Bharti: Looking out

India’s largest wireless service provider, Bharti Airtel is expanding its international operations by buying a majority stake in Bangladesh’s fourth largest wireless telephony service provider, Warid Telecom. This is the second major geography Bharti Airtel has ventured into after Sri Lanka where it launched its 2G and 3G service a year ago. Seychelles, Jersey and Guernsey (Channel Islands) are the other geographies where Bharti has a presence. To increase its international focus, the company recently announced that its current CEO Manoj Kohli will take charge as the head of the international business division.

The Warid deal
Bharti Airtel has purchased a 70 per cent stake in Warid Telecom for $300 million, including a nominal payment to existing promoters. The majority of the funds that Bharti will provide will go towards expanding Warid’s network and services. While Warid with estimated revenues of $80 million for CY09 is not expected to add substantially to Bharti’s revenues ($8 billion), the deal gives the company a foothold in a market growing at about 15 per cent annually. Analysts believe Bharti might be eyeing a faster growth (20-25 per cent) of the wireless market and expect the base to double in five years.
 

PRICING PRESSURES
in Rs crore	FY09	FY10E	FY11E
Net Sales	37,352	39,780	42,564
Operating Profit	15,285	14,521	13,795
Net Profit	7,859	8,095	7,528
Cash Profit	13,576	14,865	14,801
P/E (x)	12.5	13.8	14.5
Source: Annual report; E: Analyst estimates

The going for Bharti, however, could be tough as the three largest players in the market have close to 90 per cent subscriber share and are backed by multinational telecom companies. With ARPUs at $3 per month, the company will find it difficult to bring in profits at the operating level unless it triples it 2.9 million base, believe analysts. With the deal sewn in, the company will have to focus on its Indian operations where it has been losing market share (see chart, Losing out). Further, hyper competition has also suggests that revenues and margins will take a knock in the December quarter.

Results may disappoint
Analysts estimates that Bharti’s revenues will be flat while operating profit will fall by about 6 per cent sequentially. UBS estimates that Ebidta margins will fall 280 basis points sequentially to about 39 per cent. Average revenues per user and revenues per minute are also likely to fall below the Rs 250 and Rs 0.50 levels from Rs 324 and Rs 0.64 levels, respectively a year ago.

The outlook, believe analysts, will not change dramatically for Bharti as mobile number portability, dual SIM cards, falling tariffs and increasing competition will make it difficult for the market leader to sustain its share and profitability at current levels. At Rs 318, the stock is trading at 14 times its 2010-11 earnings and considering the flattish revenue growth prospects, is an expensive bet.