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Journalism of Courage
The short history of the Bharti Airtel stock could well be the coming of age story of the Indian telecom industry. A lame beginning, followed by doubts and disquiets, then the breakthrough. When Bharti went public in January 2002, its issue, priced at Rs 45 a share, hardly elicited the response worthy of an industry leader in the making. For a good two years, the stock languished in the backdrop of a sluggish stock market and a service that was still seen as the preserve of a few.
A string of policy changes intended to take mobile telephony to the masses 8212; like migration from a fixed licence fee regime to a revenue-sharing regime, radical cuts in call charges and free incoming calls 8212; opened the subscriber floodgates for Bharti. On July 14, the Bharti stock closed at Rs 362 an eight-bagger in barely two years.
Even, among these, MTNL and Tata Teleservices offer, at best, a limited exposure to the Indian telecom story. MTNL is present only in Delhi and Mumbai; its bread-and-butter business, landlines, is a saturated segment in those two cities; and its prospective merger with BSNL, which could be its saviour, is a perennial on-off affair. As for the Tatas, though they are gradually building a pan-India presence in telecom, their listed entity, Tata Tele, covers only Maharashtra. That leaves only two listed players with a national presence, though that number could increase with Hutch-Essar and BSNL planning to list.
Still, that paucity of investment options doesn8217;t take anything away from the promising telecom story, which might have made the big jump, but still has many hops and skips left in its stride. In 2005-06, core revenues of Bharti,
Reliance and Tata Tele increased a combined 123 per cent over 2004-05. Galloping revenues of operators is one part of the story, improving operational numbers and financial fitness is the other.
The telecom business requires an operator to make huge investments, which is like a fixed cost. Once a company sinks money into building infrastructure, the profit mantra is to add subscribers and increase phone usage. As most of them have done handsomely. For instance, Bharti8217;s operating margin has improved from 26 per cent in 2004-05 to 35 per cent in 2005-06. Tata Tele has turned profitable at the operational level. And MTNL, after a period of decline and stagnation, is once again moving ahead on the back of its broadband business, improving market share in mobile telephony and by offering big tariff cuts in its landline rates.
For investors, the question is: can such high rates of growth be sustained? Maybe for a year or two, but unlikely beyond that. A year-on-year revenue growth of 123 per cent of the three listed players, two of whom occupy the top spots in the national pecking order, is extraordinary and expected of an industry in its formative years. Experts say, the Indian telecom story is past that.
The good news is the industry is far from entering a phase of maturity and 30-50 per cent annual growth 8212; great, by any yardstick 8212; is still a realistic possibility. As on March 2006, only one in three people living in urban areas owned a phone, while the corresponding figure for rural areas was one in 50. It8217;s only now that operators are beginning to look beyond the big cities with serious intent. Says Darryl Green, chief executive officer, Tata Teleservices: 8220;The metros are growing at 24 per cent today, 8216;C8217; category at 54 per cent. So, we can8217;t ignore the smaller towns and rural areas at all.8221;
Given rising incomes, falling handset costs, product innovation and growing network, the number of mobile connections are expected to increase from about 100 million today to 150 million in two years time. The target for 2010, outlined by the government, is 500 million. Ambitious? Says Manoj Kohli, president, Bharti Airtel: 8220;Wireless coverage has to go beyond 55 per cent, it is only a matter of the gestation period. Plus, if GDP grows at 7-8 per cent continuously and the monsoons are good, the rural market will definitely grow.8221;
Although subscriber additions in the lower income 8216;B8217; circles Haryana, Kerala, Madhya Pradesh, Punjab, Rajasthan, UP and West Bengal and 8216;C8217; circles Assam, Bihar, Himachal, Orissa and the North-east generate lower average revenue per user ARPU, it8217;s still very profitable for most telecom players.
Most of them have big investment plans 8212; Bharti has lined up Rs 7,000 crore, Reliance a similar amount, Tata Tele Rs 4,000 crore and MTNL Rs 2,200 crore. Despite that magnitude of capital expenditure, their return on capital employed is expected to remain steady over the next two years at least. Says A.K. Sinha, chairman and managing director, BSNL: 8220;Number of subscribers is what matters. As this count goes up, hand-in-hand with value-added services, the ARPU also rises.8221;
In telecom, scale is important, and the biggest facilitator of that is a national presence. A wide reach enables an operator to offer greater coverage and cost-competitive plans. As of now, there are three operators who can claim that coverage BSNL, Bharti and Reliance and two others who look like getting there Hutch and Tata.
Market valuations vary due to factors like growth and management perception. While Bharti gets a premium valuation of 34 times 2005-06 earnings, MTNL gets less than half 16.1. Reliance8217;s historic PE is misleading, as the company was then laden with losses; on projected 2006-07 earnings, the PE drops to about 20. How fast they grow, and how well they manage that growth, will determine who manages to walk the talk on the bourses.
With Pragya Singh in New Delhi
