Nov 22, 2006

Is Bharti Telecom overvalued?

Indian telecom stocks like Bharti, Reliance Communication, etc are enjoying valuations which appear stratospheric going by the conventional discounted cash flow valuations. In this article I attempt to highlight the current irrational valuations.
Bharti Telecom has close to 28.6 million subscribers as on October 2006, and had a share of approximately 23% of Indian mobile telephone market, thus pegging the total mobile telephone subscribers at 125 million. Based on Q2FY07 results, it had an ARPU (Average Revenue Per User) of Rs.505 per month per subscribers. Bharti has a market capitalization of around Rs.110,000 crore.

The valuation assumptions.The post cash flow margin assumed is 14.3% (based on averages of Bharti and Reliance latest quarter results)..ARPU is assumed at Rs.450 per month per subscriber.Cost of equity is assumed at 13%

Conclusion:
The current telecom penetration is around 17.5% (including fixed telephone subscribers). Thus, the implied growth in subscribers appears very high.

The current valuations of mobile telecom companies imply steady revenues from 73 crore subscribers at an ARPU of Rs.450 per month per subscriber. While this analysis is very rough and employs lot of assumptions, it does point to an overall high valuations in the sector.

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