Bharti Airtel

Bharti Airtel's current low valuations reflect the short-term uncertainty in its business. Investors may accumulate the stock given the company's long-term prospects and attractive valuation

   TELECOM giant Bharti Airtel's stock is currently trading at a historically low valuation. The stock has a steep fall since October 2009 in contrast with a marginal increase in the benchmark indices during the period. Investors have dumped the stock following concerns over falling telecom tariff structure and a possible adverse impact of Bharti's recent overseas acquisitions on its balance sheet. While the India's largest telecom operator is expected to take a hit in its performance due to these developments in the near term, it appears to be poised for a long-term growth.

BUSINESS    

Bharti Airtel constitutes nearly 22% of the country's total subscriber base of 55.9 crore. With more than 27% share in the country's wireless revenue, it also leads the sector's revenue matrix. Bharti generates nearly 80% of its revenue from mobile services division. Enterprise and carrier services account for over 18% of revenue and the remaining comes from telemedia activities.

   The company has a pan-India presence with operations in all the 22 telecom circles. It has been adding over 28 lakh users each month for the past six months. At January 2010, the company had 12.2 crore subscribers, a rise of 38% over its previous year levels. Apart from these revenue streams, Bharti has a telecom infrastructure subsidiary called Bharti Infratel. It provides passive infrastructure services through a network of over 29,806 towers (at the end of December 2009) in 11 circles. Among new services, Bharti Airtel offers digital TV services through its direct-to-home (DTH) operations. It had two million subscribers for DTH in the December quarter.

CURRENT SCENARIO    

After a flurry of tariff cuts in October, the domestic telecom sector has not witnessed any major rate cuts. While lower tariffs would continue to impact the sector's operating parameters adversely in the next two quarters as well, there is a fair chance that rates may not decline further. This means the domestic telecom tariffs will finally stabilise at the new plateau. It needs to be noted that not all players would be able to run operations profitably at the current tariff schemes. Especially for new entrains, it would be difficult to compete with the established players, which are almost at the end of their capital expenditure cycle. This indicates that consolidation is imminent and players, such as Bharti, may emerge as beneficiaries.

OVERSEAS ACQUISITIONS    

In January 2010, Bharti acquired Warid Telecom's Bangladesh operations. It is also in advanced talks with Kuwait-based Zain to buy its operations in 15 African markets. While the impact of Warid takeover is not significant due to its comparatively smaller operations, takeover of Zain Africa will increase Bharti's debt burden. According to preliminary estimates, Bharti's debt-equity ratio may shot up to 1.1 from the current 0.4 post-acquisition. However, this is not likely to restrict Bharti's accessibility to capital in future given its cash generating operations. Also, globally telcos tend to have D/E ratios above 2. The challenge for Bharti will be to grow Zain's African operations after the acquisition. The takeover will help Bharti set its footprint in African markets where Zain is the market leader and mobile penetration is less than 20%. Further, average revenue per user (ARPU) in Zain's African markets is about $8.2 agaisnt $5 for Bharti, which can also rationalise Zain's operating costs by deploying its outsourcing strategy.

VALUATIONS

At the current price of about Rs 290, Bharti is trading at a trailing 12 month P/E of 11.6. This is lower than P/E of 19.8 for Idea Cellular, the fifth largest telecom operator in the country. Further, Bharti's enterprise value is less than seven times its profit before interest, taxes, depreciation and amortization. Though its EBITDA growth is expected to slow down in the short term due to lower tariffs and increasing number of low usage users, Bharti's non-wireless operations and overseas businesses would support profits. Bharti looks more prepared than its peers on this front. It appears to be better placed to take advantage of new opportunities in the telecom space given its scale and reach. Investors can hold on to the stock and can even accumulate it on fall given lower valuation.