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Published by: Abhishek Kumar on Feb 19, 2012
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Economic Analysis

According to the estimates by the Ministry of Statistics and Programme Implementation, the Indian economy has registered a growth of 7.4 per cent in 2009-10, with 8.6 per cent year-onyear (y-o-y) growth in its fourth quarter. The growth is driven by robust performance of the manufacturing sector on the back of government and consumer spending. GDP growth rate of 7.4 per cent in 2009-10 has exceeded the government forecast of 7.2 per cent for the full year. According to government data, the manufacturing sector witnessed a growth of 16.3 per cent in January-March 2010, from a year earlier. Economic activities which showed significant growth rates in 2009-10 over the corresponding period last year were mining and quarrying (10.6 per cent), manufacturing (10.8 per cent), electricity, gas and water supply (6.5 per cent), construction (6.5 per cent), trade, hotels, transport and communications (9.3 per cent), financing, insurance, real estate and business services (9.7 per cent), community, social and personal services (5.6 per cent). The Gross National Income is estimated to rise by 7.3 per cent in 2009-10 as compared to 6.8 per cent in 2008-09. The per capita income is estimated to grow at 5.6 per cent in 2009-10.

The Economic scenario
The number of registered foreign institutional investors (FIIs) was 1710 as on May 31, 2010 and the total FII inflow in equity during January to May 2010 was US$ 4606.50 million while it was US$ 5931.80 million in debt. Net investment made by FIIs in equity between June 1, 2010 and June 14, 2010 was US$ 530.05 million while it was US$ 875.73 million in debt. As on June 4, 2010, India's foreign exchange reserves totalled US$ 271.09 billion, an increase of US$ 9.88 billion over the same period last year, according to the Reserve Bank of India's (RBI) Weekly Statistical Supplement. Moreover, India received foreign direct investment (FDI) worth US$ 25,888 million during April-March, 2009-10, taking the cumulative amount of FDI inflows during August 1991 March 2010 to US$ 1, 32,428 million, according to the Department of Industrial Policy and Promotion (DIPP).

Growth potential story

The data centre services market in the country is forecast to grow at a compound annual growth rate (CAGR) of 22.7 per cent between 2009 and 2011, to touch close to US$ 2.2 billion by the end of 2011, according to research firm IDC India¶s report published in March 2010. The report further stated that the overall India data centre services market in 2009 was estimated at US$ 1.39 billion.





According to a report by research and advisory firm Gartner published in March 2010, the domestic BPO market is expected to grow at 25 per cent in 2010 to touch US$ 1.2 billion by 2011. Further, the BPO market in India is estimated to grow 19 per cent through 2013 and grow to US$ 1.8 billion by 2013. According to the report, the domestic India BPO services market grew by 7.3 per cent year-on-year in 2009. The BMI India Retail Report Quarter 3, 2010 released in May 2010, forecasts that total retail sales will grow from US$ 353.0 billion in 2010 to US$ 543.2 billion by 2014. According to a report titled 'India 2020: Seeing, Beyond', published by domestic broking major, Edelweiss Capital in March 2010, stated that India's GDP is set to quadruple over the next ten years and the country is likely to become an over US$ 4 trillion economy by 2020. India will overtake China to become the world's fastest growing economy by 2018, according to the Economist Intelligence Unit (EIU), the research arm of Londonbased Economist magazine.

Inflation India has been the cynosure for the past few years in the global economic arena owing to its changing inflation patterns. Between the fiscal year 2004-05 and 2007-2008, India had experienced an average growth rate of more than 9%, but the global crunch pinched the economy so hard that the economy gave in to the adverse external shocks and few sectors experienced a slump. Inflation in India 2009 stands at 11.49% Y-o-Y. The inflation rate is referred to the general rise in prices, taking into consideration the common man's purchasing power. Inflation is mostly measured in CPI.

In 2008 industry bodies, policy makers were all worried with the steadily-mounting inflation. The middle of the year augmented the tension as the majority of the population was wary of a double-digit inflation but things changed within few months. Inflation in India actually fell below 1% during the third week of March, 2009. The moderate inflation is the desirable of all too much of it or too less of it, in every way worries the policy makers. Understanding in the right manner inflation is such a situation when too many people chase too few goods and too few services, which automatically makes the prices of the goods and services high because of the high demand. At the same time, when inflation falls below the desired mark (in the negative territory), then too few people chase too many goods and too many services, making the prices of the goods and services under-priced. The India inflation is actually measured by the Y-o-Y variation in the Wholesale Price Index. While the inflation as measured by WPI is at present at a very low level, the inflation measured by the Consumer Price Index is at elevated levels of 9 to 10%

Inflation in India Statistics (%)




Mar Apr

May Jun


Aug 9.02 7.26 5.98

Sep 9.77 6.40 6.84

Oct 10.45 5.51 7.63

Nov 5.51 6.72

Dec 5.51 6.72

2009 10.45 9.63 8.03 8.70 8.63 2008 5.51 2007 6.72 2006 4.39 5.47 7.87 7.81 7.75 7.56 6.72 6.67 6.61 5.31 5.31 5.26 6.14

9.29 11.89 7.69 8.33 5.69 6.45 7.89 6.90

11.72 11.64 11.49

10.45 9.70

Industry Analysis

The Indian telecommunications industry is one of the fastest growing in the world. According to the Telecom Regulatory Authority of India (TRAI), the number of telephone subscriber base in the country reached 653.92 million as on May 31, 2010, an increase of 2.49 per cent from 638.05 million in April 2010. With this the overall tele-density (telephones per 100 people) has touched 55.38. The wireless subscriber base has increased to 617.53 million at the end of May 2010 from 601.22 million in April 2010, registering a growth of 2.71 per cent. Although the growth of telecom industry is stabilizing but with 3G operations and expansions undertaken by Bharti Airtel it is expected to grow at a higher rate in future. Currently Telecom industry is growing at a CAGR of 12.5 %.

Major Players in the Sector
y y y y y

Bharti Airtel Vodafone Idea Reliance Communications Tata Communications

CMP of the major Players in the Industry (as on 1 st September 2010)

Share Price
400 300 200 100 0 Bharti Airtel Share Price 337.3 Idea 72.1 RCOMM 163.7 Tata Communication 348.7

Share Price

Major Investments The booming domestic telecom market has been attracting huge amounts of investment which is likely to accelerate with the entry of new players and launch of new services. According to the Department of Industrial Policy and Promotion (DIPP), the telecommunications sector which includes radio paging, mobile services and basic telephone services attracted foreign direct investment (FDI) worth US$ 2,554 million during 2009-10. The cumulative flow of FDI in the sector during April 2000 and March 2010 is US$ 8,930.61 million. Further, the Indian telecom sector is expected to witness investment of around US$ 40 billion during the current fiscal, as per the Telecom Equipment and Services Export Promotion Council. With the development of 3G, expansion of the current networks and widening of Broadband Wireless Access (BSA) network, the investment in the sector is likely to increase from the US$ 20 billion witnessed last year. As per an industry report the telecom industry witnessed merger and acquisition (M&A) deals worth US$ 22.73 billion during April-June 2010, which represented 67.19 per cent of the total valuation of the deals across all the sectors during the period analysed. The sector had seen M&A deals of around US$ 439.4 million during April-June 2009. The biggest M&A deal in the sector was made by Anil Ambani's Reliance Communication Ltd that merged GTL infrastructure Ltd, its telecom tower business, for US$ 11 billion. Other major M&A deals included acquiring of Kuwait-based Zain telecom's African business for US$ 10.7 billion by Bharti Airtel and acquisition of Infotel broadband for US$ 1032.26 million by Reliance Industries.

Going Global In March 2010, Bharti Airtel bought the African operations of Kuwait-based Zain Telecom for US$ 10.7 billion, driving the Indian player into the league of top ten telecom players globally. 3G Services The Department of Telecom has taken the pioneering decision of launching of 3G services by BSNL and MTNL and initiation of process for auction of spectrum for 3G services to private operators. Allocation of spectrum for third-generation (3G) and broadband wireless access (BWA) services was done through a controlled simultaneous, ascending e-auction process.All the 71 blocks that were put up for auction across the 22 service areas in the country were sold, leaving no unsold lots. Auction for 3G spectrum ended on May 19, 2010 after 183 rounds of intense bidding over a span of 34 days. The Government is expected to morph revenue worth US$ 14.6 billion. All the available slots across 22 circles have been sold to seven different operators. A pan-India bid for third generation spectrum stood at US$ 3.6 billion. The Anil Ambani-led Reliance Communication bagged the highest number of 13 circles at a cost of US$ 1.9 billion, followed by Bharti Airtel in 12, Idea in 11 and Vodafone and the Tatas in nine circles each, according to the Department of Telecommunications. MTNL and BSNL will have to pay US$ 1.42 billion and US$ 2.2 billion respectively. Rural Telephony According to the Economic Survey 2009-10, rural tele-density has increased from 1.2 per cent in March 2002 to 15.1 per cent in March 2009 and further to 21.2 per cent at the end of December 2009. Rural telephone connections have gone up from 12.3 million in March 2004 to 123.5 million in March 2009 and further to 174.6 million in December 2009. The share of private sector players in the total telephone connections has steadily increased from around 14 per cent in 2005 to 31 per cent as on December 31, 2009. During 2008-09, the growth rate of rural telephones was 61.5 per cent as against 36.7 per cent for urban telephones. The private sector has contributed significantly to the growth of rural telephony by providing 81.5 per cent of the rural phones as on December 31, 2009. It is proposed to achieve rural tele-density of 25 per cent by means of 200 million rural connections by the end of the Eleventh Five Year Plan. The government plans to connect all revenue villages in India either through landline, mobile or WLL by February 2011.

Policy Initiatives The government has taken many proactive initiatives to facilitate the rapid growth of the Indian telecom industry.
y y



In the area of telecom equipment manufacturing and provision of IT-enabled services, 100 per cent FDI is permitted No cap on the number of access providers in any service area. In 2008, 122 new Unified Access Service (UAS) licences were granted to 17 companies in 22 services areas of the country Revised subscriber based criteria for allocation of Global System of Mobile Communication (GSM) and Code Division Multiple Access (CDMA) spectra were issued in January 2008 To provide infrastructure support for mobile services a scheme has been launched to provide support for setting up and managing 7,436 infrastructure sites spread over 500 districts in 27 states. As on December 31, 2009, about 6,956 towers had been set up under the scheme

The Road Ahead According to a report published by Gartner Inc in June 2009, the total mobile services revenue in India is projected to grow at a compound annual growth rate (CAGR) of 12.5 per cent from 2009-2013 to exceed US$ 30 billion. The India mobile subscriber base is set to exceed 771 million connections by 2013, growing at a CAGR of 14.3 per cent in the same period from 452 million in 2009. This growth is poised to continue through the forecast period, and India is expected to remain the world's second largest wireless market after China in terms of mobile connections.

Company Analysis
Airtel comes to you from Bharti Airtel Limited, one of Asia¶s leading integrated telecom services providers with operations in 19 countries across Asia and Africa. Bharti Airtel since its inception has been at the forefront of technology and has pioneered several innovations in the telecom sector. The company is structured into four strategic business units - Mobile, Telemedia, Enterprise and Digital TV. The mobile business offers services in India, Sri Lanka and Bangladesh. The Telemedia business provides broadband, IPTV and telephone services in 89 Indian cities. The Digital TV business provides Direct-to-Home TV services across India. The Enterprise business provides end-to-end telecom solutions to corporate customers and national and international long distance services to telcos. Latest News about Bharti Airtel
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Bharti Airtel launches Global Data Services in Thailand & Malaysia. Bharti Airtel and National Geographic Channel begin the hunt for µYoung Explorer¶. Airtel digital TV voted favourite DTH service in key metros in customer satisfaction survey on India¶s Favourite DTH operator. Bharti Airtel Achieves Gold Certification from Cisco India. Airtel digital TV Adds Five New Channels to its Bouquet ± expands bouquet to 215. Nokia¶s Ovi Life Tools launched on Bharti Airtel¶s mobile service.

Fundamentals of the company
y y y y y

Expansion to give Bharti a strong foothold amongst peers. Un-tapped opportunities in the domestic market to aid growth. 3G rollout would be a reliever to the current pain that the Indian telecom industry is going through. Zain to provide material uplift to Bharti¶s earnings growth profile. Domestic business is stabilizing.

Financing Mix of Bharti Airtel Year 2007-2008 2008-2009 2009-2010 Debt/Equity Ratio .32 .28 .13 

Based on the standard of <1, Airtel has a huge leveraging capacity available for further growth.  Over the three years there has been a decline in the debt equity ratio which is indicative of the fact that its highly cash rich company and they are not relying on the external sources for fund raising

Comparison of Amount of Equity and Debt
40000 35000 30000 25000 20000 15000 Share Capital Reserves a d s rpl s

10000 5000 0 2006
Share Capital

Total Debt





1893.88 1895.93 1897.91 1898.24 1898.77

Reserves a d s rpl s 5437.42 9515.21 18283.82 25627.38 34653.32
Total Debt

4796.29 5310.81 6570.34 7713.65 5038.92

It can be seen that reserves and surplus of the company has increased exponentially compared to the increase in the total debts of the company. The increase in the reserves and surplus is mainly on account of increase in the profit and loss A/c balance for the years, reflecting the strong operating income of the company. Thus it can be seen that the company has consistently tried to lower its Debt-to-equity ratio and it has gone for further investments mostly by utilizing its own reserves. The fact that the company did not distributed dividends till the last year supports the fact that the company has been going for investments by internal funding more than external sourcing of funds.







Port r¶s fi

forces Model

B rgai i g Power of Customers

y y y y y

Lack of differentiation among service providers and t eir products. Cut t roat Competition Low Switching Cost Attractive schemes for new connections No differentiation on the basis of geographical coverage

Bargai i g Power of Suppliers

y y y y

Low switching Costs on the part of the buyers Large number of competitors in the market. No differentiation between the products. Pricing based Competition

Threat of New Entrants

y y y



Entry through 3G. Although the initial capital investments are huge but players are ready to enter considering the attractiveness of the market. ISPs with gateways, radio-paging and end-to-end bandwidth, FDI is permitted up to 74% with FDI, beyond 49% requiring Government approval. These services would be subject to licensing and security requirements. FDI up to 100% is allowed for the following activities in the telecom sector :  ISPs not providing gateways (both for satellite and submarine cables);  Infrastructure Providers providing dark fiber (IP Category 1);  Electronic Mail and Voice Mail. Increasing the limit of FDIs in Telecom Sector has brought the fear of competition from foreign players.

Threat of substitutes

y y

Threat from landline, CDMA etc is high. Airtel deals only in GSM. Threats are also present in broadband market from skype, gtalk etc.\

Competitive Rivalry within an industry

y y y y y

Intensity of competition is very high in telecom industry. Low profit Margins. No significant differentiation. Large number of competitors in the market. Entry of RIL through BWA.

SWOT Analysis


y y

y y

One of world¶s leading providers of telecommunication services with presence in all the 22 licensed jurisdictions in India, and operations in Srilanka , Bangladesh and now in Africa Largest wireless service provider in India Largest private integrated telecom company in India

Not very significant presence in rural markets. Less amount spend on advertisements than its competitors.

y y y

y y y

Latest technology and low cost advantage. Fast-expanding IPLC market Untapped markets in India and abroad

High competition both from Indian and foreign companies. Saturation point in basic telephony service Re-entry of RIL into telecoms through BWA

Key Financials of the company

Attribute PE ratio EPS(Rs) Sales (Rs. Crore) Face Value Net Profit Margin (%) Last Dividend(%)

Value 13.84 24.82 9323.70 5 26.40 20

Date 06/09/2010 March, 2010 June, 2010

March, 2010 28/04/10

Key Ratios of the company

Current Ratio Quick ratio Debt Ratio Debt Equity Ratio Interest coverage ratio Inventory Turnover Ratio Debtors Turnover ratio Asset Turnover Ratio Gross Profit Margin Net Profit margin Return on equity EPS Dividend Per Share Price Earning Ratio Price to Book Value

FY 2007-08
0.57 0.55 0.33 0.30 34.38 453.06 12.28 1.03 29.08 23.99 30.94 32.90 0 12.22 3.78

FY 2008-09
0.69 0.65 0.38 0.26 46.28 547.83 12.78 1 29.33 22.58 28.13 40.79 2 10.34 2.91

FY 2009-10
0.72 0.72 0.14 0.14 -11.50 1307.05 15.30 0.81 29.97 26.40 25.78 24.82 1 13.83 3.66

The above mentioned ratios are some of the important ratios of Bharti Airtel. Current ratio and quick ratio are the ratios that indicate short term liquidity of the company i.e. whether the company will be able to meet its short term obligation or not. The only difference between current ratio and quick ratio is that quick ratio is more conservative than the current ratio, a more well-known liquidity measure, because it excludes inventory from current assets. Inventory is excluded because some companies have difficulty turning their inventory into cash. Although Airtel has the lowest current and quick ratio among its competitors but it is increasing significantly. Current ratio has increased from 0.57 in 2008 to 0.72 in 2010. Therefore, this increase shows a positive trend.

Debt Ratio and Debt equity ratio help the investors in judging the long term liquidity position of the company. Debt Ratio is a ratio that indicates what proportion of debt a company has relative to its assets. The measure gives an idea to the leverage of the company along with the potential risks the company faces in terms of its debt-load and debt Equity Ratio is a measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets and is used by the investors to know about the long term liquidity of the company. The lower the debt and debt equity ratio the better it is as it indicates that the company has less burden of debt and therefore has comparatively lower risk. Airtel has maintained lowest debt and debt equity as compared to its competitors and therefore creates a benchmark for its competitors. The Inventory turnover is a measure of the number of times inventory is sold or used in a time period such as a year. The equation for inventory turnover equals the cost of goods sold divided by the average inventory. Bharti Airtel has a very high inventory turnover ratio and it indicates that it is producing and selling its products quite efficiently. The inventory turnover ratio has increased by 138.5 % in the year 2010 which is a positive sign for the company. Asset Turnover ratio is useful to determine the amount of sales that are generated from each rupee of assets. In case of Bharti Airtel asset turnover ratio is decreasing. The company needs to improve on this front. Although it has lowest assets turnover ratio, it is still the highest among its peers. Gross profit margin and net profit margin ratios indicate about the operational efficiency of the company. Both the ratios have been showing an increasing trend in the three mentioned years. This indicates increasing efficiency of the company. ROE shows the amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. Return on equity is showing a decreasing trend. Although ROE of Airtel is decreasing but it is still the highest as compared to its peers in all the three years which shows that it is performing well as compared to its competitors. Earning per share is calculated as Profit after Tax / Number of shares. EPS of Airtel has decreased in the year 2009-10 as the company announced a split in the ratio of 2:1 which doubled its shares. Airtel has high retention ratio which is contributing to the good performance of the company. Airtel in the past did not declare any dividend but it has started declaring dividend from the year 2008-09 and declared a dividend of 20% in the FY 2008-09 and FY 2009-10. The P/E ratio (price-to-earnings ratio) of a stock (also called its "P/E", or simply "multiple") is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher P/E ratio means that investors are paying more for each unit of net income, so the stock is more expensive

compared to one with lower P/E ratio. Airtel has a PE ratio of 13.84 which is lowest among its competitors. Airtel has a low PE ratio with strong fundamentals that shows that the stock is undervalued and price of the stock is expected to grow in future. Investors taking decision on the basis of PE ratio should buy the stock. A ratio used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share. Airtel¶s Price to Book Value ratio is showing variable trend and its lower than its ratio in the year 2007-08. This shows that the stock is still undervalued and should be bought by the investor The above mentioned ratios indicate strong fundamentals of the company and indicate bright future prospects for the company. Therefore, price of the stock is expected to grow in future and is good for investment for long term.


The valuation is based on dividend discount model of stable growth. Stable growth model has been followed because the beta calculated for Bharti Airtel for last three years came out to be 0.75.Beta is less than 0.8. Therefore, the growth for Bharti Airtel is expected to be stable. Ke = Rf + Where, Rf = Risk free rate = Beta Rm-Rf = Risk Premium Ke = 5.6 + 1(7.5) = 13.1 % {Values are assumed as per the criteria for Asian markets and stable growth } (Rm ± Rf)

Growth rate = 12.5 %

{Based on the EPS growth for last 3 years}

Dividend in the year 0 = Rs. 2 per share Dividend in the Year 1 = Dividend in the year 0 (1 + growth rate)

Price = Dividend in the year 1 Ke - g Dividend in the year 1 = 2(1+.126) = Rs. 2.25


Price =


.131- .125 = Rs. 375

The price which is calculated is the intrinsic price of the company i.e the actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. The Current market price of the stock is Rs. 339.40 (as on 4th September, 2010).Hence if we look at the intrinsic price on the stock, it is evident that the stock is underpriced in the market and therefore should be bought and the target price should be Rs. 375.

Technical Analysis

Technical Chart

The stock of Bharti Airtel is showing an upward trend. It has started showing an upward movement and is expected to continue with it. As, Bharti Airtel has successfully acquired Zain Africa¶s operations, the integration of which is expected to be completed by December 2010 and has also obtained 3G licenses for several states it seems to be expanding its operation because of which it is expected that the value of the company will be highly increased. Therefore by looking at the fundamentals and technical charts it is advised for long term investors it is a great investment avenue. Also the 52 week high price of Bharti Airtel is Rs. 467; it is still 36% than its 52 week highest price. Hence the prices are expected to increase in future. Therefore the stock should be bought.

Moving Average

In Moving Average if price lies above the moving average, it is bullish indicator. If it lies below moving average, it is a bearish indicator. In the case Bharti Airtel, moving average is less than the price. Therefore, it is indicating a bullish signal and prices are expected to rise in future. Based on this analysis an investor should buy this stock.

Exponential moving Average ( EMA)

EMA is a type of moving average that is similar to a simple moving average, except that more weight is given to the latest data. The exponential moving average is also known as "exponentially weighted moving average". The EMA chart above indicates a bullish trend for

the stock as EMA is less than the price. A 200-day EMA has been constructed to judge whether long term investment is profitable or not. According to this analysis long term investment is profitable.

Stochastic Oscillator

As the stochastic oscillator is moving on the edge of the level ³80´, it is not indicating any trend. Therefore, further prices based on this tool for technical analysis, can not be judged or expected.

RSI [Relative Strength Index]

RSI is a measure of the relative strength of a stock over time. The RSI gives an indication of whether the stock is generally increasing in value over time. The RSI is computed by looking at the gain and loss in share price over a period of time and using that data to compute a value that can range anywhere between 0 to 100. The RSI is called a technical momentum indicator, or a technical analysis oscillator, as it is a tool to help measure the movement or oscillation of a stock price, or any other security. It is very important to understand whether or not a stock is increasing or decreasing in value over time. As in the figure it can be seen that RSI of Bharti Airtel is a little below the level of 70. Therefore it still not overbought t and a little rise may be seen in the prices in short term. Hence, for short term the stock should be held and for long term it should be bought looking at its fundamental growth.

Moving Average Conversion Diversion [MACD]

MACD is a trend-following momentum indicator that shows the relationship between two moving averages of prices. The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. In MACD if the signal is more than zero it shows an upward trend and if it is less than zero it shows downward trend. As in the above figure signal is more than zero, it indicates the Bharti Airtel's stock should be bought.

The overall valuation based on DCF model of stable growth, technical analysis and fundamental analysis of Bharti Airtel indicates that further prices of Airtel will rise and will be profitable in the long run. Its intrinsic value is Rs.375 whereas its market value is Rs.343. Hence, Bharti Airtel¶s stock is undervalued and should be bought.


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