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Telecom: India Vs China 2.0

Dec 21, 2006

Both China and India are amongst the largest telecom markets in the world, though China already has the laurel of being the biggest market in terms of number of subscribers and telecom equipment manufacturing. India, on the other hand, outscores everyone when it comes to growth or the incremental addition to the subscriber base. In the second of the series of article comparing the telecom sectors of India and China, we shall look at the comparative performance of their leading telecom services providers – Bharti Airtel and China Mobile.

Table 1
FY06/CY05 Unit China Mobile Bharti Airtel
Revenues US$ m 30,947 2,592
EBDITA margin % 53.8% 35.7%
Profit after tax US$ m 6,759 451
Net profit margin % 21.8% 17.4%
Debt to equity x 0.1 2.5
No. of employees Nos. 99,104 10,970
Revenue per Employee US$ m 0.31 0.24
Return on capital employed % 31.9% 21.4%
Return on equity % 23.0% 27.5%
Cellular subscribers m 246.7 19.6
EBDITA per subscriber US$ 65 62
Price to earnings x, TTM 21.1 41.2
EV/Subscriber US$ 518 965
Source: Company reports, Equitymaster Research

Topline picture…
There is simply no comparison as far as the topline of the two companies are concerned, with China Mobile earning almost 10 times more revenues than Bharti (as per FY06 numbers). This an obvious fact considering the difference in the subscriber base for the two companies. However, as far as revenue per subscriber (ARPU) is concerned, Bharti has a slight lead over its Chinese peer (see table 2 below). Bharti’s higher ARPUs are mainly a factor of the higher minutes of usage from its subscribers and are despite the lowest tariff rates in the world. However, as the company expands into the semi-urban and rural markets, where affordability is a key criterion, ARPUs are likely to come under pressure. But, we are not much concerned about the falling ARPUs as long as the company continues to lead the market in terms of addition to the subscriber base. As a matter of fact, Bharti has a 29.7% share of the country’s GSM mobile subscriber base, its share in incremental net addition stands at 32.1% (October 2006 data).

Table 2
(FY06) China Mobile Bharti Airtel
Sales (US$ bn) 30.1 2.7
No of Subscribers (m) 246.7 19.6
Avg. revenue per user per month (US$) 10.2 11.3
Source: TRAI, Equitymaster Research

Profitability profile…
On the back of operating leverage that the telecom business provides, China Mobile earns significantly higher operating margins (56%) than Bharti (36%). Now, the main defining factors here are network operating and access charges, which are lower and nil respectively for the former vis-à-vis the latter (see table 3 below). Network operating charges are sort of fixed charges that telecom companies have to incur whether they are able to grow their subscriber base or not. However, as companies ramp up their subscribers, as Bharti has been doing in the past, these charges are apportioned over a larger base, thus helping the companies to leverage their costs better. As seen from the table below, the average operating expenditure (OPEX) per subscriber for China Mobile stands almost 23% lower that what Bharti spends. We, however, expect this gap to narrow down in the future considering the relative pace in subscriber addition, where the latter has an upper hand.

Table 3
(US$; Per annum data; FY06) China Mobile Bharti Airtel
Administration and other charges per subscriber 40.3 25.3
Personnel charges per subscriber 7.1 9.2
Network operating charges per subscriber 9.3 14.0
Access charges per subscriber N A 25.2
Total operating expenses per subscriber 56.8 73.7
Total operating expenses per subscriber per month 4.7 6.1
Operating profit margin 53.8 35.7
Source: Company reports, Equitymaster Research

Both China Mobile and Bharti have led the growth of the telecom sector in the respective countries. However, while the former has a lot to boast about as far as the past performance is concerned, the latter is in the process of scripting its own success story for the future. The Indian telecom sector is currently of a size of US$ 19.5 bn. While this may seem far less when compared to US$ 73 bn Chinese telecom industry, one must remember that the penetration of telecom in India is still very low especially when benchmarked against international standards, clearly indicative of the growth potential for the country going forward. India telecom, and consequently Bharti have been beneficiaries of a more proactive regulatory regime, increasing competition, availability of cheaper handsets and robust economic growth. What needs to be done now to futher this growth is for the government to reduce the pressure of excessive taxes on the sector. This will leave more funds in the hands of companies to expand their presence across the country. This might aid India’s move towards outnumbering China as the world’s largest mobile telecom market in the future.

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