Bharti Airtel – Take the call

  • Date: November12, 2011
  • CMP: Rs 396; Large Cap
  • Advice: Safe long term investment
  • Target: 18 month – 800

There is an update on this report called Bharti Airtel – This is a year of consolidation (Aug 2012) available for readers. 

Bharti Airtel is a large telecom player. The market leading India business is seeing high competition, but going forward the profitability will stabilize and improve. The next growth engines are Indian 3G and the 16 country African acquisition.  Invest for the long term in this Indian – going – MNC Blue Chip.

Bharti Airtel – Description and Profile

  • Bharti Airtel is the market leader in the Indian telecom sector. Incorporated as recently as 1995, it is a global telecom operator ranked #5 today in terms of customers.
  • Standalone turnover is Rs 38,000 crores (FY’11), and the Market Cap at Rs 1,50,000 crores ranks it #7 in India.  Consolidated revenues in Q2FY12 was Rs 17,200 crore (annualized Rs 61,000 crore)
  • Other than India, Operations are spread over 18+ countries including Bangladesh, Sri Lanka and the African continent. Airtel has an aggregate of 237 million customers as of September 2011.

Businesses are classified as B2C and B2B

  • B2C operations include Mobile, Telemedia (broadband, IPTV and fixed line), and Digital TV (DTH)
  • B2B operations are Enterprise services (end to end telecom services) and Passive Infrastructure Services (Telecom towers)
  • Africa for Airtel is essentially a market for mobile services and Passive Infrastructure Services (Telecom towers)
Bharti Airtel, JainMatrix Investments

Fig 1 – The revenue proportions from business segments (click graphic to enlarge)

  • Strategic Partner – Singapore Telecom is a key Partner and investor in Bharti Airtel.
  • Equipment and Technology Partners – excellence from specialists
  1. For network and telecom equipment, the partners are Ericsson, Nokia Siemens Networks (NSN), Huawei, Alcatel Lucent, ECI, Tejas Networks and Cisco
  2. IBM is the partner for all business and enterprise IT systems, across geographies
  3. The Call Center expertise is from partners like IBM Daksh, Mphasis, Firstsource, Aegis, Tech Mahindra Teleperformance, and HGSL
  • Shareholding pattern is: Promoters 45.5%, Foreign Strategic Partner 22.8%;  FIIs 17.1%;  DII 8.7%; Bodies Corporate 4.1 %; Individuals – retail and Other 1.8%

Industry Snapshot

  • The total number of Indian subscribers of telecom services– wireless & wire line – is 88.6 crores. The tele-density is 73.97% (on 30/06/11), an increase of 4.69% over the previous quarter
  • Gross Revenue during the quarter was 46,891 crores, an increase of 3.03% over the previous quarter
  • The policy environment for Telecom is driven by TRAI, DoT and the Ministry of Communication & IT
  • There are 15 players in the telecom operator space, including PSUs. Here is a comparison of the larger players

Company

Subscribers

millions

ARPU

Rs/ month

MoU

minutes

ARPM

Rs/minute

Market Share %

3G licenses won

3G Bid

Rs Billion

Bharti Airtel

172.51

192

454

0.42

19.91

13 circles

122.95

RCom

144.51

105.8

240

0.44

16.77

13 circles

85.85

Idea

95.11

165.2

413

0.40

11.12

11 circles

57.68

Industry

885.99

93.44

329

100

7 private firms have won 71 circles among them

506

Above telecom data is from April and June 2011 quarters, from TRAI and public reports

Key challenges for Bharti Airtel and strategies being followed:

Bharti Airtel, JainMatrix Investements

  • Focus on network improvements, customer support and new service launches, so Airtel is seen as a stable, technically superior and quality service provider

2.       The draft National Telecom Policy 2011 attempts to ease conditions for M&A in the telecom sector, promote the ‘One Nation-One License’, and possibly infrastructure status for the industry

  • These policies are seen as boosts for the sector, particularly the larger players like Airtel
  • It will hasten the end of the intense competition phase and, through alliances and M&A, lower the number of players to 6-8. This can permit profitable telecom operations for most players.

3.       Airtel won a number of 3G licenses in important circles, but at a high price

  • 3G is the next big thing for Indian telecom players. Driven by a growth in smartphone sales, enabled by the telecom operators, a whole new ecosystem of content, services and functionality is being set up. This includes internet browsing, entertainment services, application stores, video calling, enterprise services, m-Heath, m-Education, m-Commerce, e-governance, etc.  These will drive usage, 3G penetration, subscriptions and ARPU, and help monetize the 3G license assets.

4.       Regulatory uncertainties on issues like Excess spectrum charge, license renewal fees, formation of 3G roaming alliances

  • By working with the industry bodies such as COAI, Bharti Airtel is defending its position on these issues. Many of these new conditions impose additional costs on the Telecom operators, which are unplanned for.

5.       Airtel acquired the African telecom assets of Zain in 2010, for USD $9 billion in cash.

  • This purchase is of a high growth franchise. As per Airtel estimates, Africa will eventually overtake India and China as a telecom market – as population of Africa will peak at 1.8 – 2.0 billion. By leveraging the balance sheet and sound financial engineering, Airtel was able to service this loan for only $200m per year in 2010.

6.       Mobile Number Portability was perceived as a threat for Airtel. However, the first year of experience of this consumer facility shows that it has not materially reduced market shares.

Stock valuation, performance and returns

  • CMP is 395. In the last 7 years, the market price has appreciated at 21% per annum CAGR.  It is below the all time high of 565 in Oct 2007. See Fig 3.
  • However, prices are on an uptrend in the last year or so. PE at 21.5 is still well below the 7 year range of 27.5

Bharti Airtel, JainMatrix Investements

  • EPS growth in the last 7 years has been 35% CAGR. Even so, we can see the trends – EPS had a rapid expansion from 2005 to 2009, but has fallen off in the last 2 years.
  • The Good News? Expectations now are that the period of falling consumer prices in telecom are over. The hyper competition phase has played out, and EPS will stabilize and start their climb once again for Airtel.
Bharti Airtel, JainMatrix Investments

Fig 4 – Price and EPS Trends

  • Sales have grown steadily at 23.4% over the past 7 years. Net profits have also appreciated at 21.3%. We can see however, that profits which were rising rapidly till 2009, have tapered down recently. This is due to industry hyper competition.
Bharti Airtel, JainMatrix Investments

Fig 5 – Sales and Profits Trends (click to enlarge)

  • Telecom is a very resource intensive business. Airtel has managed this well, and has grown the Cash generated from operations at 28% CAGR over the last 7 years. EPS growth has been higher at 35%.
Bharti Airtel, JainMatrix Investments

Fig 6 – Cash Flow and EPS Trends

  • RoCE is at 16% – healthy statistic; RoNW is 17.6%; Price/Book is 3.42
  • Debt / Equity is 0.7 for the consolidated entity. This is a comfortable level for a telecom player.
  • PEG is at 0.61 – indicates it is underpriced, and a good investment opportunity, especially given it’s Blue Chip status

Risks:

  • Poor regulatory conditions in India. The telecom sector continues to be buffeted by ad-hoc ism in policy matters, and overlapping jurisdictions of TRAI, DoT and the Ministry. The revenue short government may exert additional pressure to raise receipts, sacrificing industry growth.
  • The current policy directive is to allow M&As and reduce competition intensity in the sector. If this is not implemented, or even reversed in some way, the hyper competition environment may continue to haunt this sector, affecting profitability and margins.
  • The interest rate has risen in India. This increases debt servicing costs. Expectations are that rates have peaked in India, and should fall going forward.
  • Revenue and capital leakage into unrelated diversifications of Bharti group like Retail, Insurance, foods, etc. However this risk is fading as Bharti Airtel corporate governance standards are high, and investments are being made independently by the holding company, Bharti Enterprises.

Opinion, Outlook and Recommendation

  • Airtel essentially has two large businesses, India (mature asset) and Africa (growth).
  1. In India, the major investments have been made; the revenues are large and growing, and the high competition is expected to ease up. Over the next few quarters, all metrics will point up – Cash flow, operating margins and net profits, in addition to revenues which has held up well.
  2. In Africa, we will see Airtel slowly establish itself, move from #3, 4 or 5 in the market to #1 or 2. In country after country, it is engaging with the government, trade and consumers, to roll out its ‘minutes factory’, ‘network infrastructure sharing’ and ‘partner with the best vendors’ approach.  The 2013 target for Airtel Africa is $5 billion of revenues.
  • The recent bottom of the Airtel share was Rs 255 in June 2010. The share has been moving up thereafter and has appreciated 55% to today’s 396. The stock will continue its upward march, as it continues to deliver on stated corporate goals.
  • At current levels, Airtel share is above 20, 50 and 200 DMA levels. See Fig 7. This indicates the share is likely to continue to move up.
Bharti Airtel, JainMatrix Investments

Fig 7 – Airtel stock is above 20, 50 and 200 DMAs

  • I recommended the Airtel stock in my report in December 2010. See Link.
  • I reiterate my recommendation to Buy.  My 18 month target for this stock is 800.

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