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Monday, November 17, 2008

Bharti Airtel - Steady gold mine Investment in Telecom

Investors looking for steady growth credentials can bank on Bharti Airtel ....
BHARTI AIRTEL is the largest GSM (global system for mobile communications) operator in India with an overall market share of around 25% in the mobile telephony space. From the very beginning, Bharti has exclusively focused on the GSM technology and this turned out to be the right bet, as now, even non-GSM players are making a beeline for this segment.

BHARTI AIRTEL
Beta: 0.85
Institutional Holding: 28.7%
Dividend Yield: 0%
P/E: 17.2

M-Cap: Rs 123,407 cr
CMP: Rs 650
The company is present in all the 23 telecom circles in the country and has a subscriber base of close to 80 million. To diversify its business risk, it has invested in other areas like retail broadband, enterprise services and direct to home (DTH). These new business lines now contribute around one-fourth to the company’s total revenue. Bharti has been successful in adding new subscribers to its network and the numbers keep growing.

FINANCIALS:
Bharti’s operating revenue has more than trebled over the past three years to around Rs 27,000 crore. Its net profit grew by more than five times to Rs 6,400 crore during the same period. The company’s operating margin, which has remained at 40%, has come down marginally in the past few quarters. Its return on capital employed (RoCE) has gone down to 34% from
41% one year ago.
However, the RoCE for the mobile services business segment has actually increased from 50% to more than 100% during the same period. Bharti has been a front-runner in the mobile business in India and has invested early, ahead of its competitors. And this growing RoCE is bearing fruits of the same.

Read More on AIRTEL Recommendation: Analysts Picks - Bharti Airtel, Jet Airways, Lanco...

GROWTH DRIVERS:
Bharti has been focusing on different non-voice businesses. Once the company is allocated 3G spectrum, it will further help it in offering better value-added services. This will drive the average revenue per user (ARPU) and hence, the topline growth. The company has also taken initiatives in areas like DTH and IPTV (internet protocol television), which can become additional growth drivers.

RISKS:
Bharti continues to be successful in its GSM business. We believe it will face lesser risk in its core business, at least in the medium term. However, its investment in new business areas like DTH IPTV bears some degree of risk.

Read Report on AIRTEL business rival: Reliance Communications -Can it be a Dramatic run for Investors?

OUR TAKE:
Bharti has a quality subscriber base, which generates higher revenues for the company and its ARPU is among the highest for listed telecom companies in India. Secondly, its strategy of sticking to the GSM platform has worked well. Unlike CDMA (code division multiple access) players such as Reliance Communications (RCom), which are now diversifying into GSM, the company’s first-mover advantage will definitely reap better results than its peers.
We believe that Bharti will face fewer challenges in terms of adding subscribers and will continue with its steady growth in operating cash flows. So, investors who are willing to take less risk can consider this stock for their portfolio.

The enterprise value per subscriber (EV/subscriber) for Bharti Airtel and RCom is around Rs 15,500 and Rs 7,000, respectively. The market has probably taken this into account; hence, Bharti trades at a higher priceearnings (P/E) multiple than RCom. In fact, Bharti has remained an outperformer vis-àvis the Sensex for the past one year.

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