With the strong growth in the Indian economy expected to continue going forward, along with rapid expansion of coverage area, a continuing fall in tariffs, heightened competitive intensity and greater infrastructure sharing between operators, the Indian mobile subscriber base is expected to grow rapidly going ahead.
We estimate the all-India mobile subscriber base to hit 457.3 million by FY10 (256.2 million in FY08), implying a CAGR growth of 33.6% over FY08-10E.
This will primarily be driven by the ’A’ and ’B’ circle categories that will contribute over 82% of the incremental subscriber additions of the country over FY08-10E.
We expect the company to maintain its market leadership and estimate the company to grow its mobile subscriber base at a CAGR of 36.3% over FY08-10E to hit 115.1 million (62 million in FY08). This implies a subscriber market-share of 25.2% in FY2010E.
On the other hand, we expect ARPUs to decline at a CAGR of around 8% over FY08-10E to hit Rs309.9 in FY10E (Rs366.3 in FY08).
Consequently, we estimate gross revenues of the Mobile Services Business to grow at a CAGR of 32.3% over FY2008-10E. We also expect the other business segments of the company, viz. Telemedia, Long-distance and Enterprise to grow at robust CAGR growth rates between 19-38%.
The company’s Passive Infrastructure Services Business is expected to grow at a decent rate as well. We have factored in Bharti hiving off 30,000 towers from Infratel and transferring them to Indus Towers in FY2009.
Overall, this is likely to lead to a 34% CAGR growth in topline for Bharti Airtel over FY08-10E. On the other hand, we expect a 27.9% CAGR growth to be clocked in bottomline over the same period. We also expect a 120bp fall in EBITDA margins over this period, primarily on account of higher network expansion costs.
The stock is trading at a P/E of 13.8x FY2010E EPS, EV/EBITDA of 7.2x FY10E EBITDA and an EV/subscriber of $213.4 on our FY10E subscriber base.
Going forward, we do not expect any major valuation re-rating for telecom stocks, given the margin pressures likely to be faced by these companies due to falling ARPUs, intensifying competition, network expansion costs, slowing subscriber growth leading to lower topline growth and regulatory risks.
We maintain a BUY on Bharti Airtel with a target price of Rs1,105, with Rs924 as the value of the core business and Rs181 as the value of the towerco - Bharti Infratel.