Saturday, September 12, 2009

Buy - Bharti Airtel

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Bharti Airtel Ltd is India’s largest integrated and the first private telecom services provider with a footprint in all the 23 telecom circles. The businesses at Bharti Airtel have been structured into three individual strategic business units (SBUs) -- Mobile Services, Airtel Telemedia Services & Enterprise Services. For 1Q FY10, the company’s total revenue grew to Rs 99.4 bn, EBITDA grew 18% YoY and 3.8% QoQ to Rs 41.5bn, while earnings grew 24% YoY and 12.4% QoQ to Rs 25.2 bn. ARPU declined 20.6% YoY and 8.9% QoQ to Rs 278/sub/month. MOU was 478 minutes, down 1.4% QoQ. However, overall mobile minutes grew 33.7% YoY and 7.7% QoQ to 140.7b.

Rural market remains attractive: Bharti remains sanguine about the rural markets and believes that economic growth in rural India would continue unabated. ARPU in rural markets remains attractive at ~2/3rd of the overall Indian market ARPU.

Low tariffs (high affordability) is the safety net against competition: Bharti believes that very low tariffs prevailing in the Indian market are the biggest safety net for incumbents against increasing competition. Bharti's significant coverage advantage would ensure that incremental margins are in line with the current margin profile.

Bharti MTN Deal: Bharti and the MTN group are in talks to discuss exclusively a potential transaction. The MTN group is present in 21 countries of Africa and the Middle East. High tariffs and relatively low penetration in Africa makes it an attractive market for Bharti. The scope for cost and tariff reductions could trigger significant volume growth opportunity in the African markets.

Bharti, thus, remains best-placed, given low capex intensity, un-leveraged balance sheet, and scale advantage. Bharti trades at an EV of 8x FY11E EBITDA and 14.1 x FY11E EPS. Bharti is well positioned with strong incumbency advantage and healthy balance sheet.