ISEC - Bharti Airtel

ICICI Securities report on Bharti Airtel:

Bharti Airtel (BAL) continued to outperform the Indian wireless industry, adding 1.9 million wireless subscribers in May ’07 and taking the total subscriber base to 40.7 million and market share to 23% (up from 20.4% in May ’06). Further, BAL’s revenue market share is notably higher across most circles due to the company registering the best ARPU in the industry on account of early-mover advantage. The surge in net-adds in the month was led by expanding geographical footprint and launch of new attractive schemes. While the pressure on the ARPU and ARPM would continue, we believe that BAL would be able to maintain its leadership position despite increasing competition due to expansive network, high usage customers and better quality services. With valuations remaining attractive at FY09E P/E of 21x and EV/EBITDA of 11x, we reiterate BUY on the stock.

Strengthening subscribers’ market share:

BAL has been one of the leading wireless players since its inception. The company has managed to differentiate itself from the competition and leap ahead by pro-actively investing in the business since the onset of the wireless rally at end-CY04. BAL has pulled up its market share from 19% in Q3FY05 to 23% as on date, adding 24% of total net-adds in the period. We believe that the company’s track record of unbeaten performance is here to stay, with BAL maintaining forefront position, riding on its existing lead and further investments in the business.

But revenue share even higher:

BAL was the first operator to attain pan-India presence and is amongst the first three entrants for 16 of total 23 circles, providing access to higher usage customers. This is reflected in the company recording the highest ARPU in the industry and taking the revenue share to 28% as against its subscriber market share of 21% in Q3FY07. In the prevalent cut-throat competition, service quality would be the differentiating factor as against pricing. We expect that BAL’s ‘Airtel’ brand pull, better quality of service and customised offerings would ascertain its leadership going forward.

Robust financial performance and attractive valuations:

Although BAL’s Infotel business (broadband & telephone, long distance and enterprise services) has performed better than the industry, it has underperformed the wireless business, resulting in a decrease in contribution from this segment from 42% in FY04 to 35% in Q4FY07. Despite the slower growth in the Infotel segment, BAL is expected to report 34% revenue CAGR and 33% earnings CAGR through FY07-09E. The stock is currently trading at FY09E P/E of 21x and EV/EBITDA of 11x, close to most large-cap companies with similar growth profile. We reiterate BUY on the stock, with target price of Rs 956.