Bharti Airtel Ltd is one of India's leading private sector provider of telecommunications services based on an aggregate of 53.02mn customers as on October 30, 2007, consisting of 50.91mn GSM mobile and 2.11mn broadband and telephone customers. The businesses of Bharti Airtel is structured into three Strategic Business Units (SBU's) - Mobile services, Broadband & Telephone Services (B&T) and enterprise services. All these services are provided under the Airtel brand.
Investment Rationale
Robust growth witnessed by the Indian telecom Industry.
The Indian telecom industry is growing at a robust pace with the wireless subcribers contributing to this growth in a big way. We forecast the Indian wireless subscriber base to reach 305 mn by March 2010, a CAGR of 22.5% during 2007-2010. Although with increasing competion we may witness a decline in the market share but we believe that Bharti is and will likely continue to be the leader in the wireless industry. We estimate the total wireless subscriber base for Bharti of 66.2 mn by March 2010 (CAGR of 21.3%), implying a market share of 21.7% of the wireless Industry.
Revenue and subscriber leadership backed by a solid expansion strategy
We believe that Bharti will continue maintaining revenue leadership based on its pan-India presence and improving penetration and coverage. By March 2008, Bharti will improve its coverage of the Indian population to 75% from the current level of 65%.
Expansion focused on growth in susbcribers as well as profitability.
While the approach for the wireless business is to take the coverage of the Indian population to a progressively higher level, the strategy for the fixed line and broadband business is to selectively expand coverage. This is due to the significantly higher capital cost and lower return ratios resulting from deeper penetration of the Indian hinterland. The Company has a selective strategy for this segment as it intends to focus on cities with high revenue potential.
Capex plans
The company has capex plans of US$ 3.5 bn (approx Rs.140 bn) for its entire business. Out of the total, US$ 1 bn (Rs.100 bn) will be spent on the tower business. Almost 70% of the capex will be utilized for the mobility segment to accelerate network expansion to expand its footprint and for the potential launch of commercial services in SriLanka.
Valuations and recommendations
We expect Bharti to register earnings CAGR of 24.5% over FY07-10E. Bharti has reported EPS of Rs. 21.4 for FY07. We expect the company to register an EPS of Rs.39.9 in FY09E and Rs.49.6 in FY10E. At Current Market Price (CMP) of Rs.970 the stock is trading at 24.3x FY09E & 19.6x FY10E earnings per share. Bharti is India's largest private sector telecom company, with a complete suite of service offerings spanning wireless, fixed wireless, fixed line, enterprise broadband, national/international long distance, global data and undersea cable systems. Based on continued market leadership, execution capabilities, improving EBITDA margin, we recommend a "BUY" on Bharti Airtel Ltd with a price target (based on a DCF Valuation) of Rs.1175 (excluding the tower business valuations).
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