Bharti Airtel

Flow of Presentation

What is important to create Analyze

value for shareholders & Environment
customers • General Opportunities
Goal (vision) • Industry and Threats

• Competition
How these factors affect
 Future growth
Evaluation of the Airtel
current strategy to goal  ROIC
Hence valuation

Analyze Airtel
• Resources Strengths and
• Capabilities Weaknesses

• Core
Competencies Valuation

2
What Markets / Shareholders Value

W
h
at
M Focus
a
rk of
et
s
Valuat
V ion
al
u
e
Focus of Valuation

• Markets value Growth

• Markets value ROIC
• Markets punish growth without future ROIC in view
• Growth can’t remain high for long time
• This decides focus of valuation exercise
• Evaluate every factor through ROIC and Growth lens
A McKinsey & Co. Study
Logical Shareholder Value Process in Telecom Industry

Consumer and
Market Focus

Growth in
revenue

Value for
sharehol
ders
ROIC

Cost control
Introduction to Airtel

Mission
“ We will meet global standards for telecom services that delight
●

customers through customer service focus, empowered

employees, innovative services and cost efficiency. ”

Vision
●
By 2010, Airtel will be the most admired brand in India:
●
Loved by most customers
●
Targeted by top talent
●
Benchmarked by more businesses

Goals
●
Undertake transformational projects
●
Diversify into new businesses
●
To lay the foundation for building a “conglomerate” for the future
Airtel SBU’s

2G/3G
Mobile Services
●

●
Rural Market

Enterprise ●
Carrier
Services
●
Corporate

Telemedia ●

●
Fixed Line
Broadband
Services ●
DTH

Passive ●
Bharti Infratel
Infrastructure
●
Indus Towers
Key Telecom Insights : India

• Sector growing at a CAGR of >43% in the last four years

• Tele-density – 37%
• New customers added per month – >10 Million
• Mobile connections bypassed fixed line
• Country divided into different circles (23 in all)
• Licenses given for each circle
• 3-6 players per circle
• ARPUs lowest in world
• Multiple connectivity solutions (backup connectivities)
• Major players – Airtel, Reliance, BSNL, Vodafone, Tata, MTNL
• Regional players in many sectors
Regulatory Framework
Government Policies

• The Indian government allows FDI of up to 74 per cent

• Universal Service Obligations (USO)
• Unified Access Service License Regime (UASL)
• Mobile Number Portability(MNP)
• 3G Policy and spectrum allocation
Industry Analysis-Segments & Strategy

Metros ‘A’ ‘B’ ‘C’

Growth 2.8% Growth 3.5% Growth 3.9% Growth 4.9%

17% 35% 37% 11%

subscribers subscribers subscribers subscribers

Quality, Costs, Costs,

VAS, Quality On-boarding costs
Costs Quality
Porter’s 5 forces

HIGH
Bargaining
Threat of
power of
new entrants
suppliers

HIGH

Threat of Threat from

substitutes competitors

LOW LOW

Customer
Bargaining
Power

LOW
 Porter’s 5 forces
2. Low switc hing c osts
Bargaining power of
customers(high)

differentiation
1. Lack of

Threat of
substitutes(Low)
1. Broadband services
2. Penetration very low

Threat from competition

1. Large no of players
2. Reduced operating
margins and net margins

1. Entry po ssible through 3G

Threa t of ne w entrants
spectrum allocation
3. Many supp liers available

3.High Cape x
2. IT o utso urcing

2. MNP

(Low)
ma intenance
1. Network o utso urcing and
suppliers(Low)
Barga ining power of
New Entrants Face Problem

• New players at a structural disadvantage

• Operating on the less efficient 1,800MHz spectrum
• Requires 1.5-2.0x the number of base stations to cover the same
area
• Big advantage in rural areas
• Increases Capex and reduces ROIC - one of major factors
contributing to value of stock
• A rough analysis suggests that operators with access to lower
frequencies enjoy about 20% higher EBITDA margins than those
using 1,800MHz
Strategic Barrier for New Entrants

Less efficient
Spectrum
Competition of New Entrants

• Newcomers are perhaps not a serious threat to the incumbents,

they pose a threat to each other
• Especially as new entrants initially target subscribers looking for
the best deal
MNP Threat

• Post MNP the churn rate in most of the markets have clearly shown an
increase for short term(6-12 months)
• Majority of countries have seen large operators losing subscriber market
share to competition
• Operators increase focus on subscriber acquisition, retention,
aggressive advertising, higher distribution commissions, improving
quality of networks, tariff reduction
• This has led to fall in EBIDTA margins

• This may affect Airtel’s ROIC and subscriber base , hence value

• Porting charges(for MNP hold critical importance)

3G Threat

• Many new entrants may use 3G spectrum for voice traffic

• This may reduce Capex per tower in future(long term)
• But this will involve extra license fees for 3G spectrum and reduce
their ROIC in medium term
Existing Competitors - Market Share across India

Parameter Bharti Vodaphone RCom Idea BSNL TATA Commetns

Subscriber 24 17.6 18.5 11 13 9 Overall Market Leader

Share

Share in 19.6 20.6 20.1 5 - 14.4 Vodafone and RCOM

Metros marginally above Airtel
especially in Mumbai and
Kolkata
‘A’ 25.7 18.8 16.2 13.2 11.9 8.2

‘B’ 21.1 19.8 18.7 14 16.6 8.1 Market Leader

‘C’ 33.7 4.3 23 2.5 17.6 5.8

Rural Presence

Operator Rural Customers Percentage

( Mn) of rural
customers

Bharti 29.53 27%

RCOM 15.13 13.8%
Vodafone 20.41 18.6%
BSNL 19.09 17.4%

• Largest player present in rural markets- will assist revenue growth

• Future growth foundation
 Existing Competitors - Business Performance

Parameter Bharti RCom Idea Tata Comments

Teleservices

Net Profit 22.5 17 15 -7 Clearly Most Profitable

Margin

ROIC 29 12 19 -3.9 Clearly Best ROIC

Existing Competitors Profitability - EBITDA margin
Existing Competitors Profitability - EBITDA/min
Opportunities

• New technologies and paradigms

- Advanced technologies like HSPA, WiMAX, WiFi, etc.
- Further evolution of DTH and IPTV markets

• Strong strategic partnerships

- JV to provide services for Airtel’s migration to Next Generation
Networks

• Rural landscape
- Rural tele-density still below 15%
Threats

• Increased revenue may reduce market share and/or revenue

- Many new players migrating to GSM from CDMA
- Many international operators
- Tariff erosion and marketing expenditure

• Economic Meltdown
- Revival expected in the second half of fiscal year
Analysis of Airtel - Resources

• Tangible
- Financial Resources- Low leverage(D/E=0.25), high fund raising
capability
- Existing licenses across country
- Pan-India tower network
- Most extensive under-sea cables giving it a great bandwidth

• Intangible
- Brand Name
- Robust Organization Structure
Airtel- Capability

• Minute Factory Model

• High ROIC
• Marketing
• Integrated Service provider
Analysis of Airtel- Core Competencies

Core Core
Competencie
Competencies
s

Rural
Network

Licences in
900MHz
band
Strengths & Weaknesses

Strengths Weaknesses
• Largest cellular provider in • Low presence in Mumbai and
India Kolkata
• Strong pan-India presence
• Strategic alliances with Sony,
IBM and Ericsson expose them
to knowledge and technology
• Over 100 mn users
Airtel- Future Growth Factors

GROWTH FACTORS

Growth
Factors
Airtel- ROIC factors

• Able to keep ROIC due to operational efficiencies

• Has outsourced non core operations
• Higher ARPU as compared to other players in India
Revenue growth of Airtel
Revenue (Rs. Mn)
FY09 373521
FY08 270122
FY07 184202
FY06 116641
FY05 81558
FY04 50369

• During the quarter ended June 2009, the company had revenues of Rs
99,416 mn; a growth of 17% compared to the quarter ended June 2008
• Revenues from mobile services represented 83% of the total revenues
for the quarter ended June 2009
• Non-voice revenue contributed to approximately 14.8% of the total
revenues for the quarter
Profit (after tax) growth of Airtel
Profit after tax (Rs. Mn)
FY09 78590
FY08 63954
FY07 40621
FY06 20279
FY05 12116
FY04 5837

• The net income for the quarter ended June 30, 2009 was Rs 25,167
mn
User growth of Airtel
Total customer base (000's)
FY09 96649
FY08 64268
FY07 39013
FY06 20926
FY05 11842
FY04 7141

• As on June 30, 2009, the company had an aggregate of 105,195,762

customers, consisting of 102,367,881 GSM mobile and 2,827,881
Telemedia customers
• Its total customer base as on June 30, 2009 increased by 47%
compared to the customer base as on June 30, 2008
Bharti - MTN deal

• $23 - $29 bn deal, combined entity will be a leading telecom

operator
• Bharti will hold 48.8% of MTN’s equity and MTN will hold 36.4% of
Bharti’s equity
• Deal requires approval by 75% of MTN Shareholders and other
authorities
• Bharti benefits from MTN’s experience in 3G and MNP
• Bharti gains access to 21 in Africa and Middle East where ARPU
are higher
• MTN’s cost per BTS is higher so procurement from India is a
possibility
• Capex per minute (in US cents): Bharti 0.5 and MTN 2.7
Bharti – MTN Deal

• MTN’s ARPU is $14 while Bharti’s ARPU is $7, Both have EBITDA
margin = 40%
• Bharti has same EBIDTA with half ARPU and hence a low cost
business
• Africa will see transition from high-tariff, low-traffic to low tariff,
high-traffic market as mobile market develops
• Bharti could acquire stake in MTN in following ways:
- Both MTN and MTN shareholders are issued GDRs by Bharti
- Bharti makes a preferential issue to MTN
- Preferential issue is made to MTN not at the Bharti Airtel level but at
Bharti Telecom level
Risks in Bharti – MTN Deal

• Resistance modifying existing contracts with vendors

• High overseas transportation costs, Customs duty and Local
transportation costs may hinder procurement
• Execution in 21 markets across world
• Population in Africa lower than that of India hence may effect
economies of scale
• Lack of infrastructure in Africa may increase Capex (towers to be
operated by individual generators)
• Debt for the combined entity would increase compared to Bharti’s
low leverage levels
Questions & Answers
Thank You