Get connected ::: BHARTI AIRTEL

Given its foray into new services and the overseas market, Bharti Airtel’s stock looks attractive at the current valuation


THE momentum in Bharti Airtel’s performance has remained intact during the second quarter of FY08. The topline and bottomline continued to grow at a robust rate. Further, despite a declining average revenue per user, operating profitability improved due to higher efficiency.

The company is expected to remain a major beneficiary of the telecom boom in the country given its thrust on capital expenditure to improve network capacity. Its acquisition of undersea cable service i2i is likely to boost the performance of its long distance carrier business. Further, plans to enter into the entertainment distribution segment through IPTV and DTH services would start contributing to revenue from the fourth quarter. At the current valuations, the stock looks attractive given the company’s future potential.


BUSINESS :::

Bharti Airtel has three business divisions: mobile services, broadband and telephone services, and enterprise services. Mobile services is the biggest business line for the company contributing around eight of every ten rupees of revenue. It has a presence in all the 23 telecom circles in India covering about two-thirds of the country’s population. With over 48.9 million subscribers, the company enjoys a 23.4% market share in the country’s mobile services market. Broadband and telephone services are offered in 94 cities as of end-June ’07. These include fixed line telephony, national and international long distance connectivity, and broadband internet access through DSL.

The enterprise services division caters to the data communication needs of large and small enterprises. The company is foraying into the entertainment distribution segment by launching IPTV (internet based TV) and direct to home (DTH) services by the end of the December ’07 quarter. It is also planning to launch its mobile network in Sri Lanka, which is likely to be functional by March ’08. Bharti is currently in the process of demerging its mobile tower business consisting of 50,000 towers. This is expected to improve operational efficiency of the parent company apart from unlocking shareholder value.


FINANCIALS:::

Bharti has been reporting very high growth in the topline and bottomline, boosted by the buoyancy in the mobile subscriber base and a conscious effort to improve operational efficiency. Its topline grew at a CAGR of 57% in the past three years, while the bottomline saw a CAGR of 103%. The company has been able to improve profitability (profits as a percentage of topline) despite decreasing average revenue per user per month (ARPU). Operating margin (EBITDA/total revenue) expanded to 42.8% in the Septemebr’07 quarter from 39.1% during the corresponding quarter of the previous year. Net margin increased from 21.4% to 25.5%. During the same period, ARPU dropped by 16% to Rs 366.


VALUATIONS:::

At the current price of Rs 919, the stock is trading at 30 times its trailing 12-month earnings. This is lower compared to its closest rival Reliance Communications (RCom), which is trading at a P/E of 34. Also, considering other valuation parameters such as EV/EBITDA and EV/ subscriber, the scrip of Bharti is selling cheaper than that of RCom . Bharti is expected to continue its robust performance given the sustained growth in mobile subscribers and increase in its reach in the carrier segment with the takeover of i2i. At the current level, the stock is trading at FY08E P/E of 24 and EV/EBITDA of 16. This excludes the valuation of its tower business, which is likely to be around $35 billion by the end of FY ’08 as per the going market rate.

The launch of new services and entry into overseas market will help the company to reduce its dependence on the domestic mobile market, which is likely to see further reduction in average revenue per user (ARPU) as operators reach out to rural areas. Bharti appears to be better positioned to tackle this situation than its peers. On a longer-term horizon, the stock looks attractive at the current valuation.


CHARTING COURSE

• Bharti Airtel is the largest mobile services provider in the country with a subscriber base of 4.8 crore
• Network presence in 4,876 census towns and 2.9 lakh non-census towns and villages covering 65% of the country's population
• Provides broadband telephone services to 20.75 lakh subscribers spread across 94 cities Offers data and voice carrier services using 55,574-km long optical transport network
• Nine out of every ten mobile subscribers of Bharti are prepaid clients
• Average revenue per user dropped by 6% from the previous quarter to Rs 366 during the September '07 quarter
• Average minutes of use per user per month declined by 2% to 469 minutes, while share of net additions reduced from 29.2% to 25.8% during the quarter ended

HAPPY INVESTING