Bharti Airtel Research Report

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COMPANY PULSE: A Research Report of Bharti Airtel
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Report Date: 12 July 2013
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Bharti Airtel
Research Report

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Bharti Airtel Research Report
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10 YEAR X-RAY of Bharti Airtel : Analysis of Financial Track Record
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About Bharti Airtel:
Bharti Airtel Ltd. is a leading Indian telecommunication service provider that provides
telecommunication services globally, and has presence in 20 countries. The company is
operating in India, Bangladesh, Sri Lanka and 17 countries in Africa. It has more than 270
million subscribes across the globe. The company has four business segments namely
Mobile Services, Telemedia Services, Enterprise Services and Digital TV Services. Bharti
Airtel is also involved in the tower infrastructure business via its subsidiary Bharti Infratel.
The company provides services to all 23 telecom circles of India. It has been the leader in
market share in India in terms of subscriber base (22%) as well as on turnover basis (30%).
Africa business: - Bharti Airtel acquired Kuwait based Zain Telecom’s Africa business and
gained presence in 17 countries. The company offers voice and data services in these
countries.
Passive infrastructure business: - The company in involved in the telecom tower
infrastructure business via its subsidiary Bharti Infratel. Bharti Infratel has 42% stake in Indus
Towers (42% stake with Vodafone and 16% with Idea Cellular) which is one of the largest
passive infrastructure companies in the world.

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10 YEAR X-RAY Analysis of Bharti Airtel:
Bharti’s Consolidated 10 YEAR X-RAY has shown good performance. Bharti has been a
market leader and its increasing subscriber base has helped the company grow its Sales
with a CAGR of more than ~42% over the last 5 years. However, the EPS performance of
the company has not been good. A declining trend is observed in EPS after FY10.
EPS performance: - Bharti Airtel clocked excellent EPS growth rates till FY10. However, the
next three years have been bad for the company. The company had to bear high interest
burden due to the debt raised for acquiring Zain Telecom’s Africa business and for the 3G
roll-out in India. At the same time, the performance in Africa has not been good leading to
lower profits. Besides, the hyper competitive nature of the Indian telecom industry has led to
continuous fall in tariffs leading to margin pressures. However, off-late Bharti Airtel along
with other incumbent players has started concentrating on profitability and has raised tariffs.
Margins performance: -
Similar trend is observed in the margins of the company. The company’s margins were good
and improved till FY10. After that, there was pressure on the margins. On the whole, low
tariffs but high operating costs, high interest burden, high depreciation and amortization and
the delayed turnaround of the African operations led to a fall in margins and EPS of the
company.
High debt: - A big spike is seen in the company’s debt numbers in FY11 and FY12. The
company had to raise debt in order to acquire Zain Telecom’s Africa business and for the 3G
roll-out in India. This led to very high Debt to Equity and Debt to Net Profit ratios in the years
after FY10.
Value creation: -Like in other parameters, the company did well in terms of value creation
till FY10. In the period from FY04 to FY10, the company was able to generate higher returns
on the employed capital when compared to the cost incurred on this capital. After FY10,
there was a huge fall in ROCE due to high debt and low profits. The post FY10 returns of
capital employed were lower than the costs incurred on this capital leading to value
destruction. On the whole, the 10 YEAR X-RAY performance of the company appears to be
ORANGE (Somewhat Good).

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LONG-TERM PROSPECTS:
Established advantages to drive growth: - Bharti Airtel has few advantages that will help it
drive its growth in future.
- Largest player in the telecom industry
- A market leadership position in a growing telecom market
- A very strong brand which has helped it maintain customer loyalty
- Minute-Factory model: This model allows Bharti Airtel to minimize its costs substantially. In
this model, the company partners with local players for its basic infrastructural needs and
hence converts fixed cost to variable costs. The beauty of the Minute-Factory is that it can
add small capacities fairly rapidly and economically which is not possible in subscriber-led
model.
Global Acquisitions: -The Indian telecom industry is hyper competitive in nature. To fight
the intense competition, Bharti Airtel has sought overseas businesses in the South Asian
and African market. It has acquired Kuwait-based Zain Telecom’s African assets and 70%
stake in Bangladesh’s Warid Telecom. The Company has used its successful ‘minute factory
model’ (lowest-cost/min) in these territories. Bharti Airtel has about 271.2 million subscribers
worldwide – 199.6 million in India, 6.2 million in Bangladesh, 1.7 million in Sri Lanka and
63.7 million in Africa as of the end of March 2013.
Telecom penetration is low in Africa and hence, huge opportunities are available for Bharti
Airtel. So far, turning around the African operations has been a challenging task for the
company in the past three years, since acquisition. This is due to the high competition,
currency movements and political unrest in some countries and regions. However, the
African operations offer good opportunities and we can expect that these acquisitions will
enhance the company’s global presence in telecom space and will help it to increase its
profitability in the coming years.
Data business expected to be a future growth driver: - The data business is expected to
be the next phase of growth for telecom operators. Data services usage and penetration in
India is very low when compared to other countries. However, the data usage and
penetration has been on a rising trend. The trend is expected to continue with availability of
affordable smart phones and tablets, popularity of applications, coupled with the expansion
of 3G networks and introduction of 4G networks. Bharti Airtel got 3G licenses in 13 high
revenue generating telecom circles. It provides 3G services is other circles also as the
company has entered in to contract with Idea and Vodafone. Under this contract, the 3
operators can use each other’s networks in circles where they do not have a license. Bharti
Airtel has also lanched 4G services in a few places in India. The data business could help
Bharti Airtel protect its market share, providing some respite in the current environment of
intense competition in the voice market.

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Competitive position of the company: - India is the fastest-growing and the most
competitive mobile market, with telecom operators locked in a margin-destroying price war.
India currently has amongst the world’s lowest telecom tariffs. In this hyper competitive
market, Bharti Airtel is ahead of its peers in terms of turnover and subscriber base. The
company also beats other players in critical parameters such as ARPU and MOU. As
mentioned earlier, the company is a market leader both in terms of subscriber base and
revenue. Although the company has maintained its leadership position, it has been losing
market share to other players like Idea and Vodafone, which is a cause of concern.
Cancelation of 2G Licenses: - With the cancelation of 122 2G licenses issued in 2008 by
Supreme Court, it was expected that there would be a substantial decline in competitive
pressure in telecom space and consolidation will take place. While the big players have
managed to gain market share from smaller players due to the cancellation of licenses,
competitive intensity is still prevalent in the industry. Despite the fact that the number of
major telecom players has almost halved after the Supreme Court ruling, significant
competition still prevails in the domestic market as promotions and discount packs for
customers continue. The sector is expected to remain competitive. But the telecom players
are increasingly concentrating on profitability and on quality of customers. Hence, tariffs and
subsequently ARPUs are expected to go up in the future.
Telecom industry: - Expanding telecom networks to rural India, falling tariffs and continued
reduction in handset costs, have been the key drivers for the growth of the telecom industry.
In the long run, the Indian telecom market offers an attractive growth opportunity. The urban
markets are quite dense for the voice services. However, rural tele-density is close to ~40%
and offers attractive opportunities for voice services. The urban markets offer attractive
opportunities for the data and VAS services. At the end, we can say that, the telecom sector
will continue to demonstrate attractive long term opportunities for its largest operator Bharti
Airtel.
Concerns: -
Africa operations concerns: - The African operations have been a drag on the company’s
overall performance. The performance has been below par because of high competition,
currency movements, political unrests, regulatory issues, etc. The company could not
turnaround the African operations in the time it expected to do so. The performance in Africa
has a bearing on the company’s value creation potential in the future.
Falling market share: - Bharti Airtel is a market leader both in terms of subscriber base and
market share. Although the company has maintained its leadership position, it has been
losing market share to other players like Idea and Vodafone, which is a cause of concern.
The Indian telecom industry offers good opportunities. Bharti Airtel being the largest player in
India is expected to do well and take advantage of the available opportunities. The rural
market and the data services market are expected to be the next growth drivers.
Globally, the company needs it Africa business to do well. While the territory is a challenging
market, it offers attractive opportunities. Back home, the company and sector continues to
battle with high competition and regulatory issues. On the whole, the long term future
prospects of the company appear to be GREEN (Very Good).

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Conclusion:
On the whole, the 10 YEAR X-RAY performance of Bharti Airtel appears to be
ORANGE (Somewhat Good).
The long term future prospects of the company appear to be GREEN (Very Good).
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