prepaid subscribers spend anywhere between 60% and 70% less than postpaid subscribers, ARPU is bound to get hit.

Segment-wise performance*
  2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Mobile Services
Revenue (Rs m) 33,022 50,579 53.2% 61,432 97,554 58.8%
% of total revenues 67.7% 71.2%   67.2% 71.5%  
Minutes billed (m) 33,844 64,375 90.2% 62,038 121,500 95.8%
Revenue per minute (Rs) 0.98 0.79 -19.5% 0.99 0.80 -18.9%
EBIDTA margin 36.9% 41.0%   36.7% 40.8%  
EBIDTA per minute (Rs) 0.36 0.32 -10.5% 0.36 0.33 -9.9%
Broadband & Telephone Services
Revenue (Rs m) 5,244 7,023 33.9% 10,426 13,536 29.8%
% of total revenues 10.8% 9.9%   11.4% 9.9%  
Minutes billed (m) 4,080 4,596 12.6% 7,860 9,050 15.1%
Revenue per minute (Rs) 1.29 1.53 18.9% 1.33 1.50 12.8%
EBIDTA margin 20.4% 39.7%   21.7% 36.1%  
EBIDTA per minute (Rs) 0.26 0.61 131.4% 0.29 0.54 87.6%
Long Distance Services
Revenue (Rs m) 8,362 10,048 20.2% 15,426 19,258 24.8%
% of total revenues 17.1% 14.1%   16.9% 14.1%  
Minutes billed (m) 4,510 8,119 80.0% 8,145 15,218 86.8%
Revenue per minute (Rs) 1.85 1.24 -33.3% 1.89 1.27 -33.2%
EBIDTA margin 40.3% 34.5%   39.7% 34.4%  
EBIDTA per minute (Rs) 0.75 0.43 -42.9% 0.75 0.44 -42.1%
Enterprise Services
Revenue (Rs m) 2,148 3,423 59.4% 4,116 6,153 49.5%
% of total revenues 4.4% 4.8%   4.5% 4.5%  
EBIDTA margin 42.2% 41.9%   44.8% 42.2%  
* 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 34% YoY, 20% YoY and 59% YoY respectively. In the broadband business, Bharti increased its subscriber base to over 2 m (1.6 m at the end of 2QFY07) in 94 cities in India. It earned ARPUs of Rs 1,150 per month in the broadband business, which was an increase of 3% YoY.

Lower access charges and employee costs aid margins: Bharti’s operating margins expanded by 4.2% YoY during 2QFY08 to 42% (from 37.8% in 2QFY07). This was due to decline in access charges and employee costs (both as percentage of sales). Based on business segments, mobile services continued to lead the way, recording operating margin improvement to 41% (from 36.9% in 2QFY07). Also, while the BTS segment reported a 19% expansion in its operating margins, those for the LDS and ES segments contracted.

Operating margin expansion, zero interest costs propel bottomline: Strong topline growth and expansion in operating margins along with a negative interest cost (implying interest income) helped Bharti report an 87% YoY growth in net profits during 2QFY08. A lower effective tax rate (9.9% in 2QFY08 against 13.5% in 2QFY07) also helped matters for the company.

What to expect?
At the current price of Rs 1,011, the stock is trading at a multiple of 16.8 times our estimated FY10 earnings. Bharti continues to record strong performances across its business segments and has also become aggressive in terms of penetrating deeper into the nook and corner of the country with its mobile offerings. While this might mean lower revenue per user in the short to medium term, we believe that volumes shall take care of the overall growth. We shall soon update our research report on the company.

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