Company Focus

4 November 2009

Bharti Airtel Q2 FY10 Earnings Review

Recommendation : Marketperformer
CMP : Rs 298
Target : Rs 327 Revenues growth disappointing
Upside Potential : 9.73%
Bharti Airtel’s consolidated revenue for the quarter was at Rs
Sensex : 15,405 10,355 crore showing a marginal decline from Rs 10,429 crore in
Q1 FY10. The intense price war in the sector has impacted the
revenue growth of the company as the average realized rate per
Sector : Telecommunications minute (ARPM) dipped 4% QoQ to Rs 0.56 from Rs 0.58. The
Bloomberg code : BHARTI IN Average Revenue per User (ARPU) tumbled by 9.4% to Rs 252
from Rs 278 in the previous quarter. The Minutes of Usage (MoU)
Reuters Code : BRTI.BO declined by 6% to 450 minutes compared to 478 minutes in the last
quarter. The revenue growth will continue to be under pressure as
tariffs have been almost halved from the level 3 months back.
AT A GLANCE

Issued Equity Capital (Cr. Shrs) : 379.68 Operating Margins maintained

Mkt. Cap (Rs. in Crs) : 1,13,115
Major Shareholders
Promoters (%) : 67.41%
Free Float (%) : 32.59%
Avg. Daily Vol. (‘000) : 2235
Background: Bharti Airtel is the flagship company of
Bharti Enterprises. The businesses at Bharti Airtel
have been structured into three individual strategic
business units (SBU’s) - Mobile Services, Airtel
Telemedia Services & Enterprise Services. The
mobile business provides mobile & fixed wireless
services using GSM technology across 23 telecom
circles while the Airtel Telemedia Services business
offers broadband & telephone services in 94 cities.
The Enterprise services provide end-to-end telecom
solutions to corporate customers and national &
international long distance services to carriers. It has
recently forayed into the DTH space. All these
services are provided under the Airtel brand. Bharti
Infratel provides passive infrastructure services and
has a 42% stake in Indus towers.
ANALYST
Ramasubramaniam +91 44 2530 7360
ramasubramanianp@dbschola.murugappa.com
The operating profit for the quarter was at Rs 4,222 crore compared
to Rs 4,231 crore in Q1 FY10. The company was able to increase
its operating margin by 22 bps to 40.78% on the back of lower
access & interconnect charges. The company has reported interest
cost of Rs 159.71 crore which includes a loss of Rs 67.80 crore on
derivatives & forex fluctuation. The provisioning for taxes were
lower by 37% .PAT was at Rs 2,254 crore down 15% QoQ.
Mobile Segment disappoints; Strong performance from
passive Infrastructure
The revenue from the mobile segment stood at Rs 8,123 crore
down by 1.5% QoQ. At the end of the quarter the company had
110.51 million GSM mobile customers on its network, which
accounted for a market share of 23.5% of the all India mobile
market. The company has added 8.14 million mobile customers
during the quarter. During the quarter, Bharti's share of net
additions was 18.6%. Revenue from the Telemedia Services was
flat at Rs 855 crore. The revenue from Enterprise Carrier segment
increased 1% QoQ to Rs 2158 crore. Passive infrastructure
business posted a strong performance with a 4% QoQ growth.
Total tower base of Indus was at 1,00,728 with a tenancy of 1.61
while Bharti Infratel had 29,112 towers with a tenancy of 1.49.

FY Mar EV/EBIDTA
Turnover EBITDA Net Profit EPS (Rs) BVPS (Rs) PE (X) D/E ROE ROCE
(Rs Crore) (X)
2009 A 37,352 14,973 7858.95 20.70 80.07 14.39 8.32 0.42 30.19% 27.13%
2010 E 39,562 16,062 8963.11 23.61 101.92 21.36 7.97 0.41 25.95% 21.69%
2011 E 41,306 16,109 8682.60 22.87 126.57 21.63 7.82 0.38 20.02% 17.05%
Pricing pressure: unlikely to come to an early end

Bharti Airtel has joined the tariff war with the launch of ‘Freedom Plan’. The plan offers one second pulse
plan for its customers. In the ‘Freedom Plan’, Airtel customers will be charged 1 paise per second for all
Local and STD calls to Airtel numbers and 1.20 paise per second for local and STD calls to other
network. The reduction in tariff will adversely impact the Average Realization per Minute (ARPM) in the
coming quarters. This pricing competition is unlikely to come to an early end. The next six-12 months
could see aggressive launches by three to four new players (Datacom, Telenor, S-Tel), which should
further depress RPMs. The fact that these new players are coming in with huge funds, that gives them the
ability to withstand losses over a extended period of time (Telenor estimates an accumulated operational
cash flow loss of Rs 15,500 crore before EBIDTA breakeven in roughly three years), strengthens the view
that this tough environment is likely to continue for the next 12 months at least.

Outlook & Valuation

The ongoing tariff war and the resultant dent in the profitability of telecos has been more intense than
expected. The length of this uncertain period would depend upon, to a large extent, on the M&A norms in
the telecom sector that could facilitate consolidation. Bringing in clarity on the three-year lock-in clause
that prevents promoters of new telecos from selling stake and on transfer of spectrum post such sale will
facilitate an early consolidation in the sector. However till such time the sector will witness an extended
period of low tariffs due to overcapacity.

Bharti Airtel’s performance during the quarter was below expectation. We expect the pressures on
revenue growth to remain as the full impact of the reduced tariff will be felt only in the subsequent
quarters. Revenue growth from other business segments namely passive infrastructure and enterprise
carrier should however mitigate the impact of damp earnings from mobile segment. Bharti’s partnership
with Cisco and Alcatel-Lucent exemplifies this desire to diversify its business. The telecom sector faces
significant headwinds owing to the tariff war which is only likely to worsen with the entry of new players. At
CMP the stock is quoting at 7.8x its FY11E EV/EBITDA, we reiterate our Marketperformer rating on the
stock with a revised price target of Rs 327.

Chart 1: Operating Metrics

600 0.66
526 505
485 478 0.64
500
0.64 450 0.62
0.63 0.63
400
0.58 0.60

300 0.58
331 252
324 0.56
305 278
200
0.56 0.54
100
0.52

0 0.50
Sept 2008 Dec 2008 March 2009 June 2009 Sept 2009

Average Revenue Per User (ARPU) Average Minutes of Use Per User
Average Rate Per Minute (ARPM)
 Trending for Key Performance Indicators

Parameters Unit Sept 2009 June 2009 March 2009 Dec 2008 Sept 2008

Consolidated
Customers 000's 113,440 105,196 96,649 88,270 79,989
Employees No. 18,598 23,789 24,538 25,553 25,616

Mobile services
Customers 000's 110,511 102,368 93,923 85,651 77,479
Pre-paid customers as a % of total customers % 95.2% 94.7% 94.2% 93.5% 92.9%
Post-paid customers as a % of total customers % 4.8% 5.3% 5.8% 6.5% 7.1%
Bharti's mobile subscribers market share % 23.5% 24.0% 24.0% 24.7% 24.6%
Average Revenue Per User (ARPU) Rs. 252 278 305 324 331
Average Rate Per Minute (ARPM) Rs 0.56 0.58 0.63 0.64 0.63
Average Minutes of Use Per User Minutes 450 478 485 505 526
Post-paid Voluntary Churn % 0.9% 1.2% 1.2% 1.1% 1.1%
Post-paid Company Initiated Churn % 1.0% 1.3% 1.4% 1.2% 1.4%
Pre- paid Churn % 4.6% 3.5% 3.2% 2.9% 3.2%
SMS Revenue as a % of Total Mobile Revenues % 4.9% 4.3% 3.7% 4.1% 4.3%
Employees No. 7,322 7,646 7,832 8,115 8,133

Telemedia Services
Customers 000's 2,928 2,828 2,726 2,619 2,509
Average Revenue Per User (ARPU) Rs. 989 1,027 1,071 1,098 1,147
Employees No. 4,705 9,514 10,022 10,827 11,214

Enterprise Services
Employees No. 3,191 3,364 3,646 3,701 3,686

Others
Employees No. 2,604 2,539 2,418 2,330 2,233

Passive Infrastructure Services

Employees No. 776 726 620 580 350
 Q2 FY10 Results summary and comments

Particulars Q2 FY10 Q1 FY10 QoQ Q2 FY09 YoY Comments

(in Rs. Crs)

Revenues 10355.16 10429.94 -0.72% 8923.57 16.04%

Expenses 6132.52 6199.06 -1.07% 5328.44 15.09%

EBIDTA 4222.64 4230.88 -0.19% 3595.13 17.45%

Depreciation 1499.68 1437.18 4.35% 1102.18 36.06%

Other Income 37.9 18.75 102.13% 29.16 29.97%

Includes a loss of Rs
Interest 159.71 -355.54 - 1099.56 -85.48% 67.80 crore on derivatives
& forex fluctuation.

PBT 2601.15 3167.99 -17.89% 1422.55 82.85%

Tax 296.08 472.9 -37.39% -292.11 -

Extraordinary
0 0 - 0 -
income

Adjusted PAT 2254.17 2647.95 -14.87% 1668.13 35.13%

Improvement on the back

EBIDTA margin 40.78% 40.56% 22 bps 40.29% 49 bps of lower access &
interconnect charges.

EffectiveTax rate 11.38% 14.93% -20.53%

Net profit margin 21.77% 25.39% -362 bps 18.69% 308 bps
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Member: BSE, NSE, MSE
Regd. Office: Dare House, 2 (Old # 234) N.S.C. Bose Road, Chennai – 600 001.
Website : www.choladbsdirect.com
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To open Trading Account SMS CDWM TA to 55050

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CHENNAI
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REGIONAL EQUITY MANAGER

CHENNAI Mr. Lakshmanan T S P 9840019701 lakshmanantsp@dbschola.murugappa.com
EAST & WEST Mr. Ananthanarayan 9930103070 ananthanarayanj@dbschola.murugapa.com

NORTH Mr. Ajay Kumar Minocha 9838074353 ajaykm@dbschola.murugappa.com

SOUTH Mr. Shankar P V 9840494132 shankarpv@dbschola.murugappa.com

RESEARCH
Mr. Sandip Raichura Head of Equities 044-25307216 raichuraS@dbschola.murugappa.com
Mr. Radhakrishnan.R Manager Research / Technicals 044-25307353 radhakrishnanR@dbschola.murugappa.com
Mr. Alagappan A Financial Services 044-25307363 alagappana@choladbs.murugappa.com
Mr. Balajee Tirupati Infrastructure 044-25307364 balajeet@dbschola.murugappa.com
Mr. Kumar Rahul Chauhan Sugar, Capital Goods 044-25307364 kumarrc@dbschola.murugappa.com
Mr. Rohith Thomas Mathew Metals, Mining, Cement 044-25307363 rohithtm@dbschola.murugappa.com
Mr. Ramasubramaniam P Telecom, Capital Goods 044-25307360 ramasubramanianp@dbschola.murugappa.com
Ms. Sheetal Aggarwal Information Technology 044-25307365 sheetala@dbschola.murugappa.com
Mr. Sathyajith N Mutal Fund Analyst 044-25307225 sathyajithn@dbschola.murugappa.com

COMPLIANCE
Mr Guruswamy Raj Manager-Compliance guruswamyrg@dbschola.murugappa.com

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STOCK RATING: Outperformer: > 20% upside over the next 12 months; Marketperformer: trade within a +/-20% range over the next 12 months; Underperformer: > 20% downside over
the next 12 months.