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Bharti Airtel - Keep an Eye on its Africa Arm

The company is working on making its Africa acquisition successful

Bharti Airtel Limited is India’s largest integrated private telecom services provider. It is also the first private telecom player to have a footprint in all the 22 telecom circles. With the acquisition of Zain Telecom, it has become one of the world’s major telecom companies. It now has a presence in 18 countries besides India and has the ability to offer its services to almost one-third of the world population. The company is the pioneer of the low-cost model.

India operations
Bharti was able to earn revenue amounting to Rs15,200 crore in Q2FY11 owing to stable revenue from India and improving revenue from Africa. The number of network minutes clocked by the Indian operation remained flat quarter-on-quarter (q-o-q) owing to seasonality and the company’s conscious decision not to drop tariffs further.
Average revenue per minute (ARPM) declined only 0.9 per cent q-o-q (this was one of the lowest q-o-q declines in recent times). This indicates that the Indian operation’s tariffs have stabilised, which is a positive sign. Employee costs rose 7.8 per cent q-o-q. Standalone EBITDA margin stood at 37.3 per cent.

Africa operations
During the second quarter of FY11 the Africa operations showed strong growth in net subscriber additions. The company added 3.7 million subscribers during the quarter after writing off approximately 5.8 million subscribers in Q1FY11.
Average revenue per user (ARPU) also remained stable at $7.4 whereas minutes of usage (MoU) grew 8.7 per cent q-o-q resulting in ARPM drop of 8 per cent.
Higher access charges and licensing fee led to a drop in its EBITDA margin, which stood at 23.9 per cent in Q2FY11 compared to 27.5 per cent in Q1FY11. Consolidated EBITDA margin came in at 33.7 per cent vis-à-vis 36.1 per cent in Q1FY11. The company reported consolidated profit after tax of Rs1,660 crore.

Outlook
The standalone business and its growth prospects are still robust. Launch of 3G services and delay in mobile number portability (MNP) will help Bharti consolidate its position further.
Benign tariff drop and potential upside from data services on the 3G platform are expected to lend further traction to revenue. ARPU trend over the past eight quarters points towards easing price war and decreasing price elasticity in the Indian mobile market.
Zain reported better revenue but disappointed on the margins front. In future, the key challenge for Bharti will be to maintain the momentum in subscriber net additions, fuel revenue growth further, while simultaneously managing costs better.

Valuations
Bharti’s three-year average return on capital employed is 27.62 per cent. Its debt-to-equity ratio at the consolidated level is 1.30 (September 30, 2010).
On December 2 the company had a price-earnings (PE) ratio of 15.52. This is much lower than its five-year median PE of 23.10.
Over the last five years the company has clocked a compounded annual EPS growth rate of 30.79 per cent. The price-earnings to growth (PEG) ratio of the stock comes to 0.50, which is quite attractive.
Buy this stock with a five-year perspective and monitor the African situation closely.