Is Bharti Airtel stock price justifies its valuations?

If you are the regular reader of my blog than you will know that we do not like Bharti Airtel business and have not invested in it from the past 7 years. We sold all of our holdings after one year of their venture in the African businesses. If you click here you will get all the blogs that I have written or mentioned about Bharti Airtel.

If we flash back 12 – 13 years in 2004 and 2005, the dynamics of this business were different. This was considered as multibagger stock.

So what changed our view in 2010 -11?

If you are from the business family, you will always hear this common advice from your older family members to ‘stay in your means’. This implies to every business, big or small too. Sometimes expansion or becoming bigger dents your business profitability. Not many investors understand this fact. Bharti Airtel still have not reported any bigger profits than what it has reported in its 2010 financial report card. We consider they had gone far beyond their means by getting into African business. The performance of their stock price in the past six years is self explainatory.

So is it now Bharti Airtel is a new turnaround story for the market?

Yes! Investors are now believing in this business and management. After seven years their African business has turned into profits for the first time. And there is a glimpse of turnaround in its profitability. But with Reliance Jio as a competitor in India now, it is hurting its Indian operations.

Let us look at the performance of different segments in India.

Bharti Airtel Q4 – 2017 Q3 – 2017 Q4 – 2016 % change Q4 Vs Q3 % change Q4 Vs Q4
Mobile Services 12,971.9 13,812.9 14,646.6 -6.09% -11.43%
Airtel Business 2,576.9 2,705 2,366.6 -4.74% 8.89%
Tower Infrastructure Business 1,601.7 1,528.4 1,414.8 4.80% 13.21%
Home Services 678.5 702.6 658.6 -3.43% 3.02%
Digital TV Services 865.7 873.5 784 -0.90% 10.42%

 

Revenues from the mobile services in India represents 60% of its total income. This big chunk of revenue source is shrinking fast, thanks to the Reliance Jio. A fall of another 6% in its revenues compare to its last quarter is sending message that the carnage from Reliance Jio is still on.

It will be interesting to see now when will this carnage stop and how long will it take to capture some ground from there.

If we look at the African business last year.

Bharti Airtel Q4 – 2017 Q3 – 2017 Q4 – 2016 % Change Q4 Vs Q3 % Change Q4 Vs Q4
Mobile Services Africa 5047.6 5355.1 6451.1 -5.74% -21.76%

 

Their revenues in Africa are also falling down. On yearly basis, in 2017 they reported their full year revenues from Africa fell down by 12.64%.

If revenues had fallen down and still they reported profits from their African business than definitely their margins must have improved. So profits before finance cost and non-operating income and expenses stand at Rs 1,018.9 crore, representing 4.64% of their revenues in 2017 from African business. And in 2016 it was at 1.95%.

The same margins before finance cost and exceptional income and losses for Indian business in 2017 stands at 18.65%. So definitely Indian business is more profitable than the African even after 7 years.

So as per their 2017 balance sheet their borrowings stand at Rs 102,581.2 crore compare to Rs 94,992.4 crore in 2016. They paid interest of Rs 9546.6 crore in 2017 which represents 9.91% of their revenues. Almost double to their reported profits.

Valuations

We do not believe its stock price should even trade above Rs 300 per share. In simple terms, the market today is valuing this business approximately for Rs 150,000 crore. If I have to sell this business today, I will take Rs 150,000 crore from the market, pay my 100,000 crore debt and I receive net 50,000 crore!

You might be thinking that’s fair from shareholders perspective. But hang on a second, I forgot to tell you that shareholders so far had chipped in Rs 74,331.3 crore in this business. So you are not making 50,000 crore but as a shareholder you have lost 24,000 crore. So definitely if you are a shareholder of this business than you want its stock price to climb up further.

There are millions of ways you can value business and you will get different valuations. What counts is that your method and variables to calculate its value should be rationale.

This is how I like to work with valuation. If market is happy to pay 150,000 crore for this business today than they are expecting their profits to climb back again at least to 9,000 crore. They reported 4,241 crore as profits for 2017 and 6,893 crore in 2016. It has been long time they have reported that kind of profits for the year.

They will also need to pay approximately 10,000 crore towards their cost of borrowing (interest). The cost of depreciation is approximately 20,000 crore. So we are looking at operating profits of Rs 45,000 crore at least. The operating profit margins for 2017 stand at 37%. We hope that this financial year they will cut their costs and by some magic increase it to 40%.

So they will have to bring business of Rs 112,500 crore in 2018 financial year an increase of 17.69%.

I do not have resources to keep close eye on this business but there are professionals who keep an eye on day to day activities of this business. Their consensus is telling me that looking at present market condition their earnings will fall by 19% in 2018. They are still expecting revenues to rise by 5% to 100,000 crore.

You will ask me why than its stock price is trading above Rs 300 per share? The simple answer is the 102,000 crore debt is keeping its stock price above Rs 300.

The risk – reward ratio does not looks in favour of investors to me to buy at such expensive price tag Bharti Airtel stocks.

What do you think?