Closer To The Ring

This week, ETIG takes a look at the two giants in the telecom space — Bharti Airtel and Reliance Communications. Investors looking for steady growth credentials can bank on Bharti Airtel, while those with a taste for the dramatic can go for Reliance Communications. Santanu Mishra elaborates

BHARTI AIRTEL
    BHARTI AIRTEL is the largest GSM (global system for mobile communications) operator in India with an overall market share of around 25% in the mobile telephony space. From the very beginning, Bharti has exclusively focused on the GSM technology and this turned out to be the right bet, as now, even non-GSM players are making a beeline for this segment. The company is present in all the 23 telecom circles in the country and has a subscriber base of close to 80 million. To diversify its business risk, it has invested in other areas like retail broadband, enterprise services and direct to home (DTH). These new business lines now contribute around one-fourth to the company's total revenue. Bharti has been successful in adding new subscribers to its network and the numbers keep growing.
FINANCIALS: Bharti's operating revenue has more than trebled over the past three years to around Rs 27,000 crore. Its net profit grew by more than five times to Rs 6,400 crore during the same period. The company's operating margin, which has remained at 40%, has come down marginally in the past few quarters. Its return on capital employed (RoCE) has gone down to 34% from
41% one year ago.
    However, the RoCE for the mobile services business segment has actually increased from 50% to more than 100% during the same period. Bharti has been a front-runner in the mobile business in India and has invested early, ahead of its competitors. And this growing RoCE is bearing fruits of the same. GROWTH DRIVERS: Bharti has been focusing on different non-voice businesses. Once the company is allocated 3G spectrum, it will further help it in offering better value-added services. This will drive the average revenue per user (ARPU) and hence, the topline growth. The company has also taken initiatives in areas like DTH and IPTV (internet protocol television), which can become additional growth drivers.
RISKS: Bharti continues to be successful in its GSM business. We believe it will face lesser risk in its core business, at least in the medium term. However,
its investment in new business areas like DTH IPTV bears some degree of risk. OUR TAKE: Bharti has a quality subscriber base, which generates higher revenues for the company and its ARPU is among the highest for listed telecom companies in India. Secondly, its strategy of sticking to the GSM platform has worked well. Unlike CDMA (code division multiple access) players such as Reliance Communications (RCom), which are now diversifying into GSM, the company's first-mover advantage will definitely reap better results than its peers.
    We believe that Bharti will face fewer challenges in terms of adding subscribers and will continue with its steady growth in operating cash flows. So, investors who are willing to take less risk can consider this stock for their portfolio.
    The enterprise value per subscriber (EV/subscriber) for Bharti Airtel and RCom is around Rs 15,500 and Rs 7,000, respectively. The market has probably taken this into account; hence, Bharti trades at a higher priceearnings (P/E) multiple than RCom. In fact, Bharti has remained an outperformer vis-àvis the Sensex for the past one year.
Beta: 0.85 Institutional Holding: 28.7% Dividend Yield: 0% P/E: 17.2 M-Cap: Rs 123,407 cr CMP: Rs 650 RELIANCE COMM
    RELIANCE COMMUNICATIONS (RCom) is the largest CDMA player in India with a subscriber base of 46.2 million. It also offers GSM services in eight circles and has a subscriber base of around 9.8 million. It plans to expand its GSM network across the country. It has an overall market share of 18% in the wireless telephony space. It also offers a host of other related services in and outside the country. In India, it offers broadband services to companies and data-card internet services to retail customers. It has a very strong fibre optic network in India and offers services like virtual private network (VPN), audio and video conferencing among others.
    Outside India, it offers voice and data services across geographies. Its international calling cards are very popular among Indians residing outside the country. The company also offers voice traffic to corporate customers and has a 30% share of wholesale in-bound traffic. It has made a number of acquisitions internationally to strengthen its position in international voice, data and managed network services, among others. Recently, it entered the direct-to-home (DTH) business under the 'Big TV' brand. FINANCIALS: The company's operating revenue for the financial year '07-08 grew at around 32% to Rs 18,827 crore, while the operating profit increased by a little over 44% to Rs 7,960 crore. It maintained a steady growth in operating margin till the quarter ended March '08. However, the margin has declined slightly since then and it currently stands at a little below 40%.
    The company's RoCE is a little lower (~10%) because of higher capital employed in operation. Its global and broadband businesses, which account for around onethird of its consolidated revenues, is growing at a faster rate than its wireless business. But one of the main concerns is its volatile operating cash flow.
    Its consolidated net debt has almost increased by 50% in the past six months, though the debt-equity ratio is still at a
comfortable level of 0.5. GROWTH DRIVERS: RCom has a diversified presence across different service lines. The immediate growth driver could come from its pan-India presence in the GSM service. At the same time, it can also be a challenge for the company to attract new GSM subscribers, as the competition in the segment is increasing by the day with the entry of new players. The company has been investing heavily in different value-added and allied services. If RCom manages to get 3G spectrum, that will help it in offering better products. Reliance Big TV is another growth driver for the company.
RISKS: The company's trying to move from CDMA to GSM space and there's chance of cannibalisation.
OUR TAKE: RCom is venturing into a number of segments which, if executed successfully, will generate higher operating cash flows. Further, the new GSM business lines, if successful, will also help it to gain higher subscriber market share. This may be a better bet for investors who love courting risks.
Beta: 1.3 Institutional Holding: 18.5% Dividend Yield: 0.35% P/E: 7.7 M-Cap: Rs 45,356 cr CMP: Rs 220