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Bharti Airtel (BOM:532454) is India's largest telecommunications company by subscriber base, which stood at 85.7 million in December 2008, and total revenues, which were Rs. 270 billion in 2007/08.^[1][2] The company reported a net profit of Rs. 64.0 billion in 2007/08, up 57.4% from Rs. 40.6 billion in 2006/07.^[2] Globally, Bharti Airtel is the 3rd largest in-country mobile operator by subscriber base, behind China Mobile and China Unicom.^[3] In India, the company has a 24.6% share of the wireless services market, followed by 17.7% for Reliance Communications and 17.4% for Vodafone Essar.^[4]

In 2007/08, Bharti Airtel became the first telecom operator in India to reach a subscriber base of 64.3 million and had the highest net subscriber additions of 25.3 million in a year.^[2] In the 3rd quarter of 2008/09, the company added a record 8.3 million new customers, bringing its subscriber base to a total of 85.7 million.^[5] In the same quarter, the Enterprise Services segment increased its fiber optics cable network to 90,205 route-kilometers and the Mobile Services segment increased population coverage to 79% with the addition of 7 new census towns and 17,361 new non-census towns and villages.^[6]

Business Overview

Bharti Airtel is India's largest telecom company by subscriber base.^[1] It offers GSM services in all of India's 23 telecom circles.^[1]

Business and Financial Metrics

Total Revenue and Profit after Tax from 2003 to 2008 for Bharti Airtel^[2]

In 2007/08, Bharti Airtel had total revenues of Rs. 270 billion, up 46.6% from Rs. 184 billion in 2006/07.^[2] Its net profit was Rs. 64.0 billion, up 57.4% from Rs. 40.6 billion the previous year.^[2] The company grew segment revenues by 54.9% in the Mobile Services segment, 27.2% in the Telemedia Services segment, 25.3% in the Enterprise Services (Carriers) segment and 49.2% in the Enterprise Services (Corporates) segment.^[2] These increases were attributed to a 64.7% increase in the company's subscriber base from 39.0 million in 2006/07 to 64.3 million in 2007/08.^[2] As of 31 March 2008, Bharti Airtel's population coverage stood at 71% and its fiber optics cable network was 73,787 route-kilometers.^[2]

In the 3rd quarter of 2008/09, Bharti Airtel had total revenues of Rs. 96.3 billion, up 38.3% from Rs. 69.6 billion in the 3rd quarter of 2007/08.^[7] Its net profit was Rs. 21.6 billion, up 25.4% from Rs. 17.2 billion the same quarter of the previous year.^[7] The company grew segment revenues by 41.5% in the Mobile Services segment, 15.8% in the Telemedia Services segment, 56.3% in the Enterprise Services (Carriers) segment and 23.8% in the Enterprise Services (Corporates) segment.^[7] Again, these increases were attributed to a 10.5% increase in the company's subscriber base from 77.5 million in the 2nd quarter of 2008/09 to 85.7 million in the 3rd quarter of the same year.^[7] As of 31 December 2008, Bharti Airtel's population coverage stood at 79% and its fiber optics cable network was 90,205 route-kilometers.^[7]

Key Operating Metrics

Source: Average Revenue Per User (ARPU) from June 2007 to December 2008 for Bharti Airtel^[7]

The following metrics are used as indicators of the company's health.

• Average revenue per user (ARPU) per month is computed by dividing the company's total revenues (excluding equipment sales) during a certain period by its average customers in the same period and then dividing this result by the number of months in the period. A higher ARPU is better for the company.
• Churn is calculated by dividing the total number of disconnections during a certain period by the average customers in the same period and then dividing the result by the number of months in the period. A lower churn is better for the company.
• Minutes of usage (MoU) is the duration (in minutes) for which a customer uses the network. It is expressed over a period of one month. Higher MoU is better for the company.
• Subscriber base refers to the number of individuals that use or subscribe to Bharti Airtel's services. A larger subscriber base is better for the company.

The table below shows key operating metrics for Bharti Airtel over the past 7 quarters.

Business Segments

Segment Contribution to Total Revenue in 2007/08 for Bharti Airtel^[2]

Bharti Airtel has 5 business segments: (i) Mobile Services; (ii) Telemedia Services; (iii) Enterprise Services - Carriers; (iv) Enterprise Services - Coprorates; and (v) Passive Infrastructure Services.

Mobile Services (69.7% of revenue, 71.3% of EBIT, 76.2% of net profit)^[8]

The Mobile Services segment provides prepaid and postpaid mobile and fixed wireless services in all of India's 23 telecom circles. In 2007/08, revenue and EBIT from this segment stood at Rs. 218 billion and Rs. 59.3 billion respectively.^[8] Net profit rose 71.9% from Rs. 29.6 billion in 2006/07 to Rs. 51.0 billion in 2007/08.^[8]

Airtel offer mobile services using GSM technology on 900MHz and 1800MHz bands, and are the largest wireless service provider in the country, based on the number of customers. Airtel 93,923,248 mobile customers accounted for a customer market share of 24% of wireless market, as on March 31, 2009.

Airtel offer post-paid, pre-paid, roaming and value added services through their extensive sales and distribution channel covering 1,191,323 outlets. Airtel network is present in 5,060 census towns and 414,906 non-census towns and villages in India, thus covering approximately 81% of the country’s population. Post Airtel launch on January 12, 2009, Airtel services are now fully operational in Sri Lanka. These services have been launched on a state-of-the-art 3.5G network.

Telemedia Services (9.1% of revenue, 7.3% of EBIT, 7.6% of net profit)^[8]

The Telemedia Services segment provides fixed line telephone and broadband (DSL) services in 15 telecom circles across India. In 2007/08, revenue and EBIT from this segment stood at Rs. 28.6 billion and Rs. 6.1 billion respectively.^[8] Net profit rose 227% from Rs. 1.6 billion in 2006/07 to Rs. 5.1 billion in 2007/08.^[8]

Enterprise Services - Carriers (14.0% of revenue, 13.6% of EBIT, 16.7% of net profit)^[8]

The Enterprise Services - Carriers segment provides long distance voice and data services to carrier customers and other Airtel segments. In 2007/08, revenue and EBIT from this segment stood at Rs. 43.8 billion and Rs. 11.3 billion respectively.^[8] Net profit rose slightly from Rs. 11.1 billion in 2006/07 to Rs. 11.2 billion in 2007/08.^[8]

Enterprise Services - Corporates (4.4% of revenue, 6.3% of EBIT, 5.9% of net profit)^[8]

The Enterprise Services - Corporates segment provides voice and data services to corporates and SMEs. In 2007/08, revenue and EBIT from this segment stood at Rs. 13.9 billion and Rs. 5.2 billion respectively.^[8] Net profit rose 89.0% from Rs. 2.1 billion in 2006/07 to Rs. 3.9 billion in 2007/08.^[8]

Passive Infrastructure Services (1.9% of revenue 1.1% of EBIT, 1.1% of net profit)^[8]

In 2007/08, Bharti Airtel formed a joint venture with Vodafone Essar and Idea Cellular to merge their respective passive infrastructure assets in 16 telecom circles across India. A subsidiary, Bharti Infratel, was set up to manage the company's assets in this joint venture and provide passive infrastructure services to all telecom operators in India on a non-discriminatory basis. In the same year, revenue and EBIT from this segment stood at Rs. 6.0 billion and Rs. 1.2 billion.^[8] Net profit was Rs. 0.74 million.^[8]

Shareholding Pattern

The Indian promoter, Bharti Telecom Ltd, holds 45.3% of the total shares of Bharti Airtel Ltd.^[9] The foreign promoters, Pastel Ltd and Indian Continent Investment Ltd, hold 15.6% and 6.3% respectively.^[9] Private corporations that hold more than 1% of the total shares of Bharti Airtel include the Life Insurance Corporation of India (3.4%) and Europacific Growth Fund (1.5%).

Key Trends and Forces

Decreasing ARPU and net profit margin offset by increasing subscriber additions

The Indian wireless market has an average revenue per user (ARPU) of $6.8, one of the lowest in the world.^[11] In the 3rd quarter of 2008/09, the company's Mobile Services segment had an ARPU of $6.7 or Rs. 324, down 2.1% from the previous quarter and 9.5% from the 3rd quarter of 2007/08. In the same quarter, Bharti Airtel had a net profit margin of 22.4%, down 1.3% from the previous quarter and 9.3% from the 3rd quarter of 2007/08. The company's subscriber base, however, stood at 85.7 million, up 10.4% from the previous quarter and 55.3% from the 3rd quarter of 2007/08. In other words, although the company's ARPU and net profit margin have been decreasing, its total revenues and net profit have been increasing due to its growing subscriber base. Bharti Airtel has also been partnering with competitors to keep costs low, expand coverage and leverage larger economies of scale. In 2007/08, the company formed a joint venture with Vodafone Essar and Idea Cellular to merge their respective passive infrastructure assets and provide related services to all Indian telecom operators on a non-discriminatory basis.

Average MoU could fall due to increasing rural demographic of new subscribers

Average minutes of usage (MoU) for the Indian wireless market is 449 minutes, one of the highest in the world.^[11] In the 3rd quarter of 2008/09, the company's average MoU was 505 minutes, down 4.0% from the previous quarter, but up 6.5% from the 3rd quarter of 2007/08. In the same quarter, Bharti Airtel increased population coverage from 77% to 79% with the addition of 7 new census towns and 17,361 non-census towns and villages. Given that just 2% of India's rural population has access to mobile phones and that the company is adding far more non-census towns and villages than census towns to its network, Bharti Airtel expects 55.0% of its new subscribers to come from B and C telecom circles located primarily in rural India.^[12][7][11] For low income subscribers, a mobile phone is often nothing more than a status symbol where outgoing calls are made infrequently and incoming calls are free.^[13] As a result, the addition of more rural subscribers could lower the company's average MoU.^[6]

Regulatory charges are between 17% and 26% of total revenues

With access charges, license fees, revenue share and spectrum charges totaling between 17% and 26% of total revenue, Indian telecom operators have some of highest levies and duties imposed on them.^[14] In the 3rd quarter of 2008/09, regulatory charges amounted to Rs. 23,456 or 24.4% of total revenues for the quarter. Nonetheless, the company's 32.5% return on capital employed (ROCE) was still higher than the 7.8% average for the Indian telecom industry.^[7][14] A host of government agencies regulate Bharti Airtel and its competitors, including the Department of Telecommunications (DoT), the Central Government of India and The Telecommunications Regulatory Authority of India (TRAI).

Falling handset prices could increase wireless penetration rate in rural India

In 2007/08, the average selling price (ASP) of a mobile handset in India fell 38% to Rs. 3,150.^[15] Buyers are also becoming accustomed to more choices at various price points.^[15] With India's average annual per capita income of Rs. 25,000 and average spending of 4% of per capita income on communication-related expenses, Macquarie Research estimates that handset prices need to fall to Rs. 1,000 in order to improve the rate of penetration in rural India.^[15] Keeping in mind the launch of Motorola's $30 handset targeted at emerging markets and that manufacturers like Nokia, Samsung, Motorola and Flextronics are all moving production to India, handset prices are expected to fall.^[16][15] Given that Bharti Airtel expects 55.0% of its new subscribers to come from rurally-located B and C telecom circles, falling handset prices could increase the penetration rate of mobile devices in these areas.

New government policy to facilitate faster rollout of 3G spectrum

In the 2nd quarter of 2008/09, the Indian Department of Telecommunications announced a new 3G policy which set the base price for access to the Indian 3G spectrum at Rs. 20.2 billion, allowed foreign players to participate in 3G spectrum auctions and imposed a hoarding cess of 2.5% per quarter if awarded telcos failed to rollout 3G services.^[17] Third generation wireless, or 3G, is a technology that enables high-speed wireless data transfer for applications like mobile video, secure mobile e-commerce, location-based services and mobile gaming. Using a 2.0G or 2.5G network, a 3 minute song takes between 6 and 9 minutes to download.^[18] Using a 3G network, however, the time taken is between 10 to 90 seconds.^[18] The launch of 3G services would enable the company to shift existing high-usage 2G subscribers to the 3G spectrum, thus freeing up space for new subscribers in the 2G spectrum.^[17]

ADC regime to end in October 2008

The Access Deficit Charge (ADC) regime was introduced by The Telecommunications Regulatory Authority of India (TRAI) to facilitate the smooth transition from a government monopoly in the Indian telecom sector to a liberalized competitive environment.^[19] ADC was the amount payable by private telecom operators to subsidize the lower-than-cost local rates offered to them by Bharat Sanchar Nigam Limited (BSNL).^[20] The subsidy was aimed at paying for the deficit between the cost and revenue of providing basic access from BSNL's fixed lines.^[20] Until March 2008, ADC had two components: 1) all service providers pay 0.75% of their adjusted gross revenues to BSNL; and 2) international long distance service providers pay Rs. 1 per minute on international incoming calls to BSNL.^[21] In April 2008, the 1st component was abolished and the 2nd component was halved to Rs. 0.50 per minute.^[21] TRAI also announted that ADC would be completely phased out in October 2008.^[20]

FDIs inflows increasing into the Indian telecom sector

From April 2000 to March 2008, foreign direct investment (FDI) inflows into the Indian telecom sector amounted to $3.84 billion or 6.8% of the total FDI inflows into the country.^[22] In March 2008, the Central Government of India increased the FDI ceiling in the telecom sector from 49% to 74%.^[23] Furthermore, 100% FDI has been permitted in the Indian telecom equipment manufacturing sector since September 2005.^[24] In recent years, Malaysia's Maxim Telecom and India's Srei Group have both made significant investments into the Indian telecom sector. Vodafone Essar, promoted by England's Vodafone Group and one of Bharti Airtel's main competitors, plans to invest $6.0 billion over the next 3 years to increase its subscriber base from 40 million to over 100 million.^[25]

Competition

Total GSM Subscribers (in millions) in 2007/08 ^[26]

• Reliance Communications is an integrated communications service provider. It has established a pan-India, next-generation, integrated (wireless and wireline), convergent (voice, data and video) digital network that is capable of supporting services spanning the communications value chain, covering over 20,000 towns and 450,000 villages.^[27] It is India’s second-largest wireless operator by subscriber base and is only one of two operators along with Bharti to have coverage in all 23 circles in India.^[15] Its subscriber base was 55 million as of September 2008.^[28] Reliance Communications added a record 5 million subscribers in Janruary 2009.^[29] During 2007-08 Reliance Communications earned total revenue of INR 190.67 billion with EBITDA of INR 81.99 billion.^[30] The net profit registered a 7.4% increase to INR 25.86 billion.^[30]

• BSNL/MTNL the incumbent operator, is India’s third-largest wireless operator by subscriber base and along with government-owned MTNL (incumbent in the key cities of Delhi and Mumbai), provides wireless services in all 23 circles of India.^[15] As on March 31, 2008 BSNL commanded a customer base of 31.55 million Wireline, 4.58 million CDMA-WLL and 54.21 million GSM Mobile subscribers.^[31] During 2007-08 MTNLs total income was INR 51.28 billion and its net profit decreased by 12.7% to INR 4.06 billion.^[32]

• Vodafone Essar is the second largest telecom company in India in terms of subscriber base.Vodafone Essar,^[15] previously Hutchison Essar provides 2G services based on 900 MHz and 1800 MHz digital GSM technology, offering voice and data services in 22 of the country's 23 licence areas.^[33] During 2007-08 Vodafone India earned gross revenue of INR 131.96 billion with EBITDA of INR 43.31 billion.^[34] Its Adjusted operating profit was INR 2.53 billion.^[34]

• IDEA Cellular is a global system for mobile communications (GSM) Mobile Services operator. The Company operates in two segments: mobility services and national long distance.^[35] It has licenses to operate in 11 circles. With a customer base of over 17 million, IDEA Cellular covers approximately 45% of India's population and over 50% of the potential telecom-market.^[36] During 2007-08 idea Cellulars revenues stood at INR 67.37 billion up by 54% and EBITDA of INR 22.69 billion. Its net profit at INR 10.42 billion reflected a 108% growth.^[37]

• Tata Communications is India's largest telecommunication company in international long distance, enterprise data and internet services.^[38] During 2007-08 Tatacommunications earned gross revenue of INR 82.63 billion and registered a net loss of INR 279.7 million.^[39]

Market Share

Bharti Airtel has a dominant market share across the GSM subscribers in the telecom sector. Bharti Airtel's market share is facing competition since an aggressive entry strategy by the new telecom operators is being pursued, as carried out by RCOM for its national GSM rollout.

Bharti Airtel has been able to sustain highest revenues across India in line with its sharp increase in subscriber market share in 2008. Bharti’s biggest revenue market share gains came from circles Rajasthan, Bihar, Andhra Pradesh, Karnataka and Tamil Nadu.^[41]

References

1. ↑ ^{1.0 1.1 1.2} Bharti Airtel Report (Jan 2009), Emkay Research
2. ↑ ^{2.00 2.01 2.02 2.03 2.04 2.05 2.06 2.07 2.08 2.09 2.10} Annual Report (2007/08), Bharti Airtel
3. ↑ Bharti Airtel reports 37 percent jump in Q2 net profit, becomes world's third largest mobile operator (Nov 2008), International Business Times
4. ↑ Telecom Subscriber Update (Nov 2008), India Infoline
5. ↑ Bharti sees 8.3m Q3 subscriber additions sustaining ahead (Jan 2009), MoneyControl.com
6. ↑ ^{6.0 6.1} Bharti Airtel Report (Feb 2009), Indiabulls
7. ↑ ^{7.0 7.1 7.2 7.3 7.4 7.5 7.6 7.7} Quarterly Report (Dec 2008), Bharti Airtel
8. ↑ ^{8.00 8.01 8.02 8.03 8.04 8.05 8.06 8.07 8.08 8.09 8.10 8.11 8.12 8.13 8.14} Segment Contribution, Annual Report (2007/08), Bharti Airtel
9. ↑ ^{9.0 9.1} Promoter and Promoter Group (Dec 2008), Bharti Airtel, Mumbai Stock Exchange
10. ↑ Shareholding Pattern (Dec 2008), Bharti Airtel, Mumbai Stock Exchange
11. ↑ ^{11.0 11.1 11.2} Investor Presentation (Jan 2009), Bharti Airtel
12. ↑ Quarterly Performance Analysis of Companies (Aug 2008), India Telecom Report, Cygnus Business Consulting and Research
13. ↑ A Review of the Indian Mobile Market (Nov 2007), Mobile & Wireless
14. ↑ ^{14.0 14.1} Unlocking the Indian Telecom Industry’s Potential (Apr 2006), Frost & Sullivan
15. ↑ ^{15.0 15.1 15.2 15.3 15.4 15.5 15.6} Report on the Indian Telecom Sector (Mar 2008), Macquire Research
16. ↑ Phones and handsets get cheaper (Nov 2006), Telephony Online
17. ↑ ^{17.0 17.1} Telecom Update (Sep 2008), ArthaMoney
18. ↑ ^{18.0 18.1} AT&T answers the need for speed in Suffolk County (Jul 2008), AT&T Media Newsroom
19. ↑ ADC Shown the Gate (May 2008), Voice&Data
20. ↑ ^{20.0 20.1 20.2} End of the era of access deficit charge (Oct 2008), The Times of India
21. ↑ ^{21.0 21.1} TRAI scraps access deficit charge (Mar 2008), The Financial Express
22. ↑ IT & Telecom (Mar 2008), Alliance for US India Business
23. ↑ Telecom cos get more time on FDI (Mar 2006), Hindu Business Line
24. ↑ DoT wants a spin in retail FDI norms (Sep 2005), The Indian Express
25. ↑ Indian Telecom Industry (Sep 2008), Bharti Airtel
26. ↑ ^{26.0 26.1} Report on Indian Telecom - Credit Suisse 14 October 2008
27. ↑ Reliance Communications - Google Finance
28. ↑ Reliance Communication Expands Relationship With Intec To Transform Its OSS/BSS for Next Generation Readiness - INTEC
29. ↑ Reliance Communications adds a record Five Million New Subscribers in Jaunary 2009 - News - Indian Cellular website
30. ↑ ^{30.0 30.1} Reliance Communications - Annual Report 2007-2008
31. ↑ BSNL Wikipedia article
32. ↑ MTNL financials - Moneycontrol.com
33. ↑ Vodafone Company Website
34. ↑ ^{34.0 34.1} Financials Reports - Vodafone website
35. ↑ Idea - Google Finance
36. ↑ Idea Cellular Company website
37. ↑ Idea Cellular - Annual Reports 2007-2008
38. ↑ Tata Communications Overview
39. ↑ Tata Indicom - Financials Results - NSE
40. ↑ Bharti Airtel information - Moneycontrol
41. ↑ ^{41.0 41.1} Indian Telecom Revenue Insights - HSBC Global Research 11 November 2008