Bharti Tele: Better bottomline

Despite lower ARPUs, Bharti is more profitable than Hutch

Hutchison Telecommunications International Ltd is going for a dual listing in the Hong Kong and New York stock exchanges. Hutch's Indian operations, which account for 46.5 per cent of HTIL's revenues, get ample mention in the IPO filing.

This gives an opportunity to do a comparison between Bharti Televentures and Hutch India, the two largest players in the GSM space. The caveat, however, is that Bharti's numbers are based on IAS (International Accounting Standards) and Hutch's financials are according to the Hong Kong GAAP.

Latest figures available for Hutch India pertain to the six-month period ended June 2004. Revenues from Indian operations during this period increased by 64 per cent year-on-year to HK$ 3202 million (roughly Rs 1900 crore).

Incidentally, Bharti's mobile services segment also grew 64 per cent during the same period to Rs 2088 crore. But revenue and subscriber numbers are already known, since these are put out by COAI (Cellular Operators Association of India). The key question is which of the two companies is more profitable.

Hutch India reported an EBIT of HK$ 425 million in the six months till June, which translates into an EBIT margin of 13.27 per cent. Bharti did much better based on this parameter, with an EBIT margin of 21.06 per cent in the same period.

But depreciation policy differs between the IAS and the Hong Kong GAAP, so it makes more sense to look at margins at the EBITDA level. After adding back depreciation, Hutch India's profit looks much better at HK$ 954 million, or close to 30 per cent of sales. But this is still lower compared to Bharti, which had an EBITDA margin of 33.7 per cent.

This comes as a surprise, as Hutch India operates in just 10 circles currently, compared to 16 circles for Bharti. And Hutch's average monthly revenue per user (ARPU) in the June quarter was 17 per cent higher than Bharti's, according to COAI data.

Also, while over 78 per cent of Bharti's mobile subscribers are pre-paid customers, for Hutch it's around 74 per cent. One would have expected Hutch's profitability to be higher than Bharti's.

Based on the above numbers, Bharti enjoys higher profitability, although the actual picture could vary since revenue and expense recognition would differ between the IAS and Hong Kong GAAP.

This augurs well for the Bharti stock, which could continue to get a premium even after the Hutch listing. Bharti trades at a forward PE of around 21 times and a forward EV/EBITDA of around 12 times. Since it's the only listed play in the fast growing wireless space in India, it enjoys what is called a "scarcity premium".

There's a view that the HTIL listing, coupled with the expected Hutch India and Idea IPOs, would provide investors alternatives to Bharti, and lead to a decline in its valuation.

But the fact that it's the biggest and most profitable player in the GSM space, coupled with significant contributions from other sources such as fixed line services and long distance telephony, could mean that the premium may continue.

Inflation: no base effect after September

Both the government and the debt markets seem remarkably comfortable with the high inflation rate, the assumption being that inflation has peaked and will come down in the next few weeks.

The main reason for the optimism is the base effect "" the Wholesale Price Index in September 2003 saw a large rise, with the result that this year we'll see a lower percentage rise this month. That reckoning is correct.
 

Altered equation Wholesale price index
Month	2003	2004
June	174.10	186.20
July	137.20	186.60
August	174.00	*188.00
September	176.10	-
October	176.10	-
November	176.70	-
December	176.90	-
* Week ended on August 21

As can be seen from the table, the WPI jumped up from 174.0 as at end-August 2003 to 176.1 as at end-September, which means that, other things remaining the same, the inflation rate by the end of this month will be lower. The government's efforts to reduce steel prices will also help.

But look beyond September, and it will be clear that the base effect is not going to help. For instance, the WPI as at end-October, 2003 was at the same level as at end-September.

Thereafter, it moved up slowly to 176.7 in November, and to 176.9 in December. That's a rate of change not very different to that between end-July and end-August 2003, and inflation rates have shot through the roof during that period this year.

Add to that the fact that this year's monsoons haven't been as good as last year's; oil prices are ruling at much higher levels; and commodity prices have resumed an upward path. In the circumstances, if current trends continue, the impact of September's base effect is unlikely to be of much comfort.

With contributions from Mobis Philipose