BHARTI AIRTEL- Is this company cheap or expensive? - Detailed Stock Analysis.

Why Airtel stock is getting knocked down??- India's second-largest telecom operator by subscribers.

Hello investors, in this article, we will talk about Bharti Airtel, as many people requested for it in my last article.

I will focus on 5 main points  and I will explain if the company is cheap or not in valuation segment.

Let's talk about these topics in detail and turn it into a good learning session. If you haven't subscribed to DEV’S INVEST NOTES & Wodsofficial  blog  yet, subscribe to our blog for upcoming new interesting article.

Let's start with the article!

Mr Sunil Mittal is the founder of this company but this is not his first business. Even though his father was in politics, he never wanted to enter that area as he didn´t like how your private life gets exposed, but he wanted to have his own business so once he finished his college, his father gave him a small loan. He used to make one part of the bicycle but he soon realised that the business had some limitation, you can´t charge any price you want because you will only get what manufactures want to pay.

But the main problem was scale as you need to consistently invest to scale the business. So he stopped the business and tried a few other things, but he ultimately decided to make phones after his trade visit from Taiwan. He noticed that push-button telephones are very successful. In India, we were using rotary dial at that time to sell those phones, he also starts his own brand Mittbrau, which stands for Mittal. He added Brau because he wanted an international ending and he also launched more products like answering and fax machines.

In 1990´s, he successfully bid for one of the four mobile phone network licences auctioned in India. One of the conditions for this license was that the bidder needs to have some experience as he didn´t have any experience, he decided to partner with a French telecom company, Vivendi. The company went public in 2000 and they were growing rapidly, but they decided to tap emerging markets such as Sri Lanka in 2009 and Bangladesh in 2010 and in 2010, they broke several records when they acquired Zain´s African business for 10.7 billion dollars.

As I mentioned, Mr Mittal is the founder and chairman of this company. In the last 5 years, you can see that the revenue and profit has been declining every year but at the same time, Mr Mittal´s salary has increased from 27 crores to 30 crores. Promoter ( people who run the business)    holding stands at 56 % this used to be 68 % in the past, so it has declined but as they have raised money, this has affected them and there are no pledged shares. They have several segments. Mobile services of India and South Asia contributes 48 % to their revenue but we will mainly focus on Indian business because it´s the biggest.

India's second-largest telecom operator by subscribers. Let's Check.

First, we will check their subscribers and we will use Tijorifinance for it. let´s start with the mobile section so we can see subscribers.

We can also compare with Idea ( losing subscribers ) and Reliance ( gaining subscribers )  and Airtel is in black, which is very stable but you need to know one point, which nobody will tell you.

Bharti airtel´s definition of revenue earning customer is a customer who pays them something in the rolling last 30 days. So when you see a very high number of Reliance, you need to know that active customers are around 80 %, while it´s 95 % in Airtel and it´s 88 % for Idea.

Airtel´s ARPU is the highest at 157 Rs in black. This means they make 157 Rs per from each customer. Management highlighted that 200 of the total 700 districts accounts for 80% of the industry revenues. I´m sure you saw that Mr Mittal wanted to increase.

ARPU to 300 Rs as it´s too low. So how can they increase this? 

In this category, we divide their earnings into 2 categories: prepaid and postpaid. I´m sure you already know what they mean. In Prepaid, we have 2 categories. The first one is the feature phones. These are old phones that allow you to call and send SMS. ARPU is around 50 Rs. So it´s very low. 

But in prepaid, we also have smartphones, which we all use now and here the ARPU is 200 Rs approx. So when a client goes from feature to smartphone, there is a 4x jump in ARPU. But there is one more section that is postpaid. Here the ARPU starts at 399 Rs. That´s why the customer wants everyone to jump to the postpaid section but only 5 % of their customers are in this section.

In Brazil, more than 60 % of the population has postpaid plans. So why is this so low in India? 

There is a huge price difference between prepaid and postpaid as prepaid prices fell faster due to competition as it´s cheaper, people go for prepaid but we should also talk about 2G, 3G, 4G and also 5G. The g stands for generation each generation is faster and more reliable. 2g was initially made for calls and data was complementary. 3g was a faster update of 2g and Airtel launched this in 2011. But Jio started with 4g and that´s when Airtel started to switch their 3g infrastructure to 4g because 3g was only contributing single digits to their revenue.

So why don´t we switch everything to 4g leaving 2g behind? 

You must have seen that Mukesh Ambani wants only 4g. Bharti Airtel and idea still used 2g as their backup option if something goes wrong & not everyone needs 4g. Many people are happy with calls and SMS only and they will have to pay more to upgrade, they will also need new phones, which will cost a lot and that´s why Jio launched cheap Phones. It was cheap because they wanted 2g customers to switch to 4g as Jio started with 4g but we do want to see more data subscribers because that would help the company.

We can see this in Tijorifinance, you can see data subscribers. You can see that their subscribers are increasing rapidly, which is very good, we also want to check the churn rate of India, you can see it has remained stable and it stands at 2.2 %.

Churn rate is the percentage of subscribers to a service that discontinue their subscription to that service, we want this to be as low as possible and 2.2 % is good.

Take a look at the financials of this segment, due to Jio, revenue and EBIT ( Earnings Before Interest and Taxes)   have taken a hit and their Bangladesh business is a joint venture but it´s not profitable. 

Their second segment is mobile services for Africa and this contributes 25 % to their revenue.

Let´s check the same metrics as before 

You can see that their subscribers have been growing consistently, we can also check their ARPU but this is in dollars, you can see it was 2.8 dollars before and now it stands at 2.6 dollars. 

You can see that the churn rate is double than India´s at 5.7 %, as I pointed out previously, more than 40 % of their Indian customers are data customers.

In Africa, out of total customers, only 35 % are data customers, you can see that the revenue has been stable here and EBIT is growing rapidly.

The next segment is home services and this contributes 2 % to their revenue. Here we mainly have their broadband services. India’s home broadband market has a significant growth potential given its low 7% penetration among total households. 

So why is this only 7 %? 

Mainly because mobile data is so cheaply priced but as people have started working from home, we should see improvement here compared to mobile services, customers are more loyal here. Mainly due to 2 reasons.

Firstly, your customers can afford higher price so if you offer them good service, they will stay with you.

The second reason is switching. It´s easy to switch in mobile but it takes more effort in-home service. 

You can see that ARPU has declined from 1000 Rs to 800 Rs but it´s still higher than other services, they have lowered the price so they can get more customers plus competitors are launching cheaper plans, you can see revenue and EBIT have remained stable.

The next segment is Digital TV services, which contributes 3 % to their revenue, you already know what they do here and they launched this in 2008 and now they have more than 645 channels in this segment, the churn rate is only 1 %. You can see that the revenue has shown good growth and Ebit has also increased dramatically. 

In 2016, they had 11 Mn customers and this reached 14 Mn in 2020, but the ARPU decreased from 228 Rs in 2017 to 149 Rs in 2020. Next segment is Airtel business and this contributes 14 % to their revenue, as the name indicated, they help large and small enterprises. Currently, they help more than 2000 large enterprises, they help them with voice, data, network and cloud.  

They have a partnership with Google for their services like Gmail and drive and for cloud, they also partnered with Amazon for their AWS and it´s growing rapidly mainly because you can help companies with storage and processing power. You can see that the revenue and EBIT have nearly doubled.

ALSO READ: Why ITC Stock is falling? - Detailed Analysis.

Last segment is infrastructure and this contributes 8 %to their revenue, as they already had the towers for their business, they started sharing it with other telecom players. This segment is Bharti Infratel and they have more than 95 000 towers but only 42 000 are owned by them. 

The rest is a joint venture with three other partners and one of them is Vodafone. This segment does well when there are many telecom players but as you may know, now we only have three big ones, you can see that the revenue has been stable and EBIT has improved.

We will start with their balance sheet.

I have added short and long term debt for you, you can see it has increased from 95 000 crores to 107 000 crores but to deleverage, they raised money through rights issue they also listed the African business and they had a huge QIP.

Let´s take a look at the last 5-year income statement please note that even in good years, you will see single-digit margins, mainly because you have fixed costs like network and spectrum. You can see that the revenue has decreased but not so much but the profit is totally gone here.

Last year´s loss was due to exception items like license fee and Spectrum Usage Charges and reassessment of regulatory cost. 

As always, I like to see these 2 metrics. Debtor days doesn´t help you in this sector. Debtor days helps you understand how many days it takes them to collect money from their client when they send an invoice and the second metric is return on capital. 

Even in good years, you will see around 10 % return in this sector as always we will start with free cash flow because it tells us "real earnings", you can see that it was negative for several years but this doesn´t tell you the real picture. Because you have a high amount of CAPEX and depreciation helps you with cash flows and I talk a lot about free cash flows in my course and how you can value companies with it.

But with this company, there are three points you should know and will help you understand why the stock is falling.

First one is Idea and it´s related to AGR. As you may know, they have been given 10 years so it´s enough time to survive & we saw their rebranding and in their latest AGM, borrowing limit was also increased.

The second reason is Reliance as they launched new postpaid plans and the prices are competitive with free content, many people thought that Reliance won´t cut prices because now they have to answer to their investors but they launched cheaper plans again.

The third reason is 5G. The management has mentioned that it will take some years until we fully use it but they mentioned that at current prices, they won´t bid for it because they can´t afford it. This doesn´t mean that you can´t improve the speed but it won´t be as fast as 5g for sure.

So is the company cheap or expensive?

It´s not cheap because people thought it would only be Airtel and Reliance so the ARPU would increase. It´s not easy to improve ARPU because you can see Jio is setting the price here and the new users of Reliance that come with new phones have low ARPU as well. Airtel only wants to focus on premium customers but I am tracking this company only because of one point.

Jio gained market share due to cheap prices but now Jio is the biggest player, so if Jio decides to keep their prices low, it will directly hurt Jio the most as they have more market share & it´s in Jio´s benefit to increase their prices and then Airtel can match prices  and that´s the only reason I track this company and remember that Airtel has a higher percentage of active users compared to Jio.

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