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Robust prospects, sturdy business model and an appetite for growth make Bharti Airtel an attractive bet.

Bharti Airtel, India's largest mobile services company, also provides Telemedia (broadband and telephone) and Enterprise (end-to-end solutions to corporate and national and international long-distance services to carriers) services.

The company's sturdy business model and robust financials provide confidence. Importantly, Bharti is expected to sustain its robust revenue and profit growth over the next two years, which makes the stock a compelling investment at current valuations.

Consistent growth
In the mobile business, which accounted for 73 per cent of consolidated revenues, Bharti has not only consistently added new subscribers, but despite stiff competition, it has managed to increase its market share from 22 per cent in February 2007 to 24.3 per cent in May 2008.

The economies of scale and notably, a relatively low operating and capex cost per subscriber, have helped sustain margins at 40 per cent levels, except for Q4FY08.

Bharti has amongst the most extensive networks, which covers 71 per cent of the country's population. It aims to increase the coverage to 80-85 per cent by March 2009. This will be done partly through its joint-venture, Indus Towers, which will own thousands of towers and passive infrastructure (to be shared with operators).

By sharing the passive network, companies hope to keep costs low. This is important as many of them are expanding into rural India, while tariffs are on a steady decline. With this, Bharti should be able to maintain its growth by way of new subscriber additions and, in a profitable manner.

Bharti's Telemedia business has seen consistent growth in revenues and margins, even as its presence has remained unchanged at 94 cities. Unlike the mass strategy, Bharti has been selective in choosing the markets (and within those, lucrative areas like commercial, high-end residential) it wants to be present in, which has led to high ARPUs in the last many quarters.

Going ahead and within the 94 cities, the company expects prospects to pick up and new revenue streams to emerge.

In the Enterprise business, too, which includes long-distance services, the performance has been healthy. As Bharti further expands its network and reach (both, domestically as well as globally), expect revenue and profit growth to be sustained.

Robust financials
Bharti's track record has been good with 49.35 per cent compounded annual growth in consolidated revenues and 78 per cent in net profits between FY05-08.

While it reported consolidated revenues of Rs 27,025 crore (up 46 per cent) and net profit of Rs 6,700 crore (up 57 per cent) in FY08 (as per US GAAP), in Q4 though, mobile services margins were down led by higher selling expenses and tariff cuts initiated earlier.

Nonetheless, analysts expect consolidated EBIDTA margins to remain over 40 per cent, as seen in the past. 
 

KEY PARAMETERS
For Quarter ended...	Mar 07	Jun 07	Sep 07	Dec 07	Mar 08
Mobile Services revenues (Rs crore)	4,243.00	4,698.00	5,058.00	5,611.00	6,420.00
EBITDA (%)	39.10	40.60	41.00	40.80	38.80
Customers (Million)	37.14	42.70	48.88	55.16	61.98
Mobile market share (%)	22.40	23.10	23.40	23.60	23.80
Average Revenue Per User (ARPU) (Rs)	406.00	390.00	366.00	358.00	357.00
Average Minutes of Use Per User	475.00	478.00	469.00	474.00	507.00
Population Coverage (%)	59.00	62.00	65.00	68.00	71.00
Telemedia Services revenues (Rs crore)	604.00	651.00	702.00	731.00	764.00
EBITDA (%)	28.60	32.20	39.70	43.40	43.80
Customers (Million)	1.87	1.97	2.08	2.18	2.28
Average Revenue Per User (ARPU) (Rs)	1,112.00	1,121.00	1,150.00	1,140.00	1,137.00
Enterprise Services revenues (Rs crore)	1,267.00	1,194.00	1,347.00	1,464.00	1,634.00
EBITDA (%)	38.70	36.30	36.40	34.40	37.80
Consolidated revenues (Rs crore)	5,393.00	5,905.00	6,337.00	6,964.00	7,819.00
EBITDA (%)	41.50	41.40	42.80	42.60	41.60
Net profit (Rs crore)	1,353.00	1,512.00	1,614.00	1,722.00	1,853.00
Customers (Million)	39.01	44.68	50.95	57.34	64.27
Optic Fibre Network (Rkms)	40,484.00	43,658.00	55,574.00	67,138.00	73,787.00
Source: Company

Tower hive-off
Effective January 31, 2008, Bharti hived off its passive infrastructure (towers and passive equipment) to its subsidiary, Bharti Infratel, which also holds a 42 per cent stake in Indus Towers.

For two months ended March 2008, this company reported revenues of Rs 602 crore and EBIDTA margin of 37.1 per cent. Bharti Infratel will be hiving off 30,000 of the 53,000 towers it owns to Indus. Henceforth, Indus (along with passive infrastructure of Vodafone and Idea) will lease space on its existing andnew towers to various companies.

For Bharti, while it is now paying charges to host its active infrastructure on these towers, it will thus be able to focus on its core businesses, for which, it plans to invest $2.5 billion towards capex during FY09.

Fuel for growth
The key issue of spectrum availability has been largely resolved with Bharti having received spectrum in seven of the 13 circles in the last 3-4 months; the remaining is expected over the next few months, thus, ensuring that Bharti's growth prospects remain unhindered.

Secondly, with Bharti's improving finances (cash profit of Rs 11,137 crore or $2.6 billion in FY08), there are sufficient funds to finance its expansion plans. Post-hive off, Bharti Infratel too, has received $1.35 billion in form of equity from private investors, which will come handy to set up new towers (for Bharti) as well as infusing as equity contribution into Indus. With Bharti Infratel valued at $10-12 billion by analysts, there is scope to raise more funds, if needed.

Developments to watch
Among key factors to monitor is the competition, which is expected to rise as new players foray into the sector; the government had recently issued licenses to six new players. The other issue pertains to the spectrum allotment for 3G services, wherein the industry awaits clarity, and which should hopefully be there in the next 2-3 months.

Here, overbidding (through auction process) by players could lead to higher capital investment and longer pay-back periods, which is undesirable. Lastly, sharing of active infrastructure (as and when permitted) is seen as a positive step, and should help lower costs further. For Bharti, which has proved itself in the business, it should hopefully manage these events well.

Investment rationale
The Indian telephone subscriber base is expected to reach 500 million by FY10 from 300 million currently, translating into a penetration of 45 per cent (annual growth of over 30 per cent). Even thereafter, while growth rates may taper off due to the high base effect, it should remain healthy at 15-20 per cent, thanks to rising income levels.

For Bharti, it has been adding over two million mobile subscribers a month, and should emerge as a key beneficiary. Although one may want to question the spending power in the rural segment, Bharti's figures of increasing minute usage in the last three quarters, led by lower tariffs suggest that there is price elasticity. Higher usage, in turn, has also helped Bharti sustain ARPUs during the last three quarters. And, with more and more subscribers getting hooked onto mobile internet, higher spends by these customers should provide support to blended ARPUs.

Steady revenue growth in the Telemedia business along with focus on profitability (EBIDTA margins have consistently risen) provide further comfort. This along with the enterprise business, should support the overall growth in revenues and profits. Going forward, new service offerings like DTH and IPTV (to be launched soon) and foray into markets including Sri Lanka, should boost growth rates further. Analysts expect Bharti's consolidated topline and bottomline growth to range 25-30 per cent (annually) during FY09 and FY10. The stock at Rs 814, trading at a PE of 18.2 based on estimated FY09 earnings, can deliver over 25 per cent in the next one year.