Bharti Airtel a stock worth buying.

>> Sunday, March 8, 2009

Investments with a one-, two-year horizon may be made in the shares of Bharti Airtel. The company’s continuing leadership in the mobile division, increasing strength of its enterprise carrier division and improvement in the tenancy in its towers suggest that it is well placed to sustain strong earnings growth.

At Rs 602, the stock trades at 11-12 times its likely 2009-10 per share earnings, a steep discount to its historic valuations. Despite a subscriber addition pace of over 2.5 million a month, especially in rural areas, at lower ARPUs (average revenue per user), the company has been able to maintain its EBITDA (earnings before interest, taxes, depreciation and amortisation) margin above 40 per cent.

The company has joined the competition and launched life-time prepaid recharges at Rs 99, which is further expected to augment subscriber additions. Simultaneously, it has rationalised tariffs across the country and removed/reduced free minutes of usage. This has resulted in stabilising realisations per minute at 64-paise levels, though ARPUs are still declining (they remain the highest in the country).

Realisation per minute may be a better metric as it blends minutes of use and revenues generated on an average. Bharti’s mobile subscriber market share has increased by more than a percentage point over the last one year to 24.7 per cent.

The mobile services division may receive a further fillip with the launch of 2G and 3.5G services in Sri Lanka. It remains to be seen if the low-cost model of India is replicated there, but the company rationalised tariffs and made incoming calls free there, which is expected to boost subscriber growth.

This also opens up provisions for increasing ARPUs through value-added services. Bharti’s enterprise carrier division that carries national and international voice and data traffic has been increasing contribution to the company’s revenues (18 per cent currently up from 16 per cent a year ago) and has seen EBITDA margins expand steeply to 45.4 per cent for the latest quarter (up from 32.2 per cent last year). This has been possible due to the fact that the company carries the traffic for several operators, in addition to its own.

The company’s passive infrastructure business is also witnessing increasing action. Tenancy in its towers has over the last three quarters increased from 1.22 to 1.34, as have rentals. Both these divisions have significant opportunities in the form of the entry of several new players entering the fray and incumbent players acquiring a pan-India presence, who will need new towers and require a network to carry voice and data traffic nationally and internationally. The DTH rollout by Bharti, where it adds about one lakh subscribers a month, is another area to watch out. Though this may post losses in initial years, it may be a source of long-term growth.