A long term call... Review on Bharti Enterprises

One of India’s leading telecom services providers, Bharti Tele-ventures Ltd. (BTL) is a group company of Bharti Enterprises and provides Fixed Line, V-SAT, Internet and Cellular services across various cities and states across India. It currently provides cellular services in six of the twenty two license areas or circles and plans to expand the same to cover another eight-nine circles in the next 12-18 months. Not surprisingly, income from providing cellular services accounts on an average for more than 80% of its total income over the last 3 years. Fixed-line revenue comprises about 10-15% and the balance is contributed by sale of telecom equipment.

Since there have been some good-natured debates and discussions on the prospects of this company w.r.t a review penned by my friend (Mr. burningdesire), I thought I’d put in my opinions too. Without going too much into the nitty-gritty’s of the industry, let me try to only see what the future potential of this company is in the face of rapidly changing scenario in terms of liberalisation and increasing competition. To that effect, I’ll deal pre-dominantly on the positives in favour of and negatives stacked against the company...even in this case, due to constraints posed by time and space, I’ll only stick to the major ones and leave the rest to be contributed by the co-members.

There are many positive Factors

High growth in the telecom sector

India has one of the world's largest and underdeveloped telecom markets comprising pre-dominantly of a high-consumption middle-class population. The current levels of telephone penetration are abysmally low as compared to most developing countries and this offers Indian telecom companies a substantial growth potential. The total number of cellular subscribers in India are placed at 3.5-4 million in 2001 as compared to around 0.3 million subscribers in 1997. The total number of fixed-line subscribers has increased from approximately 14.5 million as of March 97, to nearly 32.4 million as of March 01. The telecom sector has seen the entry of new technologies and this, coupled with a renewed stress on development of the required infrastructure by the Government is expected to boost the fortunes of the telecom sector drastically over the next few years.

Subscriber base of the existing and proposed circles

Approximately 90% of India’s total cellular subscribers belong to BTL’s six existing and nine proposed cellular circles which also account for nearly 56% of India’s total land mass. The company also provides fixed-line services in the Madhya Pradesh circle which is the only circle sharing its boundaries with eight other circles. It is also in the process of developing fixed-line networks in the Delhi, Haryana, Karnataka and Chennai circles.

Brand Image and Products Offered

BTL has a good brand recognition and supposedly enjoys a good reputation (I’ve never tried their services). Its main brand names for its products and services are – Airtel (post-paid products), Magic (pre-paid cellular card), Tango (mobile data) and Mantra Online (Internet Service Provider). All these are brands are well recognised in the markets and the company could leverage the same very effectively to grow in the future.

Good Management Team

BTL has an excellent management team with a proven ability to successfully plan and execute business strategies. The management appears to be very proactive in identifying emerging opportunities and capitalising on them. BTL’s ability to win 8 cellular licenses in the recent competitive bid which is more than any other cellular operator is an indication of the company’s strong execution skills. At the same time, there have also been allegations about the lack of transparency which is quite typical of most large and hitherto closely held companies. Lets hope that the management becomes more opaque and forthcoming in its operations henceforth. The Board of Directors consists of Mr. Sunil Mittal (CMD), Mr. Rakesh Mittal, Mr. Rajan Mittal and various other professionals with long standing knowledge and experience in the telecom industry.

Confidence of foreign investors

BTL has a strong ally and strategic partner in Sing Tel, a leading telecom solutions provider in Asia which enables it to draw upon Sing Tel’s massive data bank of knowledge and technologies. On the financial side, leading Financial Investor’s like Warburg Pincus, International Finance Corporation (IFC, Washington), The Asia Infrastructure Fund Group and New York Life Insurance have pumped in money.

There are also some worrying factors...

Intense competition from the bigger and older fishes

Public sector giants like VSNL, BSNL and MTNL have a definite upper hand when compared to new players like BTL in terms of huge subscriber bases and (depreciated) assets. They are also extremely cash rich and have deep pockets, thanks mainly to all the years of monopoly in the business which may cause them to slash their prices drastically. Should that happen, players like BTL would stand to lose in a major way as they cannot sustain the price wars. This could adversely affect its revenue and profit growth.

Difficult for the company to raise funds in the future

Whereas the Government permits a maximum of 49% investments by foreign investors of the total equity base, the FI’s investment in BTL already is close to 42-43% which makes it difficult for the company to raise funds from this route in the future. The company proposes to raise around Rs. 1000-1500 crores through the current IPO (depending on the final cut-of rate) but a major part of the proceeds be channelised towards setting up the required infrastructure for its cellular services in the nine additional circles.

Financial Performance

the first few years of operations for any telecom company are generally dedicated to making losses, though that may not necessarily be the intention. Its just that the costs incurred on setup and infrastructure and license fees to be paid to the TRAI gobble up so much money that the financial gestation is usually not less than a minimum period of 5 years, then again depending on how fast the company grows. The same has been happening with BTL and it clocked losses aggregating Rs. 104.30 crores for the financial year ended March 31, 2001 (as against a loss of Rs. 45.40 crores in FY00). If you are therefore thinking investing in the IPO with a view to sitting on it for the next 2-3 years, don’t even bother because you’re not going to get any dividend anyway.

The positives clearly outnumber the negatives in this case. The company has it all – a massive subscriber base, good management, proven track record for providing good services and the financial backing of big FI’s on both sides of the Atlantic ocean. The negatives, though fewer in number are certainly worrying and it remains to be seen how successfully the company can maneuver around factors like competition and fiscal and financial prudence.