ASIAN STOCK FOCUS: India Bharti Tele’s Surge To Continue

By Santanu Choudhury

NEW DELHI (Dow Jones)– Bharti Tele-Ventures Ltd. (532454.BY) is
overpriced by most measures and yet the stock of India’s largest mobile
phone operator is likely to post further gains as analysts prepare to
raise their price targets.
The stock has surged 36% since the start of the year and trades at value
three times that of its regional peers based on its price to earnings
ratio, driven by robust growth in subscriber numbers and the company’s
healthy earnings.
But being India’s only private operator covering all the 23
telecommunications “circles” or zones into which the country is divided
and the only listed mobile services provider, gives the company unique
status in a hot market, justifying its premium, analysts say.
Although competition is heating up in the fast-growing telecom sector,
Bharti’s forays into under-exploited rural areas and its innovative
value-added services, such as text messaging linked to TV programs, will
offset any fall in average revenue per user due to falling tariffs, say
“I am looking at a 10%-15% upside over my 12-month price target of INR273
($6.2),” said Priyanko Panja, telecom analyst at Edelweiss Capital.
The company has long been a favorite of foreign investors. Singapore
Telecommunications Ltd. (T48.SG) owns 30.84% of the company. Warburg
Pincus LLC (WBP.XX) has a 5.74% stake. Total foreign institutional holding
stands at nearly 25%.
Bharti closed at INR310.50 Friday, 36% higher than its price of INR227.85
on Jan. 3, outstripping the benchmark Sensex which has gained 15% in the
same period.
At the current price, Bharti has a market capitalization of INR588 billion
and a price-to-earnings ratio of 40.85 times, well above that of its
regional peers, such as SingTel which has a P/E ratio of about 15 times
its projected 2005-06 earnings.
Still, Vikash Mantri, who handles telecom securities research in SBI
Capital Markets, says Bharti’s valuation is attractive, given its
prospects and the scope of the market.
Citigroup, in a recent note to clients, said: “Though competitive
pressure…remains intense with five large nationwide and some regional
players, we believe there is a shift toward profitability from pure
subscriber additions.”
Citigroup, which has a buy rating on the stock, has raised its 12-month
price target by 54% to INR400.
Morgan Stanley has an overweight rating and recently revised upward its
12-month price target to INR375 from INR304.
“Our revised earnings estimates and price target are based on higher
wireless subscribers and average revenue per user, long-distance
contribution and lower tax outflow assumptions,” Morgan Stanley said in
its mid-August report.
In July, Bharti added 533,218 subscribers, the most of the nine GSM-based
operators, after it introduced cheaper prepaid cards of INR200 each, which
proved popular in the smaller cities and towns. The company had 12.79
million subscribers by the end of the month.
By comparison, unlisted Reliance Infocomm, the second-largest mobile
operator offering both GSM and code division multiple access-based mobile
services, had 12 million subscribers.
Bharti also provides fixed-line and broadband services in 14 zones in
India and has over 970,000 customers in this segment.
For the first quarter ended June 30, the company reported a net profit of
INR5.10 billion, 70% higher than INR2.96 billion a year ago.
Revenue for the quarter grew 48% on year to INR25.17 billion from INR17.05
However, average revenue per user in the mobile segment fell to INR493
from INR515 in the year-ago quarter, a result of the company trying to tap
low-end users and falling tariffs.
Morgan Stanley says Bharti will be able to mitigate the impact of lower
revenue per user in the voice segment by increasing revenue from SMS,
especially those related to television programs that cost four-to-six
times more than a standard SMS.
It estimates the company’s net profit will grow 53% every year till fiscal
2007-08. Earnings before interest and tax are expected to rise 40% in the
User Base To More Than Double By 2007
Like its peers, Bharti has benefited from falling handset prices and
growing incomes in India, where just one in 10 people out of a billion
plus population has a phone.
With nearly 2.5 million subscribers being added every month, India has
emerged as one of the fastest growing telecom markets in the world.
The Indian government has forecast the country will have 250 million
telephones by December 2007, up from over 100 million now. Of the current
total, 59 million are mobile phones users.
Bharti, which is the leader in the GSM segment with over a 27% market
share, stands to gain the most from any growth in the market considering
its pan-Indian presence, say analysts.
Mantri of SBI Capital Markets rates Bharti a marketperformer. He expects
the company to have a subscriber base of 22 million by fiscal 2006-07 as
availability and affordability of mobile phone services increase.
He forecasts India’s mobile phone subscriber base to grow threefold to 150
million by 2008.
According to IDC Asia/Pacific, a Singapore-based telecom and IT research
firm, mobile services revenue in India is expected to more than triple to
S$12.5 billion in 2009 from S$3.7 billion in 2004.
Bharti recently signed a $125 million contract with Finnish
telecommunications company Nokia Corp. (NOK) to expand its network
capacity and cover over 5,000 towns and villages across India.
The company plans to spend $1 billion during the current fiscal year to
March 2006 to extend its coverage to 2,200 more towns. It is now present
in 2,800 towns. The money will also be used to introduce fixed-line and
broadband connections in several major cities in the country.
However, some factors could hurt Bharti’s performance, say analysts.
Mantri says although India’s telecom tariffs are among the lowest in the
world at 2-3 cents per minute, mobile phones still remain out of reach for
many people.
He says costs would have to go down significantly for any substantial
addition to subscriber numbers.
Also, with taxes and other levies accounting for 40% of the total tariff,
operators such as Bharti are dependent on the government to lower such
taxes before they are able to cut charges and improve volume, say


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