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The mystery known as Bharti Airtel - Views on News from Equitymaster

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The mystery known as Bharti Airtel
Oct 13, 2010

Bharti Airtel. Investors will likely have mixed feelings on hearing this name. Depending on when one has invested in the stock, one will either be thrilled or dejected. Year on year, the stock has returned next to nothing. But for those who've invested 3-4 months back, the returns have been fantastic to say the least.

Such volatile price behaviour is certainly not expected from a company that only a few months back was being touted as the one for all seasons. A blue chip in the truest sense. But things are starkly different now. The entire telecom sector has had a whirlwind of a time. It will not be unfair to say that the sector has witnessed change on the scale not seen in the past few years. And it this mayhem that has contributed to peel after peel of invincibility coming off the previously pachyderm like skin of Bharti Airtel.

That the company has further compounded problems for itself by going ahead and making a rather difficult looking acquisition also needs to be highlighted. But that's the story for another day. For the time being though, let us just concentrate on the company's Indian operations. The one that will determine its destiny at least in the near future.

For the uninitiated, the stock is still way below its three year high. And this after taking into account its most recent surge. But take the clock back to another few years and one would realise that the company has not done badly at all. It is a proud value creator if one takes into account wealth created since the listing of the stock.

Current investors though want to look into the future. And they eagerly ask the question as to what would the next ten years look like for the company.

Well, to arrive at an answer, we may have to use the theory of inversion. Just as the question of what should we eat in order to lose weight could be better answered by asking what we should not eat; similarly, we may have to ask what has worked for Bharti Airtel when it was going through its dream run.

We believe that Bharti's golden period was largely dependent upon two factors, the ability to provide a differentiated product backed by tremendous volume growth and to have competitors who were pricing their products in such a way so as to generate good returns on capital rather than just covering their day to day costs.

If there is one thing that we are certain about, it is the fact that volume growth will not be as attractive as it has been in the past decade. Hence, the company will have to rely more on its pricing power than volumes.

As far as the second factor is concerned, the entry of multiple players has indeed made the game more risky. A tendency of focusing on just the operating costs and not worrying about returns on capital is fast catching on. Will the situation remain the same ten years from now is anybody's guess. And it is the right answer to these two questions that will determine whether India's largest telecom company continues to reward its shareholders in a way that is attractive enough. In other words, these would be the keys that would unlock the mystery known as Bharti Airtel.

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15 Responses to "The mystery known as Bharti Airtel"

Nitin Gadgil

Nov 22, 2010

I understand that this article is for free viewing of Equitymaster Website. By providing contrasting views against the advice given to the paid subscribers, Equitymaster is confusing its paid subscribers. Please clarify your stand.

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Pats

Nov 12, 2010

Any business has a saturation point. Indian telecom consumers prefer low-cost per call attitude. This means earning per customer will not help telecom bottom-line. Airtel has to explore other emerging markets (like Singapore Telecom did in India through Airtel) and expand to make additional revenue. Increasing customer base is the only hope in India. 3G wont bring in much money because it is only for tech-savvy upper-middle which is a small crowd. This logic applies to all telecom players - see BSNL 3G they are not going anywhere inspite of 1st mover advantage.

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danny

Oct 27, 2010

guys,
pls be reasonable.this is an article is not in the premium or paid section of the website. You cant expect EM to give advise on this stock in this article. That benefit would be available to only the paid subscribers.
EM has always provided timely updates and alerts on the stocks they cover. Research Pro subscribers can see what EM has to say on Bharti. Recently when there was some confusion on the Hero Honda stake sale EM immediately came out with their alert. So guys relax and have faith in EM. Atleast I do.

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prasad

Oct 26, 2010

The entire telecom will witness a slow down as a result of too much of players/ operators coming in. Investing high on infrastructure and licence fees and cut throat competition for rate cut will lead every operator struggling for survival.... the next phase will be of the survival of the fittest.... Bharti Airtel will be surely one of them . The next phase will be of mergers and acquisitions and quit by the operators .... then only the remainants will take a long breath.

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Subramanian

Oct 25, 2010

That's why they say "invest at your own risk" with a 1/2 page disclaimer. All the more reason on why to do your own research and then feel confident in investing.

Like 

Shahed

Oct 25, 2010

I have a huge investment in this stock after EM's recommendation. I need to know whether I should Hold or Sell.

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Debashish

Oct 24, 2010

The article is confusing !Should we hold or sell ?

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Sanjeeb

Oct 24, 2010

What was the objective of the article besides confusing the readers ? Bharti's Zain acquisition needs to be taken into account if a raodma for next decade is to be drawn. Also in the near future 3G and number portability would happen. As leader, Bharti is expected gain out of these events. Would appreciate a better quality assessment from EquityMaster

Like 

Punit Jain

Oct 22, 2010

After reading your article, Bharti remains a mystery.
My opinion of Bharti is that it is a fantastic company, run by some of the best and experienced telecom businessmen. They have succeeded in the Indian environment, and will not just continue on this path here, but will also translate this experience to new geographies - of Asia and Africa.
Hyper-competition in India has resulted in a temporary blip in performance of the industry. This is created by poor regulation and governmental interference.
Watch how these seasoned folks sustain through these times, and return to the winning, profitable ways.
As an investor, I would say, this 1-2 year period is the opportunity to buy, for outsized returns over the next decade.

Like 

Deepa

Oct 22, 2010

Please clarify your stand on Bharti. Should subscribers sell or hold? This article is very confusing!

Like 
Equitymaster requests your view! Post a comment on "The mystery known as Bharti Airtel". Click here!

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