Bharti Airtel

INVESTORS seem to be relieved that the merger talks between India’s No. 1 telco Bharti Airtel and South African firm MTN have been called off. The decision by the companies on Wednesday has put an end to the uncertainties over the deal that have been prevailing for weeks.

The aborted deal may prompt Bharti to rethink its global aspirations. At the same time, the event doesn’t alter the near term scenario for the market leader in the world’s fastest growing telecom market. Given its dominant position in the domestic market and the existing and forthcoming opportunities in the form of 3G, direct-to-home (DTH), and IPTV, Bharti offers a good opportunity to long-term investors. Business and growth prospects

Bharti Airtel accounts for nearly a fourth of India’s mobile telephony market and nearly a third of total telecom revenues generated in the country. Bharti has a pan-India presence with operations in all the 22 telecom circles. At the end of August ‘09, the company had 108 million subscribers, 44% more than the year ago levels. It has been adding more than 2.8 million users each month for the last six months, the highest net addition by any mobile operator.

Apart from consumer mobile services, Bharti also provides broadband and fixed line telecom services, enterprise and carrier services. Its subsidiary Bharti Infratel provides passive infrastructure services through a network of over 28,000 telecom towers in 11 circles. Recently, the company has also launched services in the DTH and IPTV space. Its mobile services division contributes four fifths of Bharti’s revenues. Enterprise and carrier services account for nearly 18% of the revenues and the rest comes from telemedia activities. Like other telecom operators, Bharti has been witnessing a decline in key operational parameters including average revenue per user (ARPU) per month and minutes of usage (MOUs) per month. Its ARPU dropped by 20.4% to Rs 278 in the June’09 quarter from the June quarter of the previous year. MOUs fell by 10.6% by similar comparison.

GROWTH SANS MTN:

The major reason for Bharti to scout for alliances outside can be found in the fact that the domestic market is inching towards saturation. At the speed of 12 million monthly additions, India’s telecom penetration will reach 50% in another 6-8 months. Also, the current growth in subscriber additions is coming from low yielding rural and semi-urban regions. This means every new subscriber would be dragging down the profitability ratios. The situation becomes murky if one looks at the rising competition in the mobile space with the entry of new players.

With the termination of the MTN deal, Bharti is likely to focus its attention on upcoming 3G opportunities in the India. Currently, telecom operators are struggling with network congestion due to the limitations of the existing 2G networks. A 3G launch would resolve the issue for operators as it would offer more bandwidth.

Also, to start with, only four 3G licenses will be offered per circle. This would intensify the competition to get these licenses as a hoard of new players in the 2G space would also vie for them. Operators with these licenses will be able to cater to a bigger subscriber base compared to the others. 3G also supports non-SMS services including data, music, and video. This calls for more investments from the operators.

Now that the deal with MTN is scrapped, Bharti looks comfortably placed with enough financial muscle to carry on with 3G expansion without taking fresh debt. By the end of June 09, the company had Rs 6,307 crore in cash and liquid investments. After successfully operating pan-India networks, Bharti appears to be far more comfortable in the current scenario both financially and functionally.

VALUATIONS:

At the current price, Bharti is trading at a trailing twelve month P/E of 19.2. This is lower than P/Es of Reliance Communications, the second biggest telecom operator in the country (P/E of 28.7), and Idea, the fifth biggest (22.3). In terms of enterprise value relative to subscriber base and earnings before interest, depreciation, amortisation, and taxes (EBITDA), Bharti is valued higher compared to the other two peersThis can be attributed to higher subscriber additions recorded by Bharti on a sustained basis. Bharti appears to be better placed to take advantage of new opportunities in the Indian telecom space given its scale and reach. Investors can hold on to the stock and can even accumulate on fall.