Bharti Airtel Ltd

Initiating Coverage Report Under performer CMP Rs 850

Key data
Face Value : 10 NSE Code : BHARTIARTL
52 WEEK NSE High / Low : 1184 /606.35 Avg Volume (no of shares) : 585550

Shareholding Pattern 31.12.07
Foreign : 26.45% Institutions : 4.31%
Non Promoter Corp. Hold. :2% Promoters : 65.88% Public & Others : 1.36%

Company Background
Bharti Airtel Limited, a part of Bharti Enterprises, is India's leading provider of telecommunications services. The businesses at Bharti Airtel have been structured into three individual strategic business units (SBU’s) - mobile services, telemedia services (ATS) & enterprise services. The mobile services group provides GSM mobile services across India in 23 telecom circles, while the ATS business group provides broadband & telephone services in 94 cities. The Enterprise services group has two sub-units - carriers (long distance services) and services to corporates. All these services are provided under the Airtel brand. The company also has passive infrastructure tower business through the subsidary Bharti Infratel.
Bharti has recently moved into life insurance business and has tied up with Walmart to enter retail business.

Rationale for Sell
- Revenue growth tapering: - A quarter on quarter analysis for the company shows that the revenue growth quarter on quarter is tapering down.
- Average Revenue Per User (ARPU) on the decline: - Bharti Airtel, which had ARPU at Rs 465 at the end of FY07, has showed a decline in ARPU and for the quarter ending Dec’07 ARPU was Rs 358. Going forward as competition intensifies ARPU can be seen to decline further to Rs 320.

- A decline in Minutes of usage per subscriber (MOU/SUB) in a month for Q2 vs Q1 is also evident that has come down from 478 min. to 469 min. The MOU had peeked out in Q1FY08 and has shown a decline in the next quarter. With competition on the rise and number portability in the offing MOU/SUB for Airtel is expected to go down further

- Competition increased: - With dual licensing policy, stiff competition is emerging in GSM Domain. New players and existing CDMA operators such as Reliance Infocom have been allotted start up spectrum in many of the circles in which Airtel is currently operating. Competition would intensify and Bharti Airtel’s margins would come under pressure.
- Competition slated to grow at a much faster rate: - With dual licensing and number portability to be implemented and a plethora of services to be offered by competitors, growth for competitors evident.
- Technology Barrier: - Airtel, which is on GSM domain, may find it difficult to shift to advanced and more capital intensive technology of CDMA, under the dual licensing policy. This would limit the company’s growth in its core business that is telephone services.
- Subscriber Base Forecasted to shrink: - With competition intensifying, and emergence of new players, Airtel, which is a market leader in 14 of the 23 circles, stands to loose subscribers to competition. Moreover with new TRAI policy such as number portability, subscriber shift may be expected to teleservice provider that offers better quality of services. These factors would reduce the current subscriber base of Airtel.
- Additional spectrum required to add more subscribers: - In some of the circles where Airtel is operating, the subscriber base is nearing saturation in terms of the spectrum available to Airtel.

Unavailability of spectrum and further addition of subscriber base (in the current allocated spectrum) would lead to deterioration of Quality of services. Moreover in some of the sectors, new entrants have been given spectrum instead of additional spectrum allocation to existing players. To increase subscribers base in the existing available spectrum that Airtel has, the company would have to undertake intensive capex that would erode company’s profitability.
- Bharti is diversifying into areas such as insurance and retail. These businesses have long gestation periods and are fairly complex businesses.
- In spite of being in the growth business for the past 5 years ,it has not given any dividend to its shareholders

Risk and concerns
- Our call is based on the current slowdown in the growth of revenue arising out of falling ARPU, falling MOU/SUB, Airtel growing at a slower rate than competitors, entry of new players, number portability are expected to impact the margins significantly going forward. In case Bharti is able to meet these challenges effectively the fall in margins may not come thru.
- With the passive infrastructure business to be hived off as a separate entity by 2010, value unlocking for the shareholders is on the horizon for the shareholders that might increase the scrip price.
- The company is foraying into other business areas such as insurance services and retail that might provide the growth drivers.

Quarter Three Results Highlights
• ARPU declined from Rs 366 to Rs 358.
• Decline in operating profits (Consolidated) quarter on quarter from 43.75% in Q2FY08 to 42.35% in Q3FY08.
• Consolidated PAT for Q3FY08 was at Rs 14.28 billion is lower than that of last quarter (Q2FY08), which was at Rs 16.43 billion.

Valuation
With the ARPU declining on a quarter on quarter basis and growth rate tapering off, Bharti Airtel is likely to under perform the market. The company is also in only one domain of telephone services i.e. GSM and is saturated in terms of number of subscribers in various circles in which it operates. Going forward with increased competition in GSM domain, particularly from RCOM and Idea, the company is likely to under perform on the bourses. Moreover to sustain the growth company would have to undertake extensive capex.
The company has reported a drop in profit margin and a drop in absolute profit after tax in Q3FY08 compared to Q2FY08
In view of the conditions this scrip would under perform the market. A price of Rs 880-900 would be a good price to sell.