Almost four years back this business was one of our most loved business and use to rank in our top five investments for our fund. The reason was very simple, most of its profitability was from its profit margins.

As per 2010 yearly financial results, investors like you and I invested in this business around Rs 40,000 crore, had assets worth Rs 53,000 crore and reported earnings of Rs 9,350 crore on total sale of Rs 42,000 crore.

Their profit margins after all taxes and expenses was 22%, the scale of business that they were generating on their assets was okay and they were not highly leverage. The real profits or earnings was purely profit margins (i.e. how they run their business).

After four years, the equation looks like this: investors had invested Rs 60,000 crore so far and they have assets of Rs 140,000 crore and they reported profits of Rs 3,000 crore on total sales of Rs 86,000 crore.

Profit margins (their competitive edge) dropped to 3%, their assets were not helping to generate enough revenues and they are now highly leverage business. The 2014 profits were generated purely because of their leverage.

Now looking at their September 2014 quarterly and half yearly results, the profit margins are around 6% and 5% (doubled but not phenomenal). The investors have contributed around Rs 66,000 and they have total assets of Rs 188,000 crore.

Looking at those figures we expect them to report their Return on Equity around 7%. We are expecting its fair value for the year end 2015 in range of Rs 65 – Rs 75 per share and for 2016 in the range of Rs 87 – Rs 96 per share.

The valuations look unreasonable today, and to us it looks management is focusing to gain earnings from leveraging and acquisitions which is not their competitive edge. Most of those leveraging is through debts and current liabilities which comes with their own parcel of risks. As long as banks and other financial institutes are willing to help them to grow their assets and investors don’t mind with their leverage plan, the price of the stock will remain inflated. In saying that we don’t see a probability of the stock price to climb up more than falling down.

We don’t know your risk profile, so before investing or selling Bharti Airtel please seek professional financial advice. From our risk profile point of view, we would be shorting this business rather than buying. Unfortunately we don’t short.