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Bharti Vs SingTel: Wherever you are! - Views on News from Equitymaster
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Bharti Vs SingTel: Wherever you are!
Dec 16, 2005

It helps you ‘express yourself’, ‘wherever you are’! Well, we are talking of the omnipresent ‘Airtel’, the telecom services brand of Bharti Televentures (Bharti), one of the very few Indian companies across sectors that signifies the vibrancy and youth of the Indian growth story. The company has grown leaps and bounds over the past few years and has captured a greater market-share and mind-share of the Indian population. In this write-up, we have tried to draw a comparison of Bharti with SingTel, which incidentally is the largest shareholder in Bharti. Here we go!

About Bharti
Bharti is the largest GSM mobile telephony operator in the country with 27.8% market share (October 2005). The company, apart from being the largest player in the mobile segment with subscribers in all the 23 telecom circles of the country, also provides varied services like fixed line, broadband and retail Internet access. Bharti is also one of the fastest growing fixed line and long distance (DLD as well as ILD) operators in the country. It offers broadband and other data oriented services to corporate clients. During the period FY00 to FY05, Bharti has grown its revenues at a CAGR of 80%. The company turned profitable in FY04 and grew its net profits by 88% YoY in FY05. SingTel holds a 31% stake in the company.

The world’s leading mobile telecommunications company, Vodafone Group Plc. (Vodafone) recently bought around 10% stake in Bharti (4.4% from Bharti enterprises and 5.6% from Warburg Pincus). Reportedly, Vodafone has made a total investment of around US$ 1.5 bn to acquire this stake in the Indian telecom major. On an EV/subscriber basis, the valuation that Bharti has received from Vodafone is around US$ 1,000 per subscriber. Notably, this is around 13% higher than current EV/subscriber for Bharti (US$ 883 per subscriber). Bharti Enterprises maintains a controlling interest of 45.9% in Bharti through its subsidiary, Bharti Telecom Ltd. Also, with this sale of 5.6% stake, Warburg Pincus has now completely exited its position in the company.

About SingTel
SingTel is Asia’s leading communications Group with operations and investments in more than 20 countries and territories around the world. With significant operations in Singapore and Australia (through wholly-owned subsidiary SingTel Optus), the Group provides a comprehensive portfolio of services that include voice and data services over fixed, wireless and Internet platforms. In Singapore, SingTel has had more than 120 years of operating experience and has played an integral part in the development of the city as a major communications hub in the region. In Australia, Optus serves more than 6 m customers. The company is a major investor in many of the world's most sophisticated submarine cable and satellite systems. The Group is the second largest satellite operator in the Asia Pacific. Its major investments in the Asian region include Advanced Info Service of Thailand, the Bharti Telecom Group of India, Pacific Bangladesh Telecom of Bangladesh, Globe Telecom of the Philippines and Telkomsel of Indonesia. Together with its regional partners, SingTel is Asia's largest multi-market mobile operator, serving more than 74 m customers in seven markets.

One’s Goliath, the other’s ‘To-be’!
While SingTel’s growth in the past has a global angle to it, Bharti has turned out to be a pure play on the domestic market. As indicated earlier, apart from India (through Bharti), SingTel has major investments in Thailand (AIS), the Philippines (Globe Telecom) and Indonesia (Telkomsel). Bharti has however, been the fastest growth story amongst these associates of SingTel. As seen from the adjacent graph, while the entire associate portfolio (represented by ‘All’) has seen its subscriber base grow at a CAGR of 51% during FY02-FY05, Bharti’s GSM base has witnessed a growth of over 101%. The ‘Achilles’ heel’ for SingTel has been its associate in Thailand – Advanced Info Service – that has witnessed a ‘mere’ 33% CAGR during the period under consideration.

Despite its global forays that have been seen as a strategy to tide any slowdown in the highly saturated Singapore and Australian markets (where SingTel operates through its subsidiary, Optus), one must understand the fact that the company has benefited in the past from the advancements in IT communications infrastructures in the city state. This has been possible due to the small size of the country, high national income and the government’s commitment to develop the country into a premier telecommunications and broadcasting hub in the region. As reported by International Trade Administration, virtually every home in Singapore has a fixed telephone line connection. Mobile phone penetration reached an all-time high of nearly 80% in mid-2003, with more than 3.2 m mobile subscribers in a country with a population of only 4 m.

Now, this can be a barometer on which one could identify the growth prospects of the Indian telecom market. The Indian economy, like Singapore a few years back, is on its way to becoming an IT and telecommunications superpower. Also, national income is rising and the government’s commitment to develop the country into a premier technology hub in the region needs to be given some weight. The pro-business and pro-market policies (with gradually reducing regulations) are resulting into increased competition amongst existing players. This has also provided opportunities for many new market entrants and applications (like broadband services, Internet protocol virtual private network (IP VPN), wireless communications and security technologies). And the changing regulatory and business environment has been accompanied by rapid growth in teledensity.

The Indian governments have, in fact, taken several measures to complement a faster growth of the sector (see graph below). Among others, this has led to rapidly declining tariffs and a consequent growth in the subscriber base. Further easing of policies from the regulator (TRAI) in the future will only go towards aiding a faster growth of the Indian mobile telephony sector.

Source: TRAI

As far as Bharti is concerned, the company has reaped fruits of its early entry into the Indian GSM mobile market, which is one of the fastest growing in the world adding nearly 1.3 m customers a month. According to estimates by COAI (the cellular association), mobile subscriber base is expected to form 80% of the 250 m phone connections (including fixed line) by the end of FY08. From the FY05 levels of 41 m, this implies a compounded growth in addition of nearly 70% per annum. While reduction in tariffs and cost of handsets has supplemented the growth of the Indian telecom sector, future growth is likely to be aided by companies’ entry into the large and relatively untapped rural market. As a matter of fact, Bharti is gradually moving on its path of increasing 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. We expect the faster rollout of networks and lower priced (read affordable) recharge coupons to be amongst the biggest growth drivers in the future.

Apart from the inherent dynamics of the Indian telecom market, which has seen the ‘death of distance’ through a sharp rise in mobile penetration, another factor that has helped Bharti grow strongly over these years has been its associations with entities like SingTel, Warburg Pincus, and now Vodafone. SingTel helped Bharti with the capital and strategy to grow from a mid-size telecom operator into India’s largest telecom company. In fact, Bharti’s clout among SingTel’s associates is on the rise as seen (in the adjacent chart) from the rising contribution of the former’s profits and subscriber base to the total associate portfolio of the latter. Now, apart from SingTel, Warburg Pincus supported Bharti in developing the strategy and investor focus. Incidentally, Bharti has been one of Warburg Pincus’ best investments ever undertaken by the institutional investor around the world. We believe that the recent 10% stake pickup by Vodafone, which is the largest telecom company in the world, shall take Bharti to the next level of growth.

What numbers speak?
While the two companies are incomparable in terms of size (with Bharti being 15% and 25% of SingTel’s FY05 mobile subscriber base and revenues respectively), the former is at par with the latter when it comes to profitability at the operating level (similar operating margins of 36.5% in FY05). However, owing to relatively higher financial leverage (debt to equity of 0.9 for Bharti compared to 0.4 for SingTel), the Indian telecom major lags behind on the net profitability level. Also, while Bharti outshines SingTel on the ‘return on capital employed’ and ‘return on equity’ parameters, the latter has an upper hand when it comes to efficient utilisation of assets is concerned.

Also, on the back of lower average revenue per user, or ARPU (in US$ terms), Bharti has underperformed SingTel on the employee productivity front. The fact that Indian mobile tariffs are among the lowest in the world can well be understood from the fact that Bharti’s ARPUs (for both postpaid and prepaid connections) are lower as compared to SingTel’s despite the former having a ‘more-talkative’ subscriber base. This is seen from the fact that the per month minutes of usage for Bharti’s subscribers are 6 times and 2 times of SingTel’s prepaid and postpaid subscribers respectively.

Bharti & SingTel: Head on!
(FY05) Bharti Tele SingTel Group
Cellular subscribers (m) 11.0 74.0
Revenues (US$ bn) 1.9 7.6
EBIDTA margin 36.5% 36.5%
Net profit margin 16.1% 25.9%
Return on capital employed 15.7% 15.4%
Return on equity 22.8% 16.8%
Return on total assets 8.1% 9.1%
Debt to equity 0.9 0.5
Capital employed per subscriber (US$) 224 216
Revenue per employee (US$ m) 0.2 0.4
Employee costs (% of sales) 6.8% 1.2%
Capex (% of sales) 36.9% NA
Employees 7,827 19,155
ARPU (US$) - Prepaid 6.7 8.4
ARPU (US$) - Postpaid 27.2 42.5
Minutes of usage (Prepaid) 255 44
Minutes of usage (Postpaid) 680 334
Market share 26.8% 39.0%
Postpaid external churn 4.3% 1.2%
Price to earnings (FY05, x) 54.6 14.0
Price to sales (FY05, x) 8.0 3.5
Source: Company Annual Reports, Equitymaster Research

What to expect?
As per its latest annual report, telecom equipment major, Nokia has indicated that the global mobile device market is expected to grow to reach around 2 bn users by the end of 2005 (around 210% YoY growth over 2004 base of 643 m subscribers) and 3 bn users by 2010. The company further expects a large part of this growth to come from Latin America, Russia, India and China. The reasoning given for this strong expected growth is the increasing affordability and wide availability of mobile communications. Nokia’s annual report further indicates that the mobile communications, information technology, media and consumer electronics industries are converging in some areas into one broader industry. This is the result of advances in technologies that enable a variety of products and services from the different industries to become interconnected. Considering these positive vibes emanating from the world’s largest GSM handset major and similar remarks from other equipment suppliers like Ericsson and Lucent, we are very positive on sustenance of growth of the Indian telecom sector and consequently Bharti.

At the current price of Rs 350, Bharti’s stock is trading at a price to earnings multiple of 14.7 times our estimated FY08 earnings. We expect the company to continue its dominance on the Indian GSM telephony market and increase market share to 32.5% by FY08, from 27.8% currently. We have estimated revenues and profits to grow at compounded rates of 37.9% and 54.9% during the period FY05-FY08. Consequently, we maintain our positive view on the stock from a long-term perspective.

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