Bharti Airtel Limited is a leading global telecommunications company with operations in 18 countries across Asia and Africa.
The company ranks amongst the top 3 mobile service providers globally in terms of subscribers. In India, the company’s product offerings include 2G, 3G and 4G wireless services, mobile commerce, fixed line services, high-speed home broadband, DTH and enterprise services.
The company’s shares have 52 weeks price band of INR 612-325 and a total market capitalization of INR 2.92 Trillion which makes it a Large-Cap company.
Now, let’s take a deep dive into the fundamentals of the company.
The company will be evaluated on 10 parameters and each would be given a rating out of 5 stars. From this, we will arrive at a combined stock rating for the company. As the ratings are based on long term past performance, they are relevant for at least 3 years in the future until FY 2022. The parameters are as follows.
1. Economic Moat
2. Business Model and Management
3. Growth Ratios
4. Profitability Ratios
5. Cash Flow Ratios
6. Liquidity and Solvency Ratios
8. Valuation Ratios
9. ROE (Du Pont Analysis)
10. Future Prospects
(All units are INR Millions except ratios and per share data)
1. Economic Moat (★ ★ ★ ★ ★)
The company operates in the telecom industry where market dominance comes from scale, user base, technology, infrastructure and branding. In terms of scale, reach and user base the company has 283.7 million Mobile Services users, 2.4 million Homes users and 16.6 million Digital TV Services customers in India. In Africa, it has a user base of 110.6 million and 2.9 million Mobile Services customers in South Asia. Bharti Airtel had over 423 million customers across its operations at the end of March 2020. This overall shows the infrastructure and wide presence the company has across its core business markets.
The company is also ranked second, globally, based on the customer base after China Mobile Communications Corporation. Bharti Airtel has around 31.6% market share in the Indian telecom industry and has a total addressable market size of 2+ billion customers across the world. This along with the asset-heavy nature of the business and highly regulated industry gives a wide economic moat to the company. Therefore this category gets 5 stars in Bharti Airtel fundamental analysis.
2. Business Model and Management (★ ★ ★ ★ ☆)
The business model of the company is such that it has a wide variety of service offerings like Mobile Services, Home Connectivity, DTH, Tower infrastructure, Payments business etc. The company’s digital assets and offerings include the brand Airtel XStream, Wynk Music and Airtel Books. The revenue split is also such that around 46% comes from the Network business in India, 26% comes from Africa and 0.5% from South Asia. The Towers business contributes around 7%, Airtel business contributes 13.9%, Digital Services business contributes 3.3% and homes connectivity gives 2.3% contribution.
Prior to the launch of Reliance Jio, the telecom market in India was fragmented with 14 major players and Airtel had around 31.3% market share. Now the industry has undergone consolidation and there are only 3 large players namely Reliance Jio with around 36% market share, Airtel with 31.6% market share and Vodafone Idea with 26.7% of the total market share. Hence the company is well placed to take the advantage of increasing market size and data consumption in the economy.
Mr Sunil Bharti Mittal is the Founder and Chairman of the company. He is considered as the pioneer of the mobile revolution in India. Mr Gopal Vittal is the MD and CEO of the company. Under his leadership, Airtel has achieved a life-time high revenue market share. Further, he has also led the company to stability after the market disruption by Jio. Overall the management has proven capabilities and has no previous cases of principal-agent conflict. Therefore this category gets 4 stars in Bharti Airtel fundamental analysis.
3. Growth Ratios (★ ★ ★ ☆ ☆)
The revenue has seen stable CAGR growth due to increasing market size and data consumption in the economy. The Net income, Operating profits and Working capital has seen some deterioration due to the increasing competition in the industry. The company has increased its Cap-Ex significantly which will enable them to increase its reach and service offering in the near future. Therefore this category gets 3 stars in Bharti Airtel fundamental analysis.
4. Profitability Ratios (★ ★ ★ ☆ ☆)
The entire profitability of the company was drained after the entry of Jio in the market and consolidation in the industry. The company is now looking forward to target niche segments in the market with premium services which can help to improve profitability. However, the market regulator is probing the company’s differential pricing plans for possible violations and hence no comments can be made on this yet. Therefore this category gets 3 stars in Bharti Airtel fundamental analysis.
5. Cash Flow Ratios (★ ★ ★ ☆ ☆)
The net income margin has declined and the Cap-Ex as a percentage of sales has increased significantly. This, however, is a necessary Cap-Ex and will not improve profitability in the near future. The free and operating cash flow growth has also gone negative. This overall shows a moderate cash flow position for the company. Therefore this category gets 3 stars in Bharti Airtel fundamental analysis.
6.Liquidity and Solvency Ratios (★ ★ ☆☆ ☆)
The company has seen an increase in its debt obligations and hence the leverage and debt to equity ratios are increasing for the company. The profitability has also been declining and this reduces the solvency position of the company. The liquidity position is also not good as the company does not have sufficient cash on its balance sheet. Therefore this category gets 2 stars in Bharti Airtel fundamental analysis.
7. Efficiency Ratios (★ ★ ★ ★ ☆)
The table in the excel model is colour formatted so the worst performance over the period is highlighted in red colour and the best performance is highlighted by green.
Overall the business efficiency has been stable but the average revenue per user (ARPU) has dropped in the post-Jio era. This remains a continued threat to its viability. The inventory days have declined and the payable period has been fluctuating over the years due to new business ventures. The business model has a significant contribution from prepaid customers and hence the Cash conversion cycle remains negative. Therefore this category gets 4 stars in Bharti Airtel fundamental analysis.
8. Valuation Ratios (★ ★ ★ ★ ☆)
9. ROE 5 way Du Pont Analysis (★ ★ ★ ☆ ☆)
The company has seen decline in profitability and a weak income position. The ARPU has recovered well and hence there is a scope of improvement in the near future. The leverage has increased linearly and operating margin has declined. Overall this shows a decline in shareholder’s RoE. Therefore this category gets 3 stars in Bharti Airtel fundamental analysis.
10. Future Prospects (★ ★ ★ ★ ☆)
Some insights for the coming years from management discussion & analysis (MD&A) and con calls are as follows.
- Airtel’s ARPU trajectory is expected to remain stable, but there are no immediate plans for increasing the prices by the management. This is supported by, Low down trading despite the recent price hike, Increase in postpaid customer base and an increasing mix of 4G subscribers.
- The ARPU should be around INR 230 in the short term and INR 290+ in the long term. This will drive both the revenue and profitability of the company. The company will also benefit from growing opportunity in the home broadband segment, especially during the current prevalent work from home (WFH) conditions.
- To migrate to 5G more base stations and towers are required to be connected to fibre. This is driving the high Cap-Ex for the company. Airtel’s investment in core and transport infrastructure is taking a disproportionate share of the total Cap-Ex.
- The company’s management is satisfied with the total spectrum holdings of the company. There is still an opportunity to widen the spectrum and thus they are looking to have sub GHz spectrum in select circles. This will improve connectivity and reach in the near future.
The company has a good infrastructure and user base which will help them in taking the opportunity of industry consolidation. The management is also planning to focus on niche premium offerings which can help to drive profitability in the near future. Therefore this category gets 4 stars in Bharti Airtel fundamental analysis
The overall rating is arrived by taking the average of the above 10 parameter ratings and rounded up if it is above 0.5 and rounded down if it is below 0.5.
Overall Fundamental Rating:
BHARTI AIRTEL SHARES (3.5/5)
Therefore it is a 4-star stock
★ ★ ★ ★ ☆
|Economic Moat||★ ★ ★ ★ ★|
|Business & Management||★ ★ ★ ★ ☆|
|Growth Ratios||★ ★ ★ ☆ ☆|
|Profitability Ratios||★ ★ ★ ☆ ☆|
|Cash Flow Ratios||★ ★ ★ ☆ ☆|
|Liquidity & Solvency||★ ★ ☆ ☆ ☆|
|Efficiency Ratios||★ ★ ★ ★ ☆|
|Valuation Ratios||★ ★ ★ ★ ☆|
|ROE (Du Pont Analysis)||★ ★ ★ ☆ ☆|
|Future Prospects||★ ★ ★ ★ ☆|
|Overall Fundamental Rating||★ ★ ★ ★ ☆|