X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Hutch Vs Bharti: Wherever you are! - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

StockSelect
  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Hutch Vs Bharti: Wherever you are!
Dec 22, 2006

Over the past few days, there has been a high amount of news flow regarding the proposed stake sale by Hutchison Telecom International Limited (HTIL) in Hutchison Essar, India’s fourth largest mobile services operator. The stated deal is likely to be the biggest consolidation event in the Indian telecom history, with the assets of Hutch-Essar valued at roughly US$ 13 bn to US$ 15 bn. While the buzz is understandable, we draw up Hutch-Essar’s comparison with the numero uno mobile service provider, Bharti Airtel, to gauge its performance in the past quarter. Subscriber Base
The subscriber base of Hutch-Essar was 20 m as against over 27 m for Bharti at the end of September 2006. While both the operators have got an aggressive marketing strategy and have been keen on adding new subscribers, Hutch has been more active in the metros and Circle ‘A’ whereas Bharti has been aggressively targeting the circles ‘B’ and ‘C’. This augurs well for Bharti. In the month of October 2006, India added a net of 6.6 m subscribers to the mobile base, out of which over 71% were GSM subscribers. Circles ‘B’ and ‘C’ combined contributed to 53% of this GSM base. As is evident, most of the growth in the recent past has come from these circles largely due to a lower base effect. Also, as greater emphasis is laid by the Department of Telecom on rural penetration, companies like Bharti, which have a pan-India presence, will stand to gain more.

Circle wise distribution of subscribers as a percentage of total subscribers
  Bharti Airtel Hutch-Essar
  July'2006 Aug'2006 Sep'2006 July'2006 Aug'2006 Sep'2006
C' Circle 27.2% 27.3% 27.5% 0.0% 0.0% 0.0%
B' Circle < 23.8% 23.8% 23.9% 17.6% 18.5% 19.2%
A' Circle 31.0% 31.2% 31.2% 40.1% 41.0% 41.2%
All Metros 18.0% 17.8% 17.5% 42.3% 40.5% 39.6%
Source: COAI, Equitymaster Research

ARPUs
Bharti Airtel, despite its more aggressive foray into the semi-urban and rural areas, has been able to maintain higher average revenue per user vis-à-vis Hutch (see Table 2 below). The higher ARPUs are also despite the fact that the former has a larger share of customers in the prepaid category, where ARPUs tend to be (around 60%) lower than postpaid. What has helped Bharti maintain its higher ARPUs is the fact that the company has consistently been able to increase its blended (prepaid and postpaid combined) minutes of usage, which are higher than those of Hutch.

Table 2
  Hutch-Essar Bharti Airtel
Blended ARPU 417 438
MoU - Blended 402 451
% of pre paid customers 84 85.5
% of post paid customers 16 14.5
Source: Company Results    
Source: Company Reports

Churn
For a mobile company to sustain growth in revenues and subscriber base, it is very important to minimise migration of its customers to other service providers. This is possible by providing better quality service and greater customer satisfaction. The operators in India have realised the importance of this and have been making consistent efforts at improving their customer relationship management. If we look at the two companies in question we find that Bharti has been more successful in retaining its customers than Hutch.

Table 3
  Hutch-Essar Bharti Airtel
Churn - Prepaid % 5.2 5.1
Churn - Postpaid % (voluntary) 4.3 1.2
Source: Company Reports

Conclusion
In the ongoing race for the Hutch-Essar stake, speculations are making the rounds as to who is bidding for what portion of the stake. It is largely believed that Reliance Communications (India’s second largest mobile service provider) is the front-runner due to its aggressive plans of entering the GSM market. If the company is able to make the deal go through in its favour, it will emerge as the largest mobile operator in the country with significant presence across both the technologies of CDMA and GSM. The latent advantage for any acquirer in the acquisition of Hutch-Essar is that the latter has a majority of its subscribers in metros and Circle ‘A’, which is indicative of its well-entrenched position in these areas. Hutch also commands a strong brand loyalty, apart from being a market leader in the metros, where the average spending towards telecommunication is the highest in India. Thus, the acquirer of Hutch-Essar shall largely stand to benefit from this inherent advantage.

Recent telecom deals
Acquirer Acquired When Stake Cost (US$ m) Subscribers of
Acquired (m)
EV/Subscriber
(US$)
Hutch-Essar BPL Mobile Sep-05 100.0% 1,154 2.8 412
Vodafone Bharti Airtel Oct-05 10.0% 1,500 15.0 1,000
Maxis Aircel Jan-06 74.0% 1,080 4.4 335
Telekom Malaysia Spice Mar-06 49.0% 393 1.8 446
Temasek Tata Teleservices Mar-06 9.9% 335 8.9 381
Source: Company reports, Equitymaster Research

As far as valuations for this acquisition are concerned, the range that is being quoted is between US$ 13 bn to US$ 15 bn for a 100% stake. Considering the number of subscribers of Hutch-Essar (22 m at the end of November 2006), the EV/subscriber valuation comes to around US$ 591 to US$ 682.

All in all, the acquisition of Hutch-Essar will set the ball in motion for a deeper consolidation in the Indian telecom market. However, considering that consolidation might turn out to be a ‘bad deal’ for mobile users in the country, as their bargaining power will come down owing to the presence of very few players holding large market shares, the regulator might tighten its leash to prevent such an eventuality.

To Read the Full Story, Subscribe or Sign In


Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

BHARTI AIRTEL SHARE PRICE


Sep 21, 2018 (Close)

TRACK BHARTI AIRTEL

  • Track your investment in BHARTI AIRTEL with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
  • Add To MyStocks

BHARTI AIRTEL 8-QTR ANALYSIS

COMPARE BHARTI AIRTEL WITH

MARKET STATS