A REPORT

ON

RESEARCH ON BHARTI AIRTEL LTD.

By

AMAN TANDON

11BSP1279

VENTURA SECURITIES LTD.

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A REPORT

ON

RESEARCH ON BHARTI AIRTEL LTD.

By

AMAN TANDON

11BSP1279

VENTURA SECURITIES LTD.

A report submitted in partial fulfillment of

the requirements of

PGPM Program of

Distribution List:

Company Guide: Faculty Guide:

Mr. Vinit Bolinjkar Dr. Ashish Dash

Head of Research (Faculty, IBS Bangalore)

Ventura Securities Ltd.

Date of Submission: 13/05/2012

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AUTHORIZATION

I hereby declare that this project work entitled “RESEARCH ON BHARTI AIRTEL LTD” is my original work, carried out under the guidance of my Faculty Guide – Dr. Ashish Dash and my Company Guide – Mr. Vinit Bolinjkar.

The facts and figures produced in this report are based on my own experience and study. This report neither full nor in part has ever been submitted for award of any other degree.

The project is done for partial fulfillment of PGPM Program from the aforesaid institute during the period 09th April,2012 to 09th June,2012.

We wish him all the best in his future endeavors and career.

Company Guide: Faculty Guide:

Mr. Vinit Bolinjkar Dr. Ashish Dash

Head of Research (Faculty, IBS Bangalore)

Ventura Securities Ltd.

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ACKNOWLEDGMENTS

As a part of curriculum at IBS, the Summer Internship Program aims at overall development of the students by providing them an opportunity to gain corporate exposure and space to apply their theoretical knowledge in practice. No summer internship program can be successful without the support of the people who keep themselves closely involved with the student undergoing the program.

Through this report, I take the opportunity to express and share my sincere gratitude and thankfulness to all those who helped me in making my training at Ventura Securities Ltd., a success. First of all I’d like to thank Mr.Vinit Bolinjkar for making me a part of the new venture where I was given the opportunity to learn about the areas of mutual interest and my approach as a part of training and internship programs.

I’d like to thank Mr. Chintan Desai for the grooming he imparted, valuable inputs and tailoring suggestions to fill the gap which I missed out on, which helped me throughout my tenure. I appreciate Mr. Manish and Mr. Nilesh brief involvement in guiding me by providing valuable inputs and leads.

I would also like to extend my sincere thanks and gratitude to Dr. Ashish Dash, SIP Faculty Guide, IBS Bangalore, assigned for helping me with the project. His suggestion of keeping in sync with the theoretical concepts and learning at every new move was indeed of great help.

Last but not the least I’d like to express my gratitude to my colleagues, who teamed up and worked mutually to accomplish respective goals.

AMAN TANDON

11BSP1279

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EXECUTIVE SUMMARY

The internship commenced as per schedule on 9th April, 2012 at Ventura Securities Ltd. There has been an adequate amount of learning and findings regarding –

The objective of this study is to get an insight of the telecommunications industry and the bodies governing them.

The project also deals in research and forecasting of Bharti Airtel for next 3 years.

The objective of the report is to understand the cost structure of Bharti Airtel.

To understand growth in wireless services of Bharti Airtel for next 3 years.

To understand the growing MVAS Services of Bharti Airtel in untapped rural areas.

A model has been prepared for different services provided by Bharti Airtel Ltd which is serving its operations in India as well as Africa.

This report also looks at the different services provided by Bharti Airtel Ltd. – their Revenues, Capital Expenditures and EBITDA Margin.

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TABLE OF CONTENTS

Page No.

1. AUTHORIZATION………………………………………………………………….......... 3

2. ACKNOWLEDGEMENTS…………………………………………………………………..4

3. EXECUTIVE SUMMARY……………………………………….…………………………..5

4. RESEARCH METHODOLOGIES…………………………………………………….…...8

4.1 Purpose of Study......................................................................................................8

4.2 Objectives of the Report…………………………………………….……………...8

4.3 Methodology…………………………………………………..……………………8

4.4 Limitations……………………………………………….………………………....9

5. INTRODUCTION TO TELECOM SECTOR……………………………………….........10

5.1Sector specific drivers………………………….……………………………………11

5.2 Contribution to GDP of Different Sectors…..…………………….…………….....11

6. INTRODUCTION OF MVAS……………………………………………………………...13

7.1 MVAS Growth Drivers……………………………………………………………13

7.2 Challenges in MVAS……………………………………………………………...13

7.3 Categories in MVAS………………………………………………………………14

7. TELECOM PLAYERS IN INDIA…………………………………..…………………….15

8. TELECOM REGULATORY AUTHORITIES…………………………………………..17

9. TELECOM SERVICES/LICENSES IN INDIA………………………………………….19

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10. FACT SHEET OF BHARTI AIRTEL……………………………………………………20

11. FINANCIAL SNAPSHOT…………………………………………………………………21

12. COMPANY ANALYSIS…………………………………………………………………..22

11.1 Services Offered....................................................................................................23

11.2 Revenue Growth of different services offered………………………………......26

12. FORECASTING OF BHARTI AIRTEL……………………………………………….27

13. VALUATION OF BHARTI AIRTEL…………………………………………………..30

13.1 Investment Rationale………………………………………………………………32

14. COST STRUCUTRE OF BHARTI AIRTEL…………………………………………..33

15. PEST ANALYSIS…………………………………………………………………………34

16. CONCLUSION……………………………………………………………………………36

17. REFERENCES……………………………………………………………………………37

18. GLOSSARY……………………………………………………………………………....38

19. FINANCIALS AND PROJECTIONS………………………………………………….39

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RESEARCH METHODOLOGY

Purpose of Study: - The purpose of this study is to get an insight of the telecom sector and the authorities governing them. This project intends to bring out a projection of next 3 years of different services provided by Bharti Airtel Ltd.

Objectives of the Report: - The following are the objectives of the report:-

The objective of this study is to get an insight of the telecommunications industry and the bodies governing them.

The project also deals in research and forecasting of Bharti Airtel for next 3 years.

The objective of the report is to understand the cost structure of Bharti Airtel.

To understand growth in wireless services of Bharti Airtel for next 3 years.

To understand the growing MVAS Services of Bharti Airtel in untapped rural areas.

Methodology: - The methodology that is being used in this report is basically “EIC Analysis”.

Data collection for the report is done through Airtel website & some data from brochures.

The collection of data is also being used from “Ace Equity” software as well as from “Bloomberg”.

Secondary source of information is primarily used to gather the financial data. Other information relating to telecom sector has been acquired from the analysts working in the organization.

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Limitations:- The following are the limitations while preparing this report:-

The data of Airtel is divided into two parts – Airtel (India & South Asia) and Airtel Africa. So this study is related to only India & South Asia operations of Bharti Airtel Ltd.

The predicted valuation of Bharti Airtel may or may not be the same all depends on the market forces.

There could be certain changes in the regulatory environment of telecommunications industry which cannot be predicted, so the amount forecasted for different services may vary from year to year.

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INTRODUCTION TO TELECOM SECTOR

India’s economic growth has been a tremendous growth story. Driven by the domestic reform measures adopted in the 1980s and the 1990s, India has been on an upward economic growth path for the last three decades. However, a marked acceleration in growth was only witnessed from 2003-04 onward. During the five years preceding the global financial crisis in 2008, India’s economy grew at an annual average growth rate of 8.9 percent to become the second-fastest growing economy in the world after China. It is currently the fourth-largest economy in the world by Purchasing Power Parity (PPP), after the US, China and Japan.

India’s capacity for strong economic growth and resilience was best showcased during the global financial meltdown in 2008-09, when growth plunged to 6.8 percent, only to return to the pre-crisis growth levels within a year. The Indian economy posted a growth of 8 percent and 8.5 percent in the subsequent two years, respectively. Furthermore, in the current fiscal, growth is expected to remain within the range of 8 percent to 8.5 percent, despite inflationary concerns.

.As the demand for signal transmission has increased, the speed of transmission has also increased. Recently, scientists at Karlsruhe Institute of Technology in Germany have succeeded in transmitting 26 terabits (equal to about 700 DVDs or about 4 million average paperback books) of data per second at the distance of 50 kilometers.

The telecommunications industry has impact on every aspect of our lives, from the simple reality of enabling telephonic communication between people in different locations to enabling supply-chains to work seamlessly across continents to create products and fulfill demands. Telecommunication services are now recognized as a key to the rapid growth and modernization of the economy and an important tool for socio-economic development for a nation.

Telecommunications in India can be traced back to the 19th century when the British East India Company introduced telegraph services in India. The past two decades have been considered as the golden period for the telecommunications industry in India with exponential growth and development in terms of technology, penetration, as well as policy. All this has paralleled with the liberalization in this sector and huge investment by both domestic and foreign investors.

Cellular services can be further divided into two categories: Global System for Mobile Communications (GSM) and Code Division Multiple Access (CDMA).

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The GSM sector is dominated by Airtel, Vodafone-Hutch, and Idea Cellular, while the CDMA sector is dominated by Reliance and Tata Indicom. Opening up of international and domestic long distance telephony Services are the major growth drivers for cellular industry. Cellular operator’s get substantial revenue from these services, and compensate them for reduction in tariffs on airtime, which along with rental was the main source of revenue.The reduction in tariffs for airtime, national long distance, international long distance, and handset prices has driven demand.

The MVAS Services in urban areas are growing at a faster pace but in rural areas there are many untapped markets to be covered and provide services such as:- M-Commerce, M-Health, M-Education etc.

Sector-specific drivers

Unlike other growing Asian economies such as China, Thailand and Malaysia, where growth has been driven by the industrial segment, growth in India has been largely driven by the services sector. The share of the overall services sector in India’s GDP increased from 44 percent in 1990-91 to 55 percent in 2010-11, making India a primarily services led economy from a traditional agriculture-driven economy.

The telecom sector has been a significant growth catalyst for the Indian economy. The contribution of the telecom sector to the GDP has increased from 0.7 percent in 199091to 3.6 percent in 2009-10. There is a direct correlation between telecom penetration and GDP growth. As per a World Bank study, a 10 percent increase in Teledensity increases the GDP growth by 0.06 percentage points.

Contribution to GDP of Different Sectors

Agriculture Industry Service

1980-81 35.7% 24.7% 39.6%

1990-91 29.3% 26.9% 43.8%

2000-01 23.4% 26.2% 50.4%

2010-11 19% 26.3% 54.7%

Source - CSO, KPMG Analysis

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1980-81 1990-91 2000-01 2010-110

10

20

30

40

50

60

AgricultureIndustryService

As we can see from the above table the GDP of service sector is growing at a faster pace as compared to agriculture and industry.

The service sector in India accounts nearly 54% of the total GDP. The telecom sector in India is also growing at a faster rate and is the 2nd largest sector contributing to the GDP of India.

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INTRODUCTION OF MVAS

Mobile Value Added Services (MVAS) are those services that are not part of the basic voice offer and are availed separately by the end user. They are used as a tool for differentiation and allow mobile operators to develop another stream of revenue.

MVAS growth drivers:- The following are the MVAS growth drivers:-

There is increase in penetration in mobile services because yet there are many untapped rural and urban markets yet to be covered.

With the launch of 3G there is also a increase in 3G mobile handsets which again is a technological development for the telecom sector.

Indian Subscribers are more prone to applications in their mobiles rather than SMS which is showing a big driving force in value added services consumption.

With the launch of 3G services there is increase in the number of subscribers due to the high speed connectivity and more features at affordable prices.

Challenges in the MVAS market:- The following are the challenges that these MVAS Services are facing:-

Mobile Value added services are limited to urban areas only and are yet to cover the untapped rural market of India.

In the VAS services, the services that are popular and guarantee immediate returns are only considered while the others are not taken into consideration, which restricts the innovative potential.

VAS Services are not gaining popularity as compared to the other service parameters like: - network coverage and tariff plans and these services are yet to be promoted through different media services.

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Categories in MVAS - The following are the categories that comes under MVAS:-

Source -http://www.mairec.org/IJRFM/August2011/10.pdf

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M- Commerce

Retail, banking and other transactions over the mobile phone.

M- Health

M- Health is the use of mobile devices in health solutions such as:- personal apps, patient monitoring systems, updates and alerts etc.

M- Education

Training & Learning related content for organizations, educational institutions pushed to users through mobile applications over SMS, WAP etc.

M- Agriculture

It consists of agriculture related services that disseminate information, aid in decision making and potentially implement the decision.

M- Governance

Strategy & utilization of all kinds of wireless & mobile technology services, applications & devices for improving the delivery of effective governance services

M- Law

It contains services that relate to the judicial process in India. This can include services to track the progress of applications, view case proceedings etc.

TELECOM PLAYERS IN INDIA

Service Providers Subscribers(in mn) Market Share (in %)

Bharti Airtel 178.78 27.22%Vodafone 149.44 22.75%

Rcom 0.00 0.00%

Idea 110.71 16.85%

Tata 0.00 0.00%

BSNL 93.43 14.22%

Aircel 63.26 9.63%

MTNL 5.53 0.84%

Unitech 41.14 6.26%

Videocon 6.20 0.94%

Total 656.86 100.00%

Source - www.moneycontrol.com

27.22%

22.75%16.85%

14.22%

9.63%

0.84%6.26%

0.94%

Market Share (in %)

Bharti AirtelVodafoneRcomIdeaTataBSNLAircelMTNLUnitechVideocon

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Present:-

Telephony Subscribers (Wireless and Landline): 919 million (March 2012)

Mobile phone: 881 million (March 2012)

Yearly Cell phone Addition: 222.7 million (March 2012)

Teledensity: 85.09% (March 2012)

FY09 FY10 FY11 FY12 FY13 E FY14 E FY15 E0.0

200.0

400.0

600.0

800.0

1000.0

1200.0

391.8

584.3

811.6

919.0991.0

1063.01135.0

All India Subscribers (in mn)

All India Subscribers (in mn)

As we can see the total subscriber base in the current year FY12 is 919 million. In the coming years it is going to increase to 1135 million subscribers by FY15.

If there would be such a rise as estimated then the telecom companies’ revenue as well as sales will rise and would be gaining a greater market size as compared to others.

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TELECOM REGULATORY AUTHORITIES

Source - Nishith Desai Associates, Telecom Paper

T el e com C o m m is s io n -The Telecom Commission is an inter-ministerial high level government body. The Commission consists of a Chairman, four full time members, who are ex-officio, Secretary to the Government of India in the Department of Telecommunications and four part time members who are the Secretaries to the Government of India of the concerned Departments. The essential functions of the Telecom Commission are as under:

Policy formulation, licensing and coordination matters relating to telegraphs, telephones, wireless, data, facsimile services and other similar forms of communications.

International cooperation in matters connected with telecommunications.

Promotion of standardization, research & development in telecommunications.

Promotion of private investment in telecom.

Preparing the DOT budget and supervising its operations.

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MINISTRY OF COMMUNICATIONS & INFORMATION TECHNOLOGY

Telecom Commissio

n

DOT TRAI WPC TEC

Department of Telecommunications (DOT) - As per the Indian Telegraph Act,1885 and the Indian Wireless Telegraphy Act,1933 the Central Government has the exclusive privilege of establishing, maintaining and working telegraph and wireless telegraphy equipment and is the authority to grant licenses for such activities. Some of the important functions of the DOT are as follows:-

Licensing and regulation. International matters connected with telecommunications. Promotion of research & development in telecommunications.

Telecom Regulatory Authority of India (TRAI) - TRAI is an autonomous statutory body established under Telecom Regulatory Authority of India Act, 1997. TRAI acts as an independent regulator of the telecommunications industry in the country. One of the main objectives of TRAI is to provide a fair and transparent policy environment which promotes a level playing field and facilitates fair competition amongst various telecom players. The important powers of TRAI are as follows:-

Recommendations regarding the need and timing for introduction of new service providers.

Recommendations pertaining to the grant of telecom licenses including their terms and conditions.

Recommend revocation of license for non-compliance of terms and conditions of license.

Wireless Planning & Coordination Wing: The WPC was created in 1952 and is a wing of the Dot which is responsible for Frequency Spectrum Management, including licensing of wireless stations and caters to the needs of all wireless users (Government and Private) in India. It exercises the statutory functions of the Central Government and issues licenses to establish, maintain and operate wireless stations.

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TELECOM SERVICES/LICENSES IN INDIA

The telecommunication services can be categorized into following main categories which are as under:

(1.) U n ified A c c e s s S e r v ic e s ( “ U A S ” ) and Cellu l a r - M ob i le T el e phone S e r v ic e s ( “ C M T S ” ) -The country is divided into 23 service areas consisting of 19 telecom circle service areas and 4 metro service areas for providing UAS and CMTS.

(a). UAS -UAS operators can provide within their area of operation wire line as well as wireless services in a service area. Wireless services include Full mobile, Limited mobile and Fixed Wireless services.

(b).CMTS -CMTS operators are free to provide within their area of operation all types of mobile services including voice and non-voice messages, data services and Public Call Offices utilizing any type of network equipment.

(2). National Long Distance(“NLD”) and International Long Distance(“ILD”) -

(a) NLD -NLD services refers to the carriage of switched bearer telecommunications service over a long distance and NLD service licensee have the right to carry inter-circle traffic.

(b).ILD -ILD Service is defined as a network carriage (also called Bearer) service, providing the NLD operators in the country International connectivity to network facilities operated by foreign carriers in other countries. ILD service providers can provide bearer services so that end-to-end tele-services such as voice, data, fax, video and multi-media can be provided by Access Providers to the customers.

(3). Internet Service Licenses (ISP) - ISP licensees are primarily allowed to provide services such as internet access (through any method including IPTV) and internet telephony (which is a service to process and carry voice signals offered through the internet by the use of personal computers (“PC”) or internet protocol based equipment).

(4).Mobile Number Portability (MNP) - MNP allows mobile subscribers to retain their existing telephone numbers when they switch from one telecom operator to another irrespective of mobile technology. India has long felt the need for MNP. In September 2009 TRAI introduced the Telecommunications Mobile Number Portability Regulations, 2009. As per the regulations, the subscribers would be allowed to retain their mobile number while moving from (within the same service circle):-

One access provider to another irrespective of the mobile technology. One cellular mobile technology to another of the same access provider.

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Fact Sheet

Name Bharti Airtel Limited.

Business Description Provides mobile, Telemedia, enterprise, digital TV and passive infra services

Established July 07, 1995, as a Public Limited Company

Proportionate Revenue Rs. 5, 94,672 million (year ended March 31, 2011) (As per IFRS)

Proportionate EBITDA Rs. 1, 99,664 million (year ended March 31, 2011) (As per IFRS)

Shares in Issue 209981898 shares as at December 30, 2011

Listings The Stock Exchange, Mumbai (BSE) The National Stock Exchange of India Limited (NSE)

Market Capitalization Market Capitalization (as on May 21, 2012) Approx (1, 14,476 cores)

Customer Base 919 mn GSM mobile customers

Operational Network  Provides GSM mobile services in all the 23 Circles with internet access in 87 cities

Overseas Business Expanded operations in Africa,

Bangladesh and Srilanka.

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FINANCIAL SNAPSHOT

Details(in Rs. mn) FY 2012 FY 2011 Y-O-Y

Customers(000’) 257910 233100 11%

Revenue 714508 595383 20%

EBITDA 237123 200718 18%

Cash Profit 198938 178905 11%

Net income 42594 60467 -30%

Source - Bharti Airtel, Quarterly Reports (2011-2012)

Customers Revenue EBITDA Cash Profit Net Income0

100000

200000

300000

400000

500000

600000

700000

800000

FY 2012FY 2011

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COMPANY ANALYSIS

Bharti Airtel was formerly known as Bharti Tele-Ventures Limited (BTVL) is India's largest GSM mobile operator with more than 900 million mobile subscribers as of March 2012. It also offers fixed line services and broadband services. It offers its mobile services under the Airtel brand and is headed by Sunil Mittal. The company also provides telephone services and Internet access over DSL in 87 cities. The company complements its mobile, broadband & telephone services with national and international long distance services. It also has a submarine cable landing station at Chennai, which connects the submarine cable connecting Chennai and Singapore. Airtel also have services for their corporate customer like end-to-end data and enterprise services to the customers through its nationwide fiber optic backbone, last mile connectivity in fixed-line and mobile circles, VSATs, ISP and international bandwidth access through the gateways and landing station. The Company compliments its mobile and broadband & telephone services with national and international long distance services. It has over 35,252 route kilometers of optic fiber on its national long distance network. For international connectivity to east, it has a submarine cable landing station for international connectivity to the west; the Company is a member of the South East Asia-Middle East-Western Europe – 4 (SEA-ME-WE-4) consortiums along with 15 other global telecom operators. Airtel is a brand of telecommunication services in India operated by Bharti Airtel. Airtel is the largest cellular service provider in India in terms of number of subscribers. Bharti Airtel owns the Airtel brand and provides the following services under the brand name Airtel: Mobile Services (using GSM Technology), Broadband & Telephone Services(Fixed line, Internet Connectivity (DSL) and Leased Line), Long Distance Services and Enterprise Services (Telecommunications consulting for corporate).Bharti Airtel since its inception has been at the forefront of technology and has steered the course of the telecom sector in the country with its world class products and services. The businesses at Bharti Airtel have been structured into five individual strategic business units (SBU’s) –

1. Mobile Services2. Airtel Telemedia Services3. Enterprise Services 4. Digital TV Services5. Passive Infrastructure Services

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The mobile business provides mobile & fixed wireless services using GSM technology across 23 telecom circles while the Airtel Telemedia Services business offers broadband & telephone services in 87 cities. The Enterprise services provide end-to-end telecom solutions to corporate customers and national & international long distance services to carriers and all these services are provided under the Airtel brand.

Airtel has also launched 3G and 4G services which is showing a profitable growth year on year basis.

It also entered into digital TV services with 7.2 million customers as on March 31st, 2012.

In 2011, Bharti Airtel also expanded its operations in Africa which has shown a profitable growth in Africa, Bangladesh and Srilanka.

In the year 2010, Bharti Airtel had a acquisition with Zain covering 42 million subscribers in Africa with a acquisition cost of USD 10.7 billion.

SERVICES OFFERED

The different services offered by Bharti Airtel are as follows:-

Mobile Services (India & South Asia)

Mobile Services (Africa)

Telemedia Services

Digital TV Services

Enterprise Services

Passive Infrastructure Services

B2C Services - We offer mobile services using GSM technology in South East Asia across India, Sri Lanka and Bangladesh, serving a total of 188 million customers in these geographies. These services are basically customer oriented services provided for customers.

Mobile Services (India & South Asia) - The operations of Bharti Airtel in India and South Asia are divided into two distinct Customer Business Units (CBU) with clear focus on B2C (Business to Customer) and B2B (Business to Business) segments. The B2C organization consists of Consumer Business and Market Operations. The B2B business unit focuses on serving large corporate and carriers through Bharti Airtel’s wide portfolio of telecommunication solutions. In India, we have 181.3 million mobile customers as on March 31, 2012, which makes us the largest wireless operator in the country both in terms of customers and revenues. We offer postpaid, pre-paid, roaming, internet, m-

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commerce and other value added services through our extensive sales and distribution network covering over 1.5 million outlets. Our network is present in 5,118 census towns and 454,302 non-census towns and villages in India, covering approximately 86.4% of the country’s population. We also provide 3G services in key cities of the country offering host of innovative services to our customers like Mobile TV, video calls, live streaming of videos, gaming along with access to high speed internet.

Mobile Services (Africa ) - We offer mobile services in 17 countries across Africa, namely: Nigeria, Burkina Faso, Chad, Congo B, Democratic Republic of Congo, Gabon, Madagascar, Niger, Ghana, Kenya, Malawi, Seychelles, Sierra Leone, Tanzania, Uganda, Zambia and Rwanda. This makes Airtel’s footprint across Africa, the largest amongst all telecommunication service providers in the continent. We continue to grow as the most loved brand and currently serve 53.1 million customers across these geographies. We offer wide range of services to our customers, which includes post-paid and pre-paid, roaming, One-Network, Airtel Money, internet services, content, media & entertainment and other non-voice services. We have accelerated the rollout of 3G services by launching the services in 5 more countries this quarter; namely, Ghana, Sierra Leone, Kenya, Nigeria and Tanzania. The company is now offering 3G services in 7 countries.

Telemedia Services - We provide broadband (DSL), data and telephone services (fixed line) in 87 cities with growing focus on various data solutions for the Small & Medium Business (SMB) segment. We have 3.3 million customers of which 1.4 million have subscribed to broadband / internet services, as on March 31, 2012. Our product offerings in this segment include fixed-line telephones providing local, national and international long distance voice connectivity, broadband internet access through DSL; internet leased lines as well as MPLS (multiprotocol label switching) solutions. We remain strongly committed to our focus on the SMB segment by providing a range of telecom & software solutions and aim to achieve revenue leadership in this rapidly growing segment of the ICT market. The strategy of this business unit is to focus on cities with high revenue potential. We recently launched 4G services in Kolkata, based on TDLTE technology, offering a wide range of services to our customers including rich content, superfast access to High Definition (HD) video streaming, multiple chatting, and instant uploading of photos.

Digital TV Services - Airtel digital TV has 7.2 million customers on its Direct-To-Home (DTH) platform. We also offer High Definition (HD) Set Top Boxes and Digital TV

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Recorders with 3D capabilities delivering superior customer experience. We currently offer a total of 310 channels including 14 HD channels and 7 interactive services.

B2B Services -

Airtel Business - Airtel Enterprise Services has recently changed its identity to Airtel business. Airtel business offers wide portfolio of services that include voice, data, network integration, data center & managed services, enterprise mobile applications and digital media. It is India’s leading and most trusted provider of communication and ICT services to large Enterprise, Government, Small & Medium businesses and carrier customers. Airtel business offers network infrastructure, integration & management with a combination of cutting edge global network infrastructure, technical skills and world-class services through a consultative approach. Our portfolio of MPLS and IP services helps our customers in keeping mission critical applications running and in managing the flow of information across the globe. Our data center & managed services include entire suite of managed hosting, storage, business continuity, data security & cloud services. Airtel business also offers digital media services, a centralized online media management and distribution platform akin to a media exchange linking all the content owners, production facilities and screens enabling them to store, forward, share & trade multi versions of produced content to multiple platforms across the globe.

Passive Infrastructure Services - Bharti Infratel provides passive infrastructure services on a non-discriminatory basis to all telecom operators in India. It deploys, owns and manages passive infrastructure in 11 circles of India. Bharti Infratel also holds 42% share in Indus Towers (a Joint Venture between Bharti Infratel, Vodafone and Idea Cellular). Indus Towers operates in 15 circles (4 circles common with Bharti Infratel, 11 circles on exclusive basis). Bharti Infratel has 33,326 towers in 11 circles, (excluding the 35,252 towers in 11 circles for which the right of use has been assigned to Indus Towers with effect from January 1, 2009). Indus Towers has a portfolio of 109,114 towers including the towers under right of use.

Revenue Growth of Different Services Offered

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Particulars(in Rs. mn) Total Revenues % Growth

  Mar-12 Mar-11 Y-O-Y

Mobile Services(India & South Asia) 403091 363400 11%

Mobile Services (Africa) (in $USD) 4137 2878 44%

Telemedia Services 37271 36324 3%

Digital TV Services 44541 41463 7%

Enterprise Services 95109 85555 11%

Passive Infrastructure Services 12960 7760 67%

Source - Bharti Airtel, Quarterly Reports (2011-2012)

From the above table we can see that in all the services provided by Bharti Airtel it has shown increase in revenues Y-O-Y basis. This tells us that the company is in a good position.

If we take a look at the African operations it has nearly increased double due to acquisition of Zain operations by Bharti Airtel.

The passive infrastructure services has shown a growth of 67% Y-O-Y basis because there has been increase in the network operating costs leading to increase in the number of towers.

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FORECASTING OF BHARTI AIRTEL

The following services of Bharti Airtel are forecasted for next 3 years:-

Mobile Services (India & South Asia) -

Particulars (in Rs.mn) FY11 FY12 FY13 E FY14 E FY15 E

All India Subscribers 811.6 919.0 1063.0 1135.0 1207.0

Bharti Subscribers 162.2 181.3 191.3 197.7 207.7

Average Revenue Per User (ARPU)

200.4 187.6 197.6 210.3 223.8

Total Revenue Realization per minute

0.43 0.44 0.46 0.48 0.50

Total Revenues 348488.7 386580.2 441795.2 490773.3 544361.0

Source - Bharti Airtel, Quarterly Reports (2011-2012)

As we can see that there is a rise in revenues in mobile services till FY15 by 10.91%. If we see the all India as well as Bharti subscribers there is a rise in number of subscribers which will certainly boost up the sales of Bharti Airtel.

Mobile Services (Africa) -

Particulars (in $US mn) FY11 FY12 FY13 E FY14 E FY15 E

Wireless Customers 44.2 52.2 59.5 65.5 72.0

Average Minutes of use per user

110.5 178.3 183.7 192.9 202.5

Total MOU 53686 104588 123128.1 144629.5 167047.1

Total Revenues 128907.9 188341.3 217293.2 245029.0 274518.5

Source: - Bharti Airtel, Quarterly Report (2011-2012)

As the number of mobile subscribers is rising we can see that the wireless subscribers are also rising but at a slower pace by 9.92% by FY15E. The average minutes of use per user is also rising in Africa which is a very positive sign because by the data we can see that more number of subscribers are busy using these services.

Telemedia Services -

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Particulars(in Rs.mn) FY11 FY12 FY13 E FY14 E FY15 E

No. of Subscribers 12.9 13.2 13.5 14.5 15.5

Average Revenue per user (ARPU)

945.8 939.0 1016.2 1088.6 1154.9

DSL Customers 5.5 5.6 5.4 5.8 6.2

Total Revenues 36324 37272 63513.4 71339 81075.2

Source - Bharti Airtel, Quarterly Report (2011-2012)

In the Telemedia services there is a rise in the number of subscribers forecasted by 6.89% by FY15E as well as rise in revenues by 13.64% which is a sign of growth in Telemedia services.

Enterprise Services -

Particulars(in Rs.mn) FY11 FY12 FY13 E FY14 E FY15 E

Total LD Minutes 84944 96007 90177 103268 137232

National Long Distance Services

72627 82322 72723.3 77450.7 104296.1

International Long Distance Services

12317 13685 17453.6 25816.9 32935.6

Total Revenues 41292 40676.1 39161.1 46191.4 63225

Source - Bharti Airtel, Quarterly Report (2011-2012)

From the above table we can clearly see that there is a rise in the long distance minutes in national as well as international services by 32.88% by FY15E which suggests that in the near future the subscriber base of corporate as well as customers are certainly going to rise.

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Particulars(in mn) FY11 FY12 FY13 E FY14 E FY15 E

Total Revenues 362688 413536 483363 534715 567632

% Growth 0 14% 17% 11% 6%

EBITDA 125983 142516 171728 187150 198671

EBITDA Margins 35% 34% 36% 35% 35%

Growth in Wireless Services –

Source - Bharti Airtel, Annual Report (2010-2011)

FY11 FY12 FY13 E FY14 E FY15 E0

50000

100000

150000

200000

250000

32%

34%

36%

35%

34%

36%

35% 35%

EBITDAEBITDA Margins

We can observe from the above plotted chart that in FY13 E the EBITDA Margins has gone up to 36% which is a indication that the company’s EBITDA is rising at a good pace.

We believe that the Mobile services business will resume the growth trajectory driven by improved pricing and flow of 3G related Data revenues. We see strong growth in FY13E revenues driven by improved pricing environment and strong 3G related data revenues.

We expect margins to expand over the coming period predominantly driven by pricing improvement and SG&A expenses.

VALUATION OF BHARTI AIRTEL

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The following valuation method is used:-

DCF Valuation

Over the last one month, the INR has depreciated against the dollar by 11%. We however believe that the fundamentals of the company are intact. Therefore we believe that despite the regulatory issues concern the launch of 3G as well as 4G services would certainly prove a revenue hike and its African operations are also growing at a faster pace with more value added services to be launched in India as well as Africa. We initiate on our coverage on the stock with “BUY” recommendation with a target price of Rs. 510.73 per share.

We arrived at one year forward target price of Rs. 510.73 per share based on a DCF valuation approach, with explicit projections considered for the period of FY13 - 15E. We have assumed WACC of 12.25% with a cost of equity of 15.5%.

Rs in mn FY10 FY11 FY12 FY13E FY14E FY15E

EBIT 104801.0 97598.0 111430.0 112097.0 132267.0 154403.0

Less: (1-T) -13416.0 -22596.0 -26432.0 (30562.0) (34852.0) (38636.0)

Depreciation 62832.0 102066.0 131965.0 137336.0 155000.0 163171.0

Less: Working capital -2081.0 -106761.0 -16030.0 (7269.0) (10182.0) (13070.0)

Less: Capital expenditure

-97504.0 -309684.0 -186698.0 (114000.0) (86000.0) (86000.0)

Discounted FCF 54632.0 -239377.0 14235.0 97602.0 156233.0 179868.0

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Particulars Amount (Rs.in mn)

NPV 263193.0

Terminal Value 1380462

Less:- Net Debt 652476

Total Shareholder’s Value 1939776

No. of Shares 3798

Target Price (Rs.) 510.73

Particulars %

WACC 12.25%

Cost of Equity 15.5%

Cost of Debt 7.5%

Risk Free Rate 8%

Beta 0.8

Investment Rationale -

Maintained Leadership in Revenue Market Share - During FY12, the company reported 11% sequential Y-O-Y growth from its Indian operations. The revenue stood at Rs. 403091 mn. The company has reported a 11% growth from last year and it has managed its market leadership.

Rise in 3G Services - While Bharti Airtel has acquired 3G Spectrum in 13 circles, it has been providing 3G services in 19 circles currently. The 3G services are provided in the incremental circles, as the roaming agreements have been signed with other 3G providers. Currently, Assam, Punjab and Orissa are the only 3 circles where Bharti Airtel is not providing 3G services.

Launch of 4G services - The Bharti Airtel is the first company to start its 4G services in Kolkata, Karnataka and about to start in Maharashtra and Delhi. Through the rising 4G services the revenue will boost up as well we would be able to see a large chunk of customers to be attached with Bharti Airtel. This company has also buyed stake of 49% in QUALCOMM which will rise the 4G services in India.

Improvement in African Operations - Over the last one year, Bharti Airtel’s African subscriber base has grown from 65.5 mn to 72 mn and by its expanding 3g services in Africa the revenue will certainly show a hike as well as the total MOU also rose to 16% in FY12 as compared to FY11.

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COST STRUCTURE OF BHARTI AIRTEL

Expenditures (in Rs.mn) Mar-11 Mar-10 % Growth

Access Charges 49872 44357 12%

Network Operating Costs 85712 74467 15%

Cost of Goods Sold 161 203 -21%

Personnel 14512 15305 -5%

Sales and Marketing 31802 24049 32%

Administrative and other 21353 22401 -5%

Total Expenditure 203412 180782 13%

Source - Bharti Airtel, Annual Report (2010-2011)

The access charges of the company have rose to 12% Y-O-Y basis because the charges that the customer pay to the telephone companies has risen due to rise in the number of minutes.

The network operating cost is the cost that includes interconnects and port charges, installation, Power & Fuel, Rent etc. for the network that is being used. It has risen sharply by 15% Y-O-Y basis it means that the network traffic has increased with the increase in the number of towers.

The cost of goods sold has decreased by -21% which shows that the sim card utilization and purchases have decreased which have resulted in more closing stock.

In the personnel expenditure the company has decreased the salaries and bonuses while there is a slight increase in recruitment of employees.

The Sales & Marketing cost has gone up sharply by 32% because of increase in advertisements and sponsorships of Bharti Airtel to promote its brand.

The administrative cost has decreased by -5% because there was a reduction in rates & taxes, rents and repairs and maintenance.

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PEST ANALYSIS

In PEST Analysis we consider four factors which are taken into consideration:-

Political Factors

Economic Factors

Social Factors

Technological Factors

Political Factors - The following are the political factors:-

Government and Legal issues affecting how the company operates.

Regulation- Dominating Brand.

Infrastructure- First mover advantage.

Banning of phone use in certain circumstances.

Health issues- Health ministry.

Economic Factors - The following are the economic factors:-

Purchasing power of customers and company’s cost of capital.

Cost of 3G licenses lowering down.

Reduction in Tariff for calls.

Worldwide recession-both boon and bane.

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Social Factors - The following are the social factors:-

Demographic and cultural aspects of environment which influence customer needs and market size.

Health issues.

Demographics.

Social trends.

Mobile etiquette.

Saturation point.

Technological.

Technological Factors - The following are the technological factors:-

Equipped with new technology.

Fastest to launch new services

Serves high quality fixed line and broadband services.

Strong NLD optical fiber network.

E-commerce portal.

Efficient customer care service.

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CONCLUSION

As per my observation the best indicator of Bharti Airtel through which it can differentiate itself from its competitors is the tariff prices being low and the value-added services and by this 2G auction we can presume a bit rise in prices from different telecom operators.

If we go through the reports we can observe that there is a huge untapped rural market for different MVAS Services which is yet covered some parts in urban areas but none in rural areas.

According to my research I personally observe that the 3G subscribers are growing in numbers but the data usage is very low. It seems like the subscribers have activated 3G services but they are actually not using it.

Bharti Airtel one of the leading telecom companies both in terms of revenue and addition of subscriber base has launched 4G services in Kolkata and it is also going to be launched in Karnataka as well as in Maharashtra too. Bharti Airtel is the first company in India to launch 4G which is showing good results. If we see the profitability position we can say from the results that on y-o-y basis the company has shown profit from the previous year while there is also a slight growth in number of Bharti subscribers in the current year FY12. The EPS of the company being 4.15 which is high as compared to other competitors like: - Idea Cellular, Reliance Communications etc.

If we see the P/E Base of Bharti Airtel it is nearly 67.72 as compared to other cellular operators like Idea Cellular it is 131.49 as well as for Reliance Communications it is 47.08 which shows that Bharti Airtel stands second in terms of P/E Base.

The P/E Base of a company should always be less as compared to their competitors because it tells us that the company’s earnings are more as compared to their market prices. It has shown huge revenues because of its VAS Services like: - Airtel Money, My Airtel My offer, Airtel Shop, Airtel Gifts, Parallel ringing and many more services. The regulatory environment of telecom sector is uncertain and there is also extensive competition among different players so there is also a tariff war among these players.

The future of telecom sector and Bharti Airtel depends on the growing VAS Services provided by different players like: - online buying & selling of goods, m-education, m-agriculture, m-banking, m-governance etc.

So Bharti Airtel should concentrate more on the untapped rural market penetration as well as launch of more and new VAS Services.

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REFERENCES

www.airtel.in

http://www.airtel.in/wps/wcm/connect/about+bharti+airtel/Bharti+Airtel/Investor+Relations/Results/PG_Results?countrytabs=1

www.trai.gov.in

 www.dot.gov.in/osp/Brochure/Brochure.htm

www.dnb.co.in/IndianTelecomIndustry/OverviewTI.asp

http://www.kpmg.com/IN/en/IssuesAndInsights/ArticlesPublications/Documents/mPowering_India_2011.pdf

http://www.dot.gov.in/uso/usoindex.htm

http://www.bseindia.com/bseplus/StockReach/StockQuote/Equity/BHARTI%20AIRTEL%20LTD/BHARTIARTL/532454/Scrips

http://www.airtel.in/wps/wcm/connect/about+bharti+airtel/Bharti+Airtel/Investor+Relations/Results/PG_Results?countrytabs=1

http://www.mairec.org/IJRFM/August2011/10.pdf

BOOKS REFFERED:-

McKinsey Valuation, 4th Edition by John Wiley & Sons, Inc.

Brochures of Bharti Airtel.

Telecom Sector Reports by Nishith Desai & Associates.

DATABASE:-

Ace Equity.

Bloomberg.

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GLOSSARY

PPP - Purchasing Power Parity

GSM - Global System for Mobile Communications

CDMA - Code Division Multiple Access

DOT - Department of Telecommunications

TRAI - Telecom Regulatory Authority Of India

WPC - Wireless Planning & Coordination Wing

TEC - Technical Body for Equipment Approvals

MVAS - Mobile Value-added Services

UAS - Unified Access Services

CMTS - Cellular Mobile Telephone Services

NLD - National Long Distance

ILD - International Long Distance

ISP - Internet Service Licenses

MNP - Mobile Number Portability

EBITDA - Earnings before Interest Tax Depreciation and Amortization

DSL - Digital Subscriber Line

HD - High Definition

CBU - Customer Business Units

DCF - Discounted Cash Flow

Y-O-Y - Year on Year

CAPEX - Capital Expenditure

SMS - Short Messaging Service

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Financials and Projections

Income Statement -

Particulars Rs.(in mn) FY11 FY12 FY13E FY14E

Total Revenues 595383 714508 796601 1784308

Operating Expenses (389271) (463687) (517655) (742292)

Total Operating Expenditure 206112 250821 278946 1042016

EBITDA 199664 243395 277475 886114

Depreciation & Amortization (102066) (133681) (156240) (167894)

Share of Income from Associates (57) (74) (82) (95)

EBIT 97541 109640 121153 718125

Finance Income 3536 2643 1198 35686

Finance Costs (25349) (40828) (42029) (36259)

PBT 75728 71455 80322 717552

Income Tax Expenditure (17790) (17989) (20160) (153510)

PAT 93518 89444 100482 871062

Income Attributable to:-

Equity Holders of the parent 60467 42594 38754 31987

Non-Controlling Interests (1475) (13) (25) (38)

Net Income 58992 42581 38729 31949

Earnings Per Share:-

Basic 15.9 11.2 19.6 28.1

Diluted 15.9 11.2 19.6 28.1

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Balance Sheet -

Particulars Rs.(in mn) FY11 FY12 FY13E FY14E

Equity Share Capital 18988 18988 18988 18988

Reserves and Surplus 497243 514820 583579 1181542

Total Loans 578988 547935 595204 625488

Current Liability 369845 488873 448709 615165

Total Liabilities 1465064 1570616 1646480 2441183

Fixed Assets 1352987 1422532 1448626 1575210

Net Current Assets 112077 148084 197854 865973

Total Assets 1465064 1570616 1646480 2441183

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