Does Bharti Airtel Pass the Two-Minute Investment Test?

Sep 6, 2021

Rahul Shah, Editor, Profit Hunter

One of the most underrated qualities of a great investor is one of selectivity in my view.

Great investors have this knack of scanning a stock for just a few minutes and deciding whether to reject it or dig deeper.

As usual, Warren Buffett puts it best when he says that he doesn't look to jump over 7-foot bars.

He looks for one foot bar that he can step over.

Well, if this is the case then what exactly is Bharti Airtel, the blue chip that his hogging all the limelight these days?



Is it a 7-foot bar or something close to 1-foot bar?

Let us understand with the help of the following small table.

Net profit (Rs bn) FY15 FY16 FY17 FY18 FY19 FY20 FY21
Company BD 4.4 5.6 5.2 5.3 4.2 5.4 2.6
Company BA 46.2 60.8 38.0 11.0 4.1 -321.8 -150.8
Source: Screener.in

What is the maximum loan amount do you think you can sanction for each of these companies if you get to keep all the profits?

Well, as far as company BD is concerned, looks like the company has done well to earn profits of Rs 5 bn on an average (we can ignore FY21 as business suffered due to lockdowns).

And therefore, if you are looking to earn around 8% on your investments, you can sanction a loan of Rs 63 bn tops (5 bn is 8% of 63 bn) for promoters of company BD.

The second company i.e. company BA doesn't look all that straightforward though. Its earning have been all over the place. Even if you are of the optimistic kind and assume that the company can earn around Rs 50 bn profits going forward, the maximum you'd be willing to sanction is 630 bn (8% of 630 bn is 50 bn)

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Now here's where it gets really interesting.

What if it tell you that someone is willing to pay 5x the amount we are willing to sanction for company BA?

Looks outrageous, isn't it? Well, this is exactly the market cap that Bharti Airtel (Company BA) is commanding in the market place right now.

For a stock that has generated an average profit of Rs 50 bn in its best years and has been running into losses for the last few years, that's quite a bold valuation in my view.

Put differently, the company may have to generate profits of Rs 250 bn on a consistent basis going forward in order to justify its current price tag.

I know what you are thinking. The future Bharti Airtel may look a lot different than its past. Not only is it committed to improving its fundamentals but the industry prospects also look a lot better.

I don't disagree to be honest.

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But to me, trying to arrive at a reasonable estimate of the company's profits couple of years down the line looks like a complex task.

To paraphrase Buffett, it is like trying to jump over a 7-foot hurdle, especially at current valuations.

Thus, I am pretty clear on what I want to do with Bharti Airtel.

I'd rather wait for the improved fundamentals to start reflecting in the company's financials before taking a plunge. I am aware the stock may have already run up by then and the opportunity may go away.

But that's ok in my view. I'd rather miss such opportunities than depend on prayers for making money on a stock.

What do you think?

Warm regards,

Rahul Shah
Rahul Shah
Editor and Research Analyst, Profit Hunter

PS: Company BD is Bharat Dynamics Ltd, chosen because of the similarity of its name with Bharti Airtel and stable financials.

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1 Responses to "Does Bharti Airtel Pass the Two-Minute Investment Test?"

Rajeev

Sep 6, 2021

Great analysis of Bharati Airtel stock.

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Equitymaster requests your view! Post a comment on "Does Bharti Airtel Pass the Two-Minute Investment Test?". Click here!