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Thursday, July 15, 2010

The bullish case for Bharti Airtel - a guest post

Readers of this blog may know that I am not very hopeful about a rosy future for the telecom services industry in India, and aired my bearish views in a post back in Oct '09.

My friend Nishit was one of the first to write back with his counter arguments. I continue to remain sceptical about telecom services sector stocks, while Nishit is much more optimistic. He has written a guest post with his well-argued bullish views.

Please be generous with your comments, so that Nishit may get motivated to present his views every month - and readers will get the benefit of a different outlook and experience. Without further ado, here is Nishit's post.


What does one look for while buying a stock? Let me begin this post by asking the question which most of us grapple with every time we think of buying a stock.

A company with ethical Management, a business model which is scalable, a sector which offers immense growth potential, and right valuations. If our stock has all these four attributes then we have a winner on our hands.

Let us start by talking about the Sector. The Indian Telecom story is a strong and vibrant example of our progress in the world. This is due to the enabling policies of the government in liberalizing the sector and an example of private sector entrepreneurship.

We have 654 million mobile phone subscribers (as of May 2010) - second largest after China, and one of the fastest growing markets in the World. It’s not the numbers that excite me, or the number of subscribers being added. It’s the potential for exploiting the 3G and Wireless Broadband services.

Mobile Number Portability (MNP) has been further delayed to October 2010. Implementation of this will only benefit the big players. This is because the heavy spenders want good quality networks that the big players offer. The people who will switch from Bharti or Vodafone will be the low-end folks who will want to save the extra penny.

India is a country where Broadband penetration has been poor. This is due to the lack of infrastructure and laying out of cables across the country. Wireless Broadband wipes out the problem in one sweep. The existing cell phone towers can be used to relay the transmission.

Data Services would be the key going forward. Today, Corporates use the Photo Data card for access of its employees to their networks after office hours. The minimum amount of rent paid is Rs 500 and upward. This is just a precursor of things to come with 3G rollout. As we move forward towards 4G and 5G, broadband capacities would permit us to watch Television on mobile phones using the bandwidth.

Rural India suffers from acute shortage of infrastructure. Using Wireless, the government can leapfrog this bottleneck and offer various services like Mobile Banking, Weather Updates, and Health-care, using Tele-medicine. The key as usual lies in the execution.

Bharti is India’s largest pan-India operator with almost 30% market share in terms of revenue. It is better to look at the revenue than the number of subscribers. More importantly, Bharti has a large number of corporate subscribers who use the entire gamut of services offered by Bharti in terms of mobile connections, and bandwidth for Internet connectivity. Bharti also has landing stations for Internet gateways from abroad.

Another business stream, which is currently loss making for Bharti, is DTH, or Direct to Home Services. This I believe is the future for satellite TV viewing in India. The cable operators do not offer High Definition (HD) broadcasts, there is no transparency and no control over what one can watch. Many times I end up missing Formula One racing because the cable guy has only 3 channels available for sports and is showing Cricket on two of them and Football on the third. No cable operator offers recording of live television or pay-per-watch movies.

Bharti has 2.5 Million subscribers now and about 25% market share in incremental subscriptions. The Indian Telecom story would get saturated in new subscriber acquisitions sooner or later. Bharti has taken over the Zain operations in 15 countries in the African continent. This would catapult Bharti to Number 5 in the World in terms of subscribers.

Bharti has a very strong Management led by Sunil Bharti Mittal. It also has a very good second line that takes care of operations (like Manoj Kohli and Akhil Gupta). The investors in Bharti Airtel include Singtel, which owns about 32% of Bharti.

The Downside Risk comes from further price wars in this sector. We believe that eventually there would be a shakeout with only 3-4 operators other than BSNL and MTNL existing per circle.

Bharti is currently trading just under Rs 300, with EPS of Rs 24.39 and P/E of about 12. One could add on declines closer to its 52 week low of Rs 255 and hold it for 5 years.


(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto. Nishit blogs at Money Manthan.)


sreyO... said...

A good post...i think telecom sector is in nearly completion of its growth phase. There are lots of potential in this sector but govt.'s attitude and its snail paced activity towards the adoption of new changes in this sector is spoiling the game.Yet, one should have telecom sector scrip(s) to build a good portfolio...and bharti deserves to be one....and it is the best among all in this sector till date. Bhart's data support this statement.

Madhu said...

Good counter arguement Nishit. Keep it up.
You have given valid arguments supporting growth of the sector in general and Bharti in particular. Bur unfortunately profitability arguements are missing or does not have enough punch.
I feel entry of Reliance in broadband will be a game changer. Their asset lite strategy will reduce their capital employed and there by they will be able to slash margins. This will kill weak players and reduce margins for strong companies like Bharti.
Bharti can survive but can it see the growth enjoyed by it in the last few years?

Anonymous said...

Hello Sir,

First thanks to you and nishit for the great article, thanks again and hope we will have such feast again and again.

At this stage I am not much bullish on telecom operators, but as weak players starts getting out and M/A start that time I will surely buy bharti airtel, I think that will be the lowest point for telecom sector.

Also I am bullish on bharti more due to zain than DTH or 3G.


Nishit Vadhavkar said...

Thanks for your comments. Madhu - It was a deliberate reason that I did not push too much on profitability at this stage. We are seeing a Part - 2 of the years 2001-2004, where the idea is to capture a large base of subscribers, shut out competition. Huge captive base means you keep getting revenues month on month. If India has to do well, Telecom sector will be a winner. To communicate, we need telecom and whether its voice or data, where can you find one provider who gives you all in a single basket.

cvrk said...

Appears to be a good argument for industry as a whole, but not a sound reason for being bullish on bharati excepting on general grounds. The views even though appears to be good argument for broadband industry as a whole, the article does not speak numbers against the competitors, particularly with Reliance who is going to be trend maker or breaker in the revenue. Remember reliance under the leadership of Mr. Mukesh had comeout with 0.40 p STD charges even in those days. Now that he is back after patching up with his brother, his interest may be to revive the image of Dhirubhai Plan. what Bharti can do in such a competition is something to watch out. I would have been more happy to see the comparison between the competition than bullish sentimental views.