Monday, July 25, 2011


What a difference one year can make? In June-July last year, Bharti Airtel was easily the most hated stock; it was making a new 52-week low almost on a daily basis. Its market capitalization fell to below Rs 1 lakh crore mark and as hard as it may be to fathom, the country’s largest telecom company did not feature in the top 10 by market value in the benchmark Nifty index. Yes, the same stock which in the heydays of 2007 was neck to neck with ONGC for 2nd spot in market capitalization charts behind Reliance, was not even in top 10 by last year of June.

A year on, and Bharti has given 59% positive returns from those lows and has easily been the best stock in the index. So obviously, the question now is should one still buy the stock or has that buying opportunity passed by?

A few points must be taken into account while making this decision.

1) The combined market capitalization of the top two telecom companies in 2007 was Rs 3.50 lakh crores, today it stands as Rs 1.75 lakh cr, exactly half of the peak. But in 2007, we were in an unqualified and raging bull market. And telecom companies have seen bad news hitting them from all corners, be it the regulatory environment or the competitive scenario.

2) Bharti is still at number 7 among Nifty stocks by market capitalization. The market capitalization of a lot of stocks has gone back to the 2007 levels or even higher than that in some cases.

3) While Bharti’s revenue has increased nearly 40% from Rs 27,000 cr in FY08 to Rs 38,000 cr in FY11, the net profit during the same period is up only 18% to Rs 7,700 cr due to falling operating margins as a result of the tariff war which the industry has faced over the last 2 years. So the Price/earnings (PE) multiples you apply to Bharti may need to be scaled down from those days.

4) Bharti was trading at 30x forward earnings in its peak, which was clearly in frothy zone, now it trades at 18x forward earnings.

5) Over 1 year, Reliance Communications has fallen 50% due to obvious reasons and some of the funds with a mandate to invest in telecom would have had no option but to take a look at Bharti during this period.

Now let’s look at the ownership. In March 2008, Bharti was 25% owned by foreign institutional investors (FIIs). By March 2009, that number fell to 20.7%, then further to 18.4% by September 2009, then 18% by March 2010 and finally 16.6% by June 2010 and call it sheer coincidence or FII influence on stock prices, it comes as no surprise that the FII ownership in Bharti bottomed at the same time as the stock bottomed out. But despite the big outperformance, the FII ownership has still gone up nearly 100 basis points to 17.59%. Also, the number of FIIs that have Bharti in their portfolio now is 640 vs 831 in 2008.

While big debate for Bharti has been related to tariff, the one point that’s being missed here is the penetration level achieved due to these low tariffs. Just look around you, everyone from your maid to your driver and the garbage cleaner are all carrying a mobile these days. The economies of scale are quite large here and this penetration could only get deeper going forward as India’s middle income class is among the fastest growing groups in the world.

Now I am not saying one should buy Bharti today, clearly it’s an overbought stock in the near-term and index stocks will not just keep going up on a daily basis. But what I am trying to tell here is that just as some of these stocks can surprise on the downside when they are in an unqualified bear market like Bharti was between 2008-2010, the upside potential too could surprise in a bull market which Bharti clearly is in. So probably, any dips in Bharti would represent a good buying opportunity.

Disclaimer: The author of this article does not invest/trade in stock markets including derivatives. His only exposure to stock markets is via the stock options of TV18 and Network18 given to him by his company as part of his compensation. Please consult your financial advisor before acting on any piece of advice in this article. This article should be used as only one of various parameters before making an investment decision.


  1. Hi Anuj, this is really great, i agree to your view on Bharti, what are your thoughts on RCom ?

  2. @Kaustav,

    Thanks for the appreciation. Well as was the case today, Rel Comm will provide bigger trading moves, but am not sure how many people can catch them right. From a portfolio perspective, Bharti may provide much stable returns, though there will be temptation to go for Rel Comm as the stock has been decimated over last one year.