Bharti Airtel: Buy

With its sound positioning across the telecom value chain, the company is likely to lead the sector comeback.



Having been through turmoil in late 2009 and much of 2010, after the entry of several new players and the resultant tariff war, the telecom sector this year looks more settled and may be set for a revival.

In this regard, India's largest mobile operator, Bharti Airtel, with its sound positioning across the telecom value chain looks likely to lead the comeback.

Investors with a two-year horizon can buy the shares of Bharti, given the return in stability in average revenues per user (ARPUs) and realisations per minute (RPM) in its mobile operations as a result of its focus on adding more lucrative subscribers.

Increasing tenancy and sharing revenues in its tower business and growth in its other key segments are other positives.

At Rs 389, the share trades at 17 times its likely per share earnings in FY13. Significant expansion of margins in its tower segment as well as broadband and landline business (telemedia) could broad-base the company's effort to get into a high-growth trajectory.

With peak capex out of its way as far as the mobile segment is concerned, margins in this business may reach a steady state, going forward. Operating margin, at 33.6 per cent, is still healthy and among the highest in the industry.

Given the volatile markets, investors can choose to accumulate the stock on any corrections related to the broader markets.

Key metrics stabilise

Bharti has in recent times consciously reduced the pace of subscriber additions with less than 2.5 million subscribers added per month in the last two to three months.

The company used to garner over three million connections in the earlier quarters. This may have been done to have a more lucrative base to drive its services. This trend is in line with the strategy adopted by large peers such as Vodafone and Idea Cellular, suggesting that the frenetic race to add mobile connections at low tariffs may be a thing of the past.

Bharti's domestic and African mobile ARPUs, at Rs 190 and $7.3 respectively, have remained stable as have minutes of usage per user. RPM, at 42.8 paisa, has remained at about the same levels it was previously.

Given that Bharti has started increasing tariffs for mobile services by as much as 20 per cent, realisations may expand over the next three-four quarters.

Towers hold potential

The tower business (comprising Bharti Infratel and 42 per cent stake in Indus Towers, totalling 78,689 towers) has seen a steady increase in revenues and operating margin to 37.7 per cent currently.

This has been due to increasing tenancy (1.83), nearing two operators a tower and rise in sharing revenues (Rs 33,533 per operator per month currently).

The potential listing of Indus Towers or Bharti Infratel could unlock further value. The telemedia segment too has seen increases in revenues as well as operating margins to 45.5 per cent currently.

These two businesses (tower and telemedia) contribute nearly 19 per cent of the company's revenues and look poised to aid the overall growth.

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