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November 2nd, 2009
In the last one month or so, the stock of Bharti Airtel Limited has attracted investors’ wrath and naturally the stock price has fallen from a level of around Rs 450 to the present level of a little less than Rs 300 as at the end of October 30th, 2009, giving a negative return of around 35 per cent to investors. At this point of time, there’s an intense battle between bulls and bears and they’ve found another stock to beat out of shape or take it upwards. In the ultimate analysis, who will be the winner? Only time will tell. But, in the meantime, as investors, what shall we do? Shall we sell/hold the stock or start accumulating the stock at the current level of Rs 293? I try to answer these questions in a comprehensive manner. In the following pages, you’ll find my analysis.
Basically, Bharti Airtel is a GREAT company despite its attempt at diversification into Africa and other countries. Though investors should be cautious with all acquisitions and diversifications, the stock on Indian bourses is providing interesting and compelling options to long-term investors. (Please don’t forget to read the author’s disclaimer on the last page)
THE BEST OF MY STUFF ON
1. Income Tax Slabs 2009-10 for Salaried Class
2. Direct Taxes Code Bill 2009
3. Public Provident Fund PPF ac-Little Known Facts
4. Interest Rate Futures-NSE launches IRFs
5. Good and Services Tax-GST-an introduction
6. Nifty Bees-Exchange Traded Fund
922 886 619 598 524
Photograph: By the author
Airtel logo: Company’s website
SHAREHOLDING PATTERN Sep-09 Promoters-Foreign Promoters-Indian FIIs DIIs Others Holding more than 1% stake LIC of India ICICI Prudential Life Ins Co
The promoters are Bharti Enterprises Ltd led by Sunil Bharti Mittal and his family members. The total promoting shareholding stands at 68 per cent. Interestingly, their stake has consistently gone up in the last three from 61 per cent to the present 68 per cent.
% 22.40 45.30 18.40 8.10 5.80 4.60 1.35
MUTUAL FUND HOLDINGS: The following equity mutual fund schemes hold large chunk of shares in Bharti Airtel Limited as of September 30, 2009: ICICI Infrastructure Fund, Franklin India Flexi Cap, DSP BR TIGER Fund, Franklin India Bluechip Fund, Reliance Vision Fund, SBI Magnum Contra Fund, SBI Infrastructure Fund, SBI Magnum Tax Gain Scheme, HDFC Top 200, Reliance Growth Fund and more than 200 other mutual fund schemes. (The picture as of October 31, 2009 will be more useful as its share price has fallen sharply between September 30th and October 31st. This MF holdings data as on October 31st will be available in the next few days). Most of the equity mutual fund schemes are good funds with a long-term track record. But what we need to see is how they’ve been in and out of the stock over different months. PLDEGE OF EQUITY SHARES BY PROMOTERS: The promoters have not pledged any of their equity shares as on September 30, 2009. EQUITY SHARES: The total outstanding shares are at 379.68 crore, with paid-up equity being Rs 1,898 crore (face value – Rs 5 per share). MANAGEMENT TEAM: The company’s chairman is Sunil Bharti Mittal and the Chief Executive Office is Manoj Kohli. Sunil Bharti Mittal is the promoter and the main architect for the phenomenal success of the company in the last ten years. As an entrepreneur, he had taken greater risks and proved his business acumen and vision in the face of tough competition from several GSM and CDMA players. Rama Krishna Vadlamudi, BKC, Bombay. November 2nd, 2009 Please read the Author’s Disclaimer at the end
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PAST TRACK RECORD:
Net sales went up from Rs 7,900 crore in 2004-05 to Rs 34,000 crore in 200809, a CAGR (compounded annual growth rate) of 44 per cent in four years Net profit went up from Rs 1,200 crore in 2004-05 to Rs 7,700 crore in 200809, a CAGR (compounded annual growth rate) of 59 per cent Its earnings per share had gone up from Rs 3.27 in 2004-05 to Rs 20.23 per share to 208-09 (face value Rs 5), a CAGR of 58 per cent It net worth has gone up steeply from Rs 4,500 crore in March 2005 to Rs 27,500 crore in March 2009, a CAGR of 57 per cent The maiden dividend of the company since its inception was paid in 2008-09 at a rate of Rs 2 per Rs 10 face value (before the share split). As the company was ploughing back its profits into business, it’d never considered any dividend till last year. The stock was listed in February 2002 The net sales of the trailing four quarters have been a little subdued due to a general slowdown in the economy and competition from new players The net profit of the trailing four quarters has been muted
The impending rollout of 3G will bring more business to the company, though it may take another year for Bharti to start 3G services 3G services auction is scheduled to start by GOI on November 16th Likely consolidation in the sector may benefit Bharti Airtel, the biggest player Competition is likely to increase the market pie The usage of data services as of now is very low; any increase in them will bring more revenue, especially, market leader and large player, like, Bharti The contribution form non-voice segments is growing at a faster clip Bharti Airtel has been actively considering various options to make a foray into foreign shores, like, Africa, despite its recent setback over MTN merger Of course, investors have to be extremely cautious with regard to any kind of mergers, acquisitions or diversifications as the overall experience of Indian investors has been bad to worse in the last ten years
RISKS ASSOCIATED WITH THE COMPANY:
Telecom sector is heavily regulated and as such the company may be vulnerable to adverse policy changes New players may nibble away at the market share of the company affecting its profitability, capital efficiency and revenues Its foreign exchange outflow is Rs 5,400 crore and inflow is Rs 1,800 crore during 2008-09. This makes the company vulnerable to the any adverse movements in the rupee exchange rate in relation to major currencies, like, US, JPY, EUP and GBP. Any hedges taken to protect revenues due to any sudden appreciation or depreciation in the value of rupee. Of late, its pricing power in the market has come down and it may impact not only its revenues, but also its profitability and capital efficiency Any slowdown in business especially in new business segments is likely to affect the company’s growth plans in future Changes in available technology could increase competition and our capital costs, though the company is in the best position to overcome such hurdles due to its superior technology, innovation and business vision
Rama Krishna Vadlamudi, BKC, Bombay. November 2nd, 2009 Please read the Author’s Disclaimer at the end
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The Indian telecommunication industry is now the second largest wireless market in the world after China. The focus on rural penetration and customer affordability will be instrumental in driving the next phase of growth in India. The majority of the wireless net additions have started to come from the rural segment. The telecom industry plays a pivotal role in transforming the lives of the rural households which account for 70% of India's population. The rural segment is witnessing a growth of 8-10% every month – giving a substantial boost to the telecom sector. With rural teledensity still below 15%, the opportunities are immense and Airtel is leveraging its fast mover advantage to reach the hinterlands. Currently, more than 60% of our new customers come from rural India. Bharti Airtel is structured as four strategic business units – Mobile Services, Telemedia Services, Enterprise Services & Digital TV. The other revenue segment is considered as ‘Others.’
STRONG STRATEGIC PARTNERSHIPS:
The company has a strategic alliance with SingTel, which has enabled them to further enhance and expand their telecommunications network in India to provide quality service to its customers. The investment made by SingTel in Bharti is one of their largest investments made in the world outside Singapore. It has also established strong alliances with equipment and technology partners who share their drive for development of innovative solutions. Ericsson, Nokia Siemens and Huawei are equipment partners supporting our aggressive expansion plans by deploying state of the art technology across our networks. IBM has been working closely to transform IT systems, key business processes and establishing an enterprise integration platform. Telephone services and long distance networks equipment partners include Siemens, CISCO, WIPRO and Tellabs among others.
MOBILE SERVICES DIVISION:
The company offers mobile services using GSM (Global System of Mobile communications) technology as opposed to CDMA technology employed by rivals, Reliance Communications and Tata Teleservices. It operates in all 22 licensed jurisdictions (also known as Telecom Circles) in India. It offers post-paid, pre-paid and a host of other services. Its sales network consists of 13.62 lakh service outlets as on September 30, 2009. Its coverage is extended up to 5,070 Census towns covering more than 83 per cent of the country’s population with a customer market share 23.5 per cent of wireless market as on September 30, 2009. The company launched its operations in Sri Lank in January 2009 and the present customer base there is 10 lakh at present. Bharti Airtel Limited, a group company of Bharti Enterprises, is among Asia’s leading integrated telecom services providers with operations in India and Sri Lanka. The company has an aggregate of over 113.4 million customers as of end September 2009, including 11.05 crore mobile customers. The company added 3.20 crore mobile customers in 2008-09, a rise of 52 per cent over the previous year. At the end of March 2009, it has got a total of 9.66 crore customers, with 97 per cent of them being mobile customers.
Rama Krishna Vadlamudi, BKC, Bombay. November 2nd, 2009 Please read the Author’s Disclaimer at the end
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The growth in revenues has happened despite reductions in tariffs and intense competition. With mobile tariffs in India being among the lowest in the world, the Company's prime focus is on ensuring customer satisfaction through network quality, superior customer service and continuous innovation in value added services that would help expand its mobile subscriber base and drive up volumes.
TELEMEDIA SERVICES DIVISION:
Under this division, the Company provides broadband (DSL) and telephone services (fixed line) in 15 circles spanning over 95 cities with growing focus on new media and entertainment solutions such as DTH and IPTV. The total customers under this segment as on September 30, 2009 are 29.28 lakh of which 40 per cent is from broadband/internet services.
ENTERPRISE SERVICES DIVISION:
The Enterprise business provides end-to-end telecom solutions to corporate customers and national and international long distance services to carriers. Enterprise Services segment provides a broad portfolio of services to large enterprises. Enterprise Services is regarded as the trusted communications partner to India's leading organizations. This business unit provides long distance wholesale voice and data services to carrier customers as well as to other business units of Airtel. The national long distance (NLD) infrastructure comprises of 1.13 lakh route kilometers (Rkms) of optical fibre, providing a pan-India reach covering all major cities in India. The company has two international landing stations in Chennai and Mumbai, that connects two submarine cable systems - i2i to Singapore and SEA-MEWE-4 to Europe. The company specializes in providing customized solutions to address unique requirements of different industry verticals; BFSI, IT, ITeS, Manufacturing and Distribution, Media, Education, Telecom, Government, PSUs and Retail among others.
DIGITAL TV SERVICES DIVISION:
The Digital TV business provides Direct-to-Home TV services across India. All these services are provided under the Airtel brand. Airtel Digital TV, with a base of over 1.3 million customers, is available through more than 54,000 retail points and Airtel Relationship Centres in over 5,000 towns and thousands of villages across the country.
PASSIVE INFRASTRUCTURE SERVICES DIVISION:
The company also deploys, owns and manages passive infrastructure pertaining to telecom operations under its subsidiary Bharti Infratel Limited. Bharti Infratel and Indus Towers are the two top providers of passive infrastructure services in India. Bharti Infratel provides passive infrastructure services on a non-discriminatory basis to all telecom operators in India. Bharti Infratel deploys, owns and manages passive infrastructure in 11 circles of India. Bharti Infratel also holds 42% share in Indus Towers (a Joint Venture between Bharti Infratel, Vodafone and Idea Cellular). Indus Towers operates in 16 circles (4 circles common with Bharti Infratel, 12 circles on exclusive basis). Bharti Infratel has 29,112 towers in 11 circles, excluding the 35,066 towers in 12 circles for which the right of use has been assigned to Indus with effect from January 1, 2009. Indus Towers has a portfolio of 100,728 towers including the towers under right of use. (Figures are as on September 30, 2009)
Rama Krishna Vadlamudi, BKC, Bombay. November 2nd, 2009 Please read the Author’s Disclaimer at the end
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TOTAL CUMULATIVE INVESTMENTS IN VARIOUS BUSINESS SEGMENTS:
Total Cum. Investments Rs Crore
70 000 60 000 50 000 40 000 30 000 20 000 10 000 65 395 47 237 31 971 7 484 9 151 Telemedia Enterprise Mobile 14 933 1 856 Passive Infrastructure Less: Acc Depreciation&Am ortisation Net Fixed Assets
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Data: As on September 30, 2009
Segment Contribution EBITDA (Half-year ended 30.9.09)
Passive Others Infrastructure 5% 8%
Segment Contribution Revenues (Half-Year ended 30.9.09)
Others 1% Passive Infrastructure 7% Enterprise 18% Telemedia 7%
As can be seen from the above two tables, revenue contribution from Mobile Services is at 67 per cent of total revenues, the EBITDA contribution of this segment is only 56 per cent of the total EBITDA. In the case of Enterprise Services segment, the revenue contribution is at 18 per cent but the EBITDA contribution is much higher at 23 per cent – indicating the profitability of Enterprise Services segment is superior to that of Mobile Services.
SWOT ANALYSIS of BUSINESS
STRENGTHS Being a big player and biggest brand, it can face competition skillfully With a market share of 25 per cent, Bharti is a leading & dominant player Other players can’t match its network It has got a good management team This management team will translate into better customer segmentation New players cannot match its network It has huge cash Rs 6,500 crore (30.9.09) Tariff wars are not new to the biggest player in India’s Telecom Sector Its debt-equity ratio is only 0.12
WEAKNESSES Due to stiff competition, its market share may be under pressures The pace of growth has tapered off Being a market leader, it takes time to respond to the market threats As in the case of HindustanUnilever, over over a period of eight to nine years, small competitors may nibble away at Bharti’ market share. However, the company has shown good Management skills to face up to the increasing competition. As of now, Bharti Airtel is in a strong position.
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THREATS Growth rate is likely to be under pressure if not growth per se Reliance Com to give tough competition Tata Docomo’s audacious offer of ‘one paise per second’ has taken away Bharti’s market share Being heavily regulated, the business is susceptible to regulatory actions Global economic slowdown is likely to affect telecom business ARPUs are falling rapidly
OPPORTUNITIES Consolidation in the sector to benefit large players Subscribers are in general buying new SIM cards in addition to existing ones A few days back, Bharti itself launched its own ‘one paise per second’ plan The contribution from non-voice segments is growing at a faster clip The usage of data services is low, which may create more opportunities Bharti Airtel is actively pursuing markets in Africa and other developing countries
SOME IMPORTANT DATA & INFO: Face Value: Rs 5 per share (In July 2009 reduced from Rs 10 to Rs 5) Its market capitalization: Rs 1.11 lakh crore (30.10.2009) Till 2006, the company was known as Bharti Televentures Limited Total employees: At the end of March 31, 2009, Bharti Airtel had a total of 24,538 employees; 10,357 were on the rolls of Bharti Airtel Limited, 14,181 were on the rolls of Bharti Airtel Services Limited. Paid-up capital: Rs 1,900 crore. This has remained stagnant in the last five years which means there’s been no equity dilution which is an investor-friendly feature. Though, investors need to look for any equity dilution in future as part of the company’s ambitious plan to widen its footprint across the globe. As I was writing this, a flash news indicated that the company is selling an additional 7.30 lakh shares to Singtel Total Debt: Total debt of RS 7,700 crore for a company with a net worth of Rs 27,500 crore is manageable (March 2009). In fact, its debt-equity ratio (March 2009) of 0.30 is quite low compared to its debt-ridden peers. And debt-servicing is not a problem at all for a company with huge cash flows. The debt has since come down to Rs 4,210 crore with debt-equity ratio at 0.12 with total reserves at Rs 30,800 crore as on 30.09.09. Its captal expenditure during September 2009 quarter was Rs 2,280 crore 52-week high: Rs 518 (19.05.09) and 52-week low: Rs 290 (30.10.2009)
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LATEST QUARTERLY RESULTS: (as per US GAAP)
Highlights for the Second Quarter ended September 30, 2009:
• • • • • • • • • • • •
Overall customer base at 11.34 crore Net addition of 82.44 lakh customers in a single quarter Market leader with a customer market share of all India wireless subscribers at 23.5% Total Revenues of Rs. 9,846 crore (up 9% Y-o-Y) EBITDA of Rs. 4,142 crore (up 12% Y-o-Y) EBITDA margin at 42.1% (prior year: 41.0%) Cash Profit of Rs. 4,099 crore (up 31% Y-o-Y) Net profit of Rs. 2,321 crore (up 13% Y-o-Y). Net profit margin is 23.6 per cent, which has improved Operating profit margin (EBIDTA) is 42.1 per cent, which has gone up Return on net worth is 30.3 per cent, which is slipping Return on capital employed is 26.0 per cent – this is also coming down
Sep.09 ARPU Rs 252 ARPM Rs 0.56 These figures are for MOBILE SERVICES
Jun.09 278 0.58
Sep.08 331 0.63
As can be seen from above, the ARPUs are on a steep decline. They have come down by around 24 per cent, compared to September 2008 quarter which is quite huge and disturbing for investors. Compared to June 2009 quarter, ARPUs have declined by around nine per cent which has alarmed the investors and it’s no surprise the stock has witnessed intense selling with huge supported by large volumes on the bourses last week. Even ARPMs have declined by 11 per cent year on year and decreased by nine per cent quarter on quarter indicating the increased competition from new and smaller players in the market. These steep declines in these important parameters have disappointed the market participants and investors immensely causing the stock to fall heavily on bourses. CAPITAL EFFICIENCY: However, the company has been maintaining its robust margins at around 42 per cent which is the highest in the industry, though the capital efficiency reflected in the RONW and ROCE ratios has been on a downward curve in the last few years or so as can be seen in the following table:
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Period ending March.2006 March.2007 March.2008 March.2009 Sep.20009 o
No. of customers In crore 2.09 3.90 6.43 9.66 11.34
OPM % 37.30 40.20 42.10 41.00 42.10
NPM % 19.40 23.00 24.80 22.90 23.60
RONW % 29.50 37.40 38.00 32.50 30.30
ROCE % 21.30 28.20 31.70 30.40 26.00
DER % 0.45 0.31 0.19 0.23 0.12
The biggest strength of the company is the phenomenal growth the company enjoyed in the 42 months, during which period the customer base has surged by almost 5.5 times The company has been able to maintain, remarkably, its operating profit margins at around 42 per cent in the last 18 months The net profit margin is slightly down from 24.80 per cent in March 2008 to 23.60 per cent in September 2009 Its return on net worth has shown an alarming deceleration from 38 per cent in March 2009 to 30.3 per cent in September 2009 Its return on capital employed too has shown a sudden fall from 31.7 per cent in March 2008 to 26 per cent in September 2009 Basically, the steep decine in RONW and ROCE indicates that the company’s profitability has been under tremendous pressure due to surge in capital expenditure and stiff competition However, the company has been financial savvy to reduce its debtequity ratio from 0.19 in March 2008 to 0.12 in September 2009
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Bharti Airtel has a DNA that ensures continuation of its success It has got a rich human resource talent pool, management depth and entrepreneurial vision The company is focusing on building a strong brand, and enhancing customer experience It has got a strong brand, ‘Airtel’, known across all its business segments The company has been able to generate positive free cash flows The company is focusing on new services and businesses (managed services, m-commerce, m-entertainment, media) It is expanding its network in to rural markets It has the ability to leverage on the strengths of its business partners It is an innovative company and our products and services are based on deep customer deep customer understanding Going forward, its profit margins are likely to improve in tower business, ie, passive infrastructure business compensating for any losses in mobile services that it may suffer due to increased competition The small players may not be able to match the pricing strategies and management depth of Bharti Airtel which will force smaller and less nimble players to suffer The company is expected to emerge stronger from competition We’ve only scratched the surface as far as the potential for Telecom Sector for future is concerned. As inveterate investors, it’s our duty to track the sector diligently whether the company is doing all the right things to stay competitive in the business and exploiting the available opportunities and turn them into profit High volumes on the bourses; hence there’s no risk of liquidity CASH COW: Cash flow for 2008-09 from operating activities is Rs 11,900 crore approximately. CASH AT HAND: Rs 4,590 crore as on 31.03.2009 including marketable securities of Rs 2,340 crore. The total cash & cash equivalents have since gone up to Rs 6,470 crore including marketable securities of Rs 5,850 crore as on September 30, 2009. It has got good management team and entrepreneurial spirit The company’s strength lies in its strong customer base The Indian telecom sector has seen a phenomenal growth and currently has close to 430 mn telecom customers. The market surpassed the USA to become the second largest market in the world after China. Notwithstanding this, the telecom penetration is only 37% with a wireless penetration of 33.7% and broadband penetration of 0.54%, thereby offering a good growth potential.
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The future is always hazy! Nobody had a clue what was going on in the first week of March 2009 except Mark Mobius who was the first expert to tell us that we’re in an upside. Really a wise man whom we can look forward to in our approach towards equity investments! When ICICI Bank came down to RS 250 investors panicked unnecessarily in March 2009; but, it has bounced back from that abysmal and given a return of 200 to 250 per cent for investors who had the temerity to buy the stock when the pessimism was highest in the stock at that time. The beauty is the bank has withstood all the liquidity and NPA pressures; cut down its balance sheet ruthlessly; found its feet again and now it’s up and about though it still has the legacy of higher NPAs hanging around its neck like an albatross! The point good companies learn from their mistakes and make course corrections. When SBI introduced cheaper Home Loans at 8 per cent, many experts felt it would create a huge dent on HDFC’s housing business and the HDFC stock tanked, of course amidst plummeting stock markets, and lost more than 10 to 15 per cent and touched a low of Rs 1,200 on 20.11.08. But in its business place, nothing has happened to HDFC as had been feared by the experts. It’s no wonder the stock is quoting around Rs 2,650, giving a decent return of 120 per cent in less than a year. Even during 2007, following the sub-prime market crisis in the US, market experts like Ramesh Damani and Rakesh Jhunjhunwala had opined that large IT companies, like, Infosys, TCS, Wipro and HCL Tech would face severe dent in their businesses and face margin pressure. But on the contrary, these large IT companies have successfully weathered the sub-prime crisis by doing some internal adjustments, cost cuttings and other measures. Who ever has cosied up to these frontline IT stocks during the highest pessimism have been rewarded handsomely. Successful companies have their own DNA and have the capacity to bounce back from their lows and reward patient investors with decent returns. Bharti Airtel has been rated as a successful because: It predicted the preference for GSM instead of CDMA It initiated the first round of consolidation in the telecom space It with stood the travails of Indian Policy successfully It invented outsourcing in telecom-SUCCESSFULLY outsourced its operations – network management to Nokia and information technology to IBM Has priced itself more competitively without being the lowest tariff player It has put in strong team; process; distribution; branding and consumer insight practices Has the lowest debt-equity ratio of 0.12 Rama Krishna Vadlamudi, BKC, Bombay. November 2nd, 2009 Please read the Author’s Disclaimer at the end
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Due to a variety of factors, Bharti Airtel Limited has received investors’ wrath of late. The main reasons are: the perception that Telecom Sector would witness a price war and affecting the profits, the calling off its merger efforts with MTN of South Africa is seen as a negative by many, competition from smaller players like Tata Docomo which has come out with a ‘per-second billing’, delay in 3G rollout and some regulatory issues pertaining to audit of Telecom Companies. Due to competition, Airtel has announced its own ‘one paise per second’ billing plan joining the bandwagon in the process which may affect its pricing power and revenues in the next one or two few quarters. But, the company is place in a best situation to deal with competition head-on and likely to decimate smaller players in the process. It has made a capital expenditure (net of depreciation and amortization as shown in a table above) of more than Rs 47,000 crore since inception. No other player can reach or afford such a capex plan.
The company is diversifying itself into other verticals such as DTH, enterprise solutions, mobile banking and others which may provide additional revenue stream in future. Moreover, the company is an innovator in the market and has developed extraordinary execution skills. One interesting trend is that many existing subscribers belonging to rival operators have taken an additional SIM card from Tata Docomo for its ‘one paise per second scheme’ for SMSes and phone calls in addition to their existing phones. Does that mean that there is additional biz for telecom players? May be, new subscribers would go only for the one paise per second schemes. What's the reach of the new players, their connectivity and service quality needs to be evaluated in future. I think telecom sector is still in an evolving stage and there're more surprises in store for investors and competitors alike in future. Nobody is able to foresee the big opportunities it may throw open in the next two to three years. Can we take contrarian call on Bharti Airtel? Will it be able to withstand the competition from ohter players and survive like, an Asian Paints, or a Coca-Cola for that matter? Or, will it go the way HUL had suffered between 2000 and 2008 at the hands of much smaller players? I think Telecom Sector is different from FMCG. Anyway, as I said earlier it's too early to foresee clear trends in Telecom Sector. In uncertain times, it’s the big player with deep pockets that will call the shots ultimately. As such, stay with the ‘men’ not the ‘boys.’ THE OVERHANG OF BHARTI-MTN MERGER: If you believe, the diversification into other countries will not benefit the company, you’d better stay out of its equity shares. In India, we’ve seen that diversifications and foreign acquisitions into other countries have been very tortuous. As we’ve seen in the case of Tata Steel, Tata Motors, Suzlon Energy, Dr Reddy’s Labs, etc. Investors need to watch out carefully for any possible acquisitions, merger news from the company as it may severely impact their investments. In fact, the Rama Krishna Vadlamudi, BKC, Bombay. November 2nd, 2009 Please read the Author’s Disclaimer at the end
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diversification or merger/acquisition could be the biggest risk for investors going forward. Any such moves may have long-term impact which as small investors may not be able to fathom correctly due to several complexities involved.
VALUATION and PROSPECTS:
At the closing market price of Rs 293 on October 30th, 2009; Market capitalization of Bharti Airtel Limited works out to Rs 1.10 lakh crore as at the end of October 2009. Based on free float, the market cap is around Rs 36,500 crore and the company’s weight in Sensex is 3.27 per cent and Nifty50 is 2.75 respectively. The price-earning ratio is 12.25 based on trailing four quarter earning per share (EPS) of Rs 23.90 on face value of Rs 5 per share (in July 2009, the share was split from Rs 10 face value to Rs 5). Its price-book value is 3.19 with a book value of Rs 91.94 per share. The company consistently maintains an operating profit margin of around 40 per cent in the past five years despite severe competition in the market and entry of new players. However, going forward, the company has to make a sacrifice in its OPM in order to retail market share as well as decimate weak competitors (may be, strong ones also depending on the competitors’ strategies also) in the process. Last year, the company announced unprecedented tariff cuts in certain plans. The company maintains an RONW and ROCE of around 33 per cent (2008-09) despite the paid-up capital being Rs 1,900 crore. However, RONW has been on the decline in the past two years due to increased capital expenditure by the company and competition from numerous players. Overall, the company has got a strong balance sheet with robust cash flows. The dividend yield is 0.34 per cent. Low-beta stock: Its latest beta is around 0.83 indicating that its price volatility is lesser compared to the volatility in benchmarks, like, Sensex and Nifty. Low-beta stocks are more suitable to small and long-term investors. But, there’s no guarantee that it will remain the same as India itself has become an extremely high-beta market making small investors more nervous in the process. In the last three to four weeks, the stock has been witnessing unabated selling making its beta higher in the process.
MY TAKE ON BHARTI AIRTEL STOCK
The company’s Price-Earnings Ratio is at around 12.25 at the current market price of Rs 293 as on October 30th, 2009. It price-book value is around 3.19. Its operating profit margin is 42 per cent, which is quite good in a business with stiff competition. The company has a strong balance sheet and its CASH HOLDING is at Rs 6,470 crore as on 30.9.09. It’s generating enormous free cash flows net of capital expenditure. It’s in the best position to leverage its strengths and decimate smaller players in the process. But, it’d take some time for it to regroup its energies and mount an onslaught on its competitors and consolidation is evitable ultimately. Rama Krishna Vadlamudi, BKC, Bombay. November 2nd, 2009 Please read the Author’s Disclaimer at the end
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The company has got the best business model, resources, management team and huge network to face any kind of competition. Investors with a three-year outlook can consider investing in its equity shares at the current market price of Rs 293. Small investors should not try to time the market. But, they should be mentally prepared for a fall of 20/30 per cent from the current level. And they should not worry too much about the price fluctuations if they want to make safe money in the long-term. By any reckoning, the current market price offers a good entry point and small investors should start nibbling away at the shares in instalments at different price levels so that their acquisition cost will be low and reasonable. This stock is suitable for investors with long-term horizon of at least three years. It’s likely to give long-term decent returns to investors. If you’re looking for spectacular return in one month or even one year, DON’T BUY THE STOCK.
DATA SOURCE: NSE, BSE, CAPITAL MARKET, Company’s website, etc References: 1. Valuable Inputs from PN Rao, Ratna KPS, Ravi TM and Suryadeep B STING ALL OF YOU!
FINALLY, HAPPY INVESTING ALL OF YOU!
ARPU (for Mobile and Telemedia Services): Average revenue per customer per month is computed by: dividing the total revenues, excluding equipment sales during the relevant period by the average customers; and dividing the result by the number of months in the relevant period. ARPM (Average Rate Per Minute): Average Rate Per Minute is computed by: Dividing the total revenues by total minutes. Book Value Per Equity Share: Total stockholder’s equity as at the end of the relevant period divided by issued and outstanding equity shares as at the end of the relevant period. Cash Profit From Operations: It is not a US GAAP measure and is defined as operating income adjusted for depreciation and amortization, pre-operating costs, interest expense and interest income. DTH Direct to Home broadcast service Earnings Per Basic Share: It is computed by dividing net profit attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. EBITDA Earnings/ (loss) before interest, taxation, depreciation and amortization. It is not a US GAAP measure and is defined as operating income adjusted for depreciation and amortization and pre-operating costs. EBITDA Margin or EBITDA / Total Revenues: It is computed by dividing EBITDA for the relevant period by total revenues for the relevant period.
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IPTV Internet Protocol TV: IPTV is the method of delivering and viewing television programmes using an IP transmission and service infrastructure, which can deliver digital television to the customers. IPTV when offered using an IP network and high speed broadband technology becomes interactive because of availability of return path and is capable of providing Video on Demand (VOD), time shifted television and many other exciting programmes. Market Capitalization: Number of issued and outstanding shares as at end of particular date multiplied by closing market price as on that particular date Debt-Equity Ratio: It is computed by dividing net debt as at the end of the relevant period by stockholder’s equity as at the end of the relevant period. Return On Capital Employed (ROCE): For the full year ended March 31, 2006, 2007, 2008 and 2009, ROCE is computed by dividing the sum of net profit and finance cost (net) for the period by average (of opening and closing) capital employed. For the quarterly computation, it is computed by dividing the sum of net profit and finance cost (net) for the preceding (last) 12 months from the end of the relevant period by average capital employed. Average capital employed is calculated by considering average of quarterly average for the preceding (last) four quarters from the end of the relevant period. Return On Net Worth (RONW): For the full year ended March 31, 2006, 2007, 2008 and 2009, it is computed by dividing net profit for the period by the average (of opening and closing) Stockholder’s equity. For the quarterly computations, it is computed by dividing net profit for the preceding (last) 12 months from the end of the relevant period by the average Stockholder’s equity for the preceding (last) 12 months. Average Stockholder’s equity is calculated by considering average of quarterly average for the preceding (last) four quarters from the end of the relevant period. OTHERS: CDMA: Code Division Multiple Access COAI Cellular Operators Association of India DoT Department of Telecommunications DTH Direct To Home IPTV Internet Protocol Television ISP Internet Service Provider IUC Interconnection Usage Charges MNO: Mobile Network Operator MNP: Mobile Number Portability NLDO National Long Distance Operator TDSAT Telecom Disputes Settlement & Appellate Tribunal TRAI Telecom Regulatory Authority of India UASL Unified Access Service License USOF Universal Service Obligation Fund GSM Global System for Mobile Communications IGAAP Generally Accepted Accounting Principles in India USGAAP United States Generally Accepted Accounting Principles
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FLASH NEWS! Singapore Telecommunications (Singtel) is increasing its stake in Bharti Airtel Limited by an additional 1.52 per cent stake or 7.30 lakh shares at a cost of Rs 3,000 crore (depending on the future market price) in three instalments over an 18-month period. Singtel holds an effective stake of 30.43 per cent in Bharti Airtel taking its total share holding to 31.95 per cent. The usual caveat is institutional investors have deep pocket and come with a very long-time horizon. They can absorb substantial erosion in their capital in the short time in order to make huge profits over longer time intervals. Their time horizon may not be suitable to other small investors. This analysis has been initiated much before this FLASH NEWS hit headlines yesterday. This is to inform the readers that my analysis is no way influenced by this piece of important news for the stock. THE analysis is aimed at small investors; not at HNIs and institutional players — for they have their own methods of looking at markets slightly differently. AUTHOR’s DISCLAIMER: This should not be construed as a recommendation by me. The author holds a small stake in the company’s equity shares and as such it’s safe to assume that the author has a vested interest in the stock price and general market going up. The views of the author are personal. Readers or investors must consult their certified financial advisor before taking any decision on their equity investments and the investment should be in line with their risk profile & risk appetite and their general market perception. Any equity investment should be within their overall ASSET ALLOCATION, which is extremely vital.
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