Rama Krishna Vadlamudi November 2nd, 2009

In the last one month or so, the stock of Bharti Airtel Limited has attracted investors’
wrath and naturally the stock price has fallen from a level of around Rs 450 to the
present level of a little less than Rs 300 as at the end of October 30th, 2009, giving a
negative return of around 35 per cent to investors. At this point of time, there’s an
intense battle between bulls and bears and they’ve found another stock to beat out of
shape or take it upwards. In the ultimate analysis, who will be the winner? Only time will
tell. But, in the meantime, as investors, what shall we do? Shall we sell/hold the stock or
start accumulating the stock at the current level of Rs 293? I try to answer these
questions in a comprehensive manner. In the following pages, you’ll find my analysis.
Basically, Bharti Airtel is a GREAT company despite its attempt at diversification into Africa and
other countries. Though investors should be cautious with all acquisitions and diversifications, the
stock on Indian bourses is providing interesting and compelling options to long-term investors.

(Please don’t forget to read the author’s disclaimer on the last page)

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Photograph: By the author Airtel logo: Company’s website

PROMOTER SHAREHOLDING:

SHAREHOLDING PATTERN
The promoters are Bharti Enterprises Sep-09 %
Ltd led by Sunil Bharti Mittal and his Promoters-Foreign 22.40
family members. The total promoting Promoters-Indian 45.30
shareholding stands at 68 per cent. FIIs 18.40
Interestingly, their stake has DIIs 8.10
consistently gone up in the last three Others 5.80
from 61 per cent to the present 68 per Holding more than 1% stake
cent.
LIC of India 4.60
ICICI Prudential Life Ins Co 1.35

MUTUAL FUND HOLDINGS:

The following equity mutual fund schemes hold large chunk of shares in Bharti
Airtel Limited as of September 30, 2009: ICICI Infrastructure Fund, Franklin India
Flexi Cap, DSP BR TIGER Fund, Franklin India Bluechip Fund, Reliance Vision
Fund, SBI Magnum Contra Fund, SBI Infrastructure Fund, SBI Magnum Tax
Gain Scheme, HDFC Top 200, Reliance Growth Fund and more than 200 other
mutual fund schemes. (The picture as of October 31, 2009 will be more useful as
its share price has fallen sharply between September 30th and October 31st. This
MF holdings data as on October 31st will be available in the next few days). Most
of the equity mutual fund schemes are good funds with a long-term track record.
But what we need to see is how they’ve been in and out of the stock over
different months.

PLDEGE OF EQUITY SHARES BY PROMOTERS:

The promoters have not pledged any of their equity shares as on September 30,
2009.

EQUITY SHARES:
The total outstanding shares are at 379.68 crore, with paid-up equity being Rs
1,898 crore (face value – Rs 5 per share).

MANAGEMENT TEAM:

The company’s chairman is Sunil Bharti Mittal and the Chief Executive Office is
Manoj Kohli. Sunil Bharti Mittal is the promoter and the main architect for the
phenomenal success of the company in the last ten years. As an entrepreneur,
he had taken greater risks and proved his business acumen and vision in the
face of tough competition from several GSM and CDMA players.

Rama Krishna Vadlamudi, BKC, Bombay. November 2nd, 2009 Page 2 of 17

Please read the Author’s Disclaimer at the end
PAST TRACK RECORD:

Net sales went up from Rs 7,900 crore in 2004-05 to Rs 34,000 crore in 2008-
09, a CAGR (compounded annual growth rate) of 44 per cent in four years

Net profit went up from Rs 1,200 crore in 2004-05 to Rs 7,700 crore in 2008-
09, a CAGR (compounded annual growth rate) of 59 per cent

Its earnings per share had gone up from Rs 3.27 in 2004-05 to Rs 20.23 per
share to 208-09 (face value Rs 5), a CAGR of 58 per cent

It net worth has gone up steeply from Rs 4,500 crore in March 2005 to Rs
27,500 crore in March 2009, a CAGR of 57 per cent

The maiden dividend of the company since its inception was paid in 2008-09 at
a rate of Rs 2 per Rs 10 face value (before the share split). As the company
was ploughing back its profits into business, it’d never considered any dividend
till last year.

The stock was listed in February 2002

The net sales of the trailing four quarters have been a little subdued due to a
general slowdown in the economy and competition from new players

The net profit of the trailing four quarters has been muted

GROWTH DRIVERS:

The impending rollout of 3G will bring more business to the company, though it may take
another year for Bharti to start 3G services

3G services auction is scheduled to start by GOI on November 16th

Likely consolidation in the sector may benefit Bharti Airtel, the biggest player

Competition is likely to increase the market pie

The usage of data services as of now is very low; any increase in them will bring more
revenue, especially, market leader and large player, like, Bharti

The contribution form non-voice segments is growing at a faster clip

Bharti Airtel has been actively considering various options to make a foray into foreign
shores, like, Africa, despite its recent setback over MTN merger

Of course, investors have to be extremely cautious with regard to any kind of mergers,
acquisitions or diversifications as the overall experience of Indian investors has been bad
to worse in the last ten years

RISKS ASSOCIATED WITH THE COMPANY:

 Telecom sector is heavily regulated and as such the company may be vulnerable
to adverse policy changes
 New players may nibble away at the market share of the company affecting its
profitability, capital efficiency and revenues
 Its foreign exchange outflow is Rs 5,400 crore and inflow is Rs 1,800 crore during
2008-09. This makes the company vulnerable to the any adverse movements in
the rupee exchange rate in relation to major currencies, like, US, JPY, EUP and
GBP. Any hedges taken to protect revenues due to any sudden appreciation or
depreciation in the value of rupee.
 Of late, its pricing power in the market has come down and it may impact not only
its revenues, but also its profitability and capital efficiency
 Any slowdown in business especially in new business segments is likely to affect
the company’s growth plans in future
 Changes in available technology could increase competition and our capital
costs, though the company is in the best position to overcome such hurdles due
to its superior technology, innovation and business vision

Rama Krishna Vadlamudi, BKC, Bombay. November 2nd, 2009 Page 3 of 17

Please read the Author’s Disclaimer at the end
 BUSINESS MODEL

The Indian telecommunication industry is now the second largest wireless market in
the world after China. The focus on rural penetration and customer affordability will be
instrumental in driving the next phase of growth in India. The majority of the wireless net
additions have started to come from the rural segment. The telecom industry plays a
pivotal role in transforming the lives of the rural households which account for 70% of
India's population.
The rural segment is witnessing a growth of 8-10% every month – giving a substantial
boost to the telecom sector. With rural teledensity still below 15%, the opportunities are
immense and Airtel is leveraging its fast mover advantage to reach the hinterlands.
Currently, more than 60% of our new customers come from rural India. Bharti Airtel is
structured as four strategic business units – Mobile Services, Telemedia Services,
Enterprise Services & Digital TV. The other revenue segment is considered as ‘Others.’

STRONG STRATEGIC PARTNERSHIPS:

The company has a strategic alliance with SingTel, which has enabled them to further
enhance and expand their telecommunications network in India to provide quality
service to its customers. The investment made by SingTel in Bharti is one of their largest
investments made in the world outside Singapore. It has also established strong
alliances with equipment and technology partners who share their drive for
development of innovative solutions. Ericsson, Nokia Siemens and Huawei are
equipment partners supporting our aggressive expansion plans by deploying state of the
art technology across our networks. IBM has been working closely to transform IT
systems, key business processes and establishing an enterprise integration platform.
Telephone services and long distance networks equipment partners include Siemens,
CISCO, WIPRO and Tellabs among others.

MOBILE SERVICES DIVISION:

The company offers mobile services using GSM (Global System of Mobile
communications) technology as opposed to CDMA technology employed by rivals,
Reliance Communications and Tata Teleservices. It operates in all 22 licensed
jurisdictions (also known as Telecom Circles) in India. It offers post-paid, pre-paid
and a host of other services. Its sales network consists of 13.62 lakh service outlets as
on September 30, 2009. Its coverage is extended up to 5,070 Census towns covering
more than 83 per cent of the country’s population with a customer market share 23.5 per
cent of wireless market as on September 30, 2009. The company launched its
operations in Sri Lank in January 2009 and the present customer base there is 10 lakh
at present.
Bharti Airtel Limited, a group company of Bharti Enterprises, is among Asia’s leading
integrated telecom services providers with operations in India and Sri Lanka. The
company has an aggregate of over 113.4 million customers as of end September 2009,
including 11.05 crore mobile customers. The company added 3.20 crore mobile
customers in 2008-09, a rise of 52 per cent over the previous year. At the end of March
2009, it has got a total of 9.66 crore customers, with 97 per cent of them being mobile
customers.

Rama Krishna Vadlamudi, BKC, Bombay. November 2nd, 2009 Page 4 of 17

Please read the Author’s Disclaimer at the end
The growth in revenues has happened despite reductions in tariffs and intense
competition. With mobile tariffs in India being among the lowest in the world, the
Company's prime focus is on ensuring customer satisfaction through network quality,
superior customer service and continuous innovation in value added services that
would help expand its mobile subscriber base and drive up volumes.

TELEMEDIA SERVICES DIVISION:

Under this division, the Company provides broadband (DSL) and telephone services
(fixed line) in 15 circles spanning over 95 cities with growing focus on new media and
entertainment solutions such as DTH and IPTV. The total customers under this
segment as on September 30, 2009 are 29.28 lakh of which 40 per cent is from
broadband/internet services.

ENTERPRISE SERVICES DIVISION:

The Enterprise business provides end-to-end telecom solutions to corporate customers
and national and international long distance services to carriers. Enterprise Services
segment provides a broad portfolio of services to large enterprises. Enterprise
Services is regarded as the trusted communications partner to India's leading
organizations. This business unit provides long distance wholesale voice and data
services to carrier customers as well as to other business units of Airtel.
The national long distance (NLD) infrastructure comprises of 1.13 lakh route
kilometers (Rkms) of optical fibre, providing a pan-India reach covering all major cities in
India. The company has two international landing stations in Chennai and Mumbai, that
connects two submarine cable systems - i2i to Singapore and SEA-MEWE-4 to Europe.
The company specializes in providing customized solutions to address unique
requirements of different industry verticals; BFSI, IT, ITeS, Manufacturing and
Distribution, Media, Education, Telecom, Government, PSUs and Retail among others.

DIGITAL TV SERVICES DIVISION:

The Digital TV business provides Direct-to-Home TV services across India. All these
services are provided under the Airtel brand. Airtel Digital TV, with a base of over 1.3
million customers, is available through more than 54,000 retail points and Airtel
Relationship Centres in over 5,000 towns and thousands of villages across the country.

PASSIVE INFRASTRUCTURE SERVICES DIVISION:

The company also deploys, owns and manages passive infrastructure pertaining to
telecom operations under its subsidiary Bharti Infratel Limited. Bharti Infratel and Indus
Towers are the two top providers of passive infrastructure services in India. Bharti
Infratel provides passive infrastructure services on a non-discriminatory basis to all
telecom operators in India. Bharti Infratel deploys, owns and manages passive
infrastructure in 11 circles of India. Bharti Infratel also holds 42% share in Indus Towers
(a Joint Venture between Bharti Infratel, Vodafone and Idea Cellular). Indus Towers
operates in 16 circles (4 circles common with Bharti Infratel, 12 circles on exclusive
basis). Bharti Infratel has 29,112 towers in 11 circles, excluding the 35,066 towers in 12
circles for which the right of use has been assigned to Indus with effect from January 1,
2009. Indus Towers has a portfolio of 100,728 towers including the towers under right of
use. (Figures are as on September 30, 2009)

Rama Krishna Vadlamudi, BKC, Bombay. November 2nd, 2009 Page 5 of 17

Please read the Author’s Disclaimer at the end
TOTAL CUMULATIVE INVESTMENTS IN VARIOUS BUSINESS SEGMENTS:

Total Cum. Investments Rs Crore

70 000 65 395
60 000 47 237
Rs crore

50 000
40 000 31 971
30 000 18 158
20 000 14 933
7 484 9 151
10 000 1 856

Infrastructure

Others

Net Fixed Assets

Enterprise
Telemedia

Depreciation&Am
Grand Total
Mobile

Passive

Less: Acc

ortisation
Data: As on September 30, 2009

Segment Contribution EBITDA

(Half-year ended 30.9.09)

Passive
Others
Infrastructure
5%
8%

Enterprise
23% Mobile
56%

Telemedia
8%

Rama Krishna Vadlamudi, BKC, Bombay. November 2nd, 2009 Page 6 of 17

Please read the Author’s Disclaimer at the end
 Segment Contribution Revenues
(Half-Year ended 30.9.09)

Others
1%
Passive
Infrastructure
7%
Enterprise
18%

Telemedia
7%
Mobile
67%

As can be seen from the above two tables, revenue contribution from Mobile
Services is at 67 per cent of total revenues, the EBITDA contribution of this
segment is only 56 per cent of the total EBITDA. In the case of Enterprise
Services segment, the revenue contribution is at 18 per cent but the EBITDA
contribution is much higher at 23 per cent – indicating the profitability of
Enterprise Services segment is superior to that of Mobile Services.

SWOT ANALYSIS of BUSINESS

STRENGTHS WEAKNESSES

Being a big player and biggest brand, it
can face competition skillfully
With a market share of 25 per cent,
Bharti is a leading & dominant player
Other players can’t match its network
It has got a good management team
This management team will translate
into better customer segmentation
New players cannot match its network
It has huge cash Rs 6,500 crore (30.9.09)
Tariff wars are not new to the biggest
player in India’s Telecom Sector
Its debt-equity ratio is only 0.12
Due to stiff competition, its market share
may be under pressures
The pace of growth has tapered off
Being a market leader, it takes time
to respond to the market threats
As in the case of HindustanUnilever, over
over a period of eight to nine years,
small competitors may nibble away
at Bharti’ market share. However,
the company has shown good
Management skills to face up to the
increasing competition. As of now,
Bharti Airtel is in a strong position.

Rama Krishna Vadlamudi, BKC, Bombay. November 2nd, 2009 Page 7 of 17

Please read the Author’s Disclaimer at the end
 THREATS
Growth rate is likely to be under pressure
if not growth per se
Reliance Com to give tough competition
Tata Docomo’s audacious offer of
‘one paise per second’ has taken away
Bharti’s market share
Being heavily regulated, the business
is susceptible to regulatory actions
Global economic slowdown is likely to
affect telecom business
ARPUs are falling rapidly
OPPORTUNITIES
Consolidation in the sector to benefit
large players
Subscribers are in general buying new
SIM cards in addition to existing ones
A few days back, Bharti itself launched
its own ‘one paise per second’ plan
The contribution from non-voice segments
is growing at a faster clip
The usage of data services is low, which
may create more opportunities
Bharti Airtel is actively pursuing markets in
Africa and other developing countries

SOME IMPORTANT DATA & INFO:

 Face Value: Rs 5 per share (In July 2009 reduced from Rs 10 to Rs 5)

 Its market capitalization: Rs 1.11 lakh crore (30.10.2009)
 Till 2006, the company was known as Bharti Televentures Limited
 Total employees: At the end of March 31, 2009, Bharti Airtel had a
total of 24,538 employees; 10,357 were on the rolls of Bharti Airtel
Limited, 14,181 were on the rolls of Bharti Airtel Services Limited.
 Paid-up capital: Rs 1,900 crore. This has remained stagnant in the last
five years which means there’s been no equity dilution which is an
investor-friendly feature. Though, investors need to look for any equity
dilution in future as part of the company’s ambitious plan to widen its
footprint across the globe. As I was writing this, a flash news indicated that
the company is selling an additional 7.30 lakh shares to Singtel
 Total Debt: Total debt of RS 7,700 crore for a company with a net worth of
Rs 27,500 crore is manageable (March 2009). In fact, its debt-equity ratio
(March 2009) of 0.30 is quite low compared to its debt-ridden peers. And
debt-servicing is not a problem at all for a company with huge cash flows.
The debt has since come down to Rs 4,210 crore with debt-equity ratio at
0.12 with total reserves at Rs 30,800 crore as on 30.09.09.
 Its captal expenditure during September 2009 quarter was Rs 2,280 crore
 52-week high: Rs 518 (19.05.09) and 52-week low: Rs 290 (30.10.2009)

Rama Krishna Vadlamudi, BKC, Bombay. November 2nd, 2009 Page 8 of 17

Please read the Author’s Disclaimer at the end
LATEST QUARTERLY RESULTS: (as per US GAAP)

Highlights for the Second Quarter ended September 30, 2009:

• Overall customer base at 11.34 crore

• Net addition of 82.44 lakh customers in a single quarter
• Market leader with a customer market share of all India wireless
subscribers at 23.5%
• Total Revenues of Rs. 9,846 crore (up 9% Y-o-Y)
• EBITDA of Rs. 4,142 crore (up 12% Y-o-Y)
• EBITDA margin at 42.1% (prior year: 41.0%)
• Cash Profit of Rs. 4,099 crore (up 31% Y-o-Y)
• Net profit of Rs. 2,321 crore (up 13% Y-o-Y).
• Net profit margin is 23.6 per cent, which has improved
• Operating profit margin (EBIDTA) is 42.1 per cent, which has gone up
• Return on net worth is 30.3 per cent, which is slipping
• Return on capital employed is 26.0 per cent – this is also coming down

Sep.09 Jun.09 Sep.08

ARPU Rs 252 278 331
ARPM Rs 0.56 0.58 0.63
These figures are for MOBILE SERVICES

As can be seen from above, the ARPUs are on a steep decline. They have come
down by around 24 per cent, compared to September 2008 quarter which is quite
huge and disturbing for investors. Compared to June 2009 quarter, ARPUs have
declined by around nine per cent which has alarmed the investors and it’s no
surprise the stock has witnessed intense selling with huge supported by large
volumes on the bourses last week. Even ARPMs have declined by 11 per cent
year on year and decreased by nine per cent quarter on quarter indicating the
increased competition from new and smaller players in the market. These steep
declines in these important parameters have disappointed the market
participants and investors immensely causing the stock to fall heavily on bourses.

CAPITAL EFFICIENCY:

However, the company has been maintaining its robust margins at around 42 per
cent which is the highest in the industry, though the capital efficiency reflected in
the RONW and ROCE ratios has been on a downward curve in the last few years
or so as can be seen in the following table:

Rama Krishna Vadlamudi, BKC, Bombay. November 2nd, 2009 Page 9 of 17

Please read the Author’s Disclaimer at the end
Period No. of
OPM NPM RONW ROCE DER
ending customers
In crore % % % % %
March.2006 2.09 37.30 19.40 29.50 21.30 0.45
March.2007 3.90 40.20 23.00 37.40 28.20 0.31
March.2008 6.43 42.10 24.80 38.00 31.70 0.19
March.2009 9.66 41.00 22.90 32.50 30.40 0.23
Sep.20009 11.34 42.10 23.60 30.30 26.00 0.12

o The biggest strength of the company is the phenomenal growth the

company enjoyed in the 42 months, during which period the customer
base has surged by almost 5.5 times

o The company has been able to maintain, remarkably, its operating

profit margins at around 42 per cent in the last 18 months

o The net profit margin is slightly down from 24.80 per cent in March
2008 to 23.60 per cent in September 2009

o Its return on net worth has shown an alarming deceleration from 38 per
cent in March 2009 to 30.3 per cent in September 2009

o Its return on capital employed too has shown a sudden fall from 31.7
per cent in March 2008 to 26 per cent in September 2009

o Basically, the steep decine in RONW and ROCE indicates that the
company’s profitability has been under tremendous pressure due to
surge in capital expenditure and stiff competition

o However, the company has been financial savvy to reduce its debt-
equity ratio from 0.19 in March 2008 to 0.12 in September 2009

Rama Krishna Vadlamudi, BKC, Bombay. November 2nd, 2009 Page 10 of 17

Please read the Author’s Disclaimer at the end
 INVESTMENT RATIONALE

Bharti Airtel has a DNA that ensures continuation of its success

It has got a rich human resource talent pool, management depth and
entrepreneurial vision

The company is focusing on building a strong brand, and enhancing
customer experience

It has got a strong brand, ‘Airtel’, known across all its business segments

The company has been able to generate positive free cash flows

The company is focusing on new services and businesses (managed
services, m-commerce, m-entertainment, media)

It is expanding its network in to rural markets

It has the ability to leverage on the strengths of its business partners

It is an innovative company and our products and services are based on
deep customer deep customer understanding

Going forward, its profit margins are likely to improve in tower business, ie,
passive infrastructure business compensating for any losses in mobile
services that it may suffer due to increased competition

The small players may not be able to match the pricing strategies and
management depth of Bharti Airtel which will force smaller and less nimble
players to suffer

The company is expected to emerge stronger from competition

We’ve only scratched the surface as far as the potential for Telecom Sector
for future is concerned. As inveterate investors, it’s our duty to track the
sector diligently whether the company is doing all the right things to stay
competitive in the business and exploiting the available opportunities and
turn them into profit

High volumes on the bourses; hence there’s no risk of liquidity

CASH COW: Cash flow for 2008-09 from operating activities is Rs 11,900
crore approximately.

CASH AT HAND: Rs 4,590 crore as on 31.03.2009 including marketable
securities of Rs 2,340 crore. The total cash & cash equivalents have since
gone up to Rs 6,470 crore including marketable securities of Rs 5,850 crore
as on September 30, 2009.

It has got good management team and entrepreneurial spirit

The company’s strength lies in its strong customer base

The Indian telecom sector has seen a phenomenal growth and currently
has close to 430 mn telecom customers. The market surpassed the USA to
become the second largest market in the world after China.
Notwithstanding this, the telecom penetration is only 37% with a wireless
penetration of 33.7% and broadband penetration of 0.54%, thereby
offering a good growth potential.

Rama Krishna Vadlamudi, BKC, Bombay. November 2nd, 2009 Page 11 of 17

Please read the Author’s Disclaimer at the end
The future is always hazy! Nobody had a clue what was going on in the first week
of March 2009 except Mark Mobius who was the first expert to tell us that we’re
in an upside. Really a wise man whom we can look forward to in our approach
towards equity investments!

When ICICI Bank came down to RS 250 investors panicked unnecessarily in

March 2009; but, it has bounced back from that abysmal and given a return of
200 to 250 per cent for investors who had the temerity to buy the stock when the
pessimism was highest in the stock at that time. The beauty is the bank has
withstood all the liquidity and NPA pressures; cut down its balance sheet
ruthlessly; found its feet again and now it’s up and about though it still has the
legacy of higher NPAs hanging around its neck like an albatross! The point good
companies learn from their mistakes and make course corrections.

When SBI introduced cheaper Home Loans at 8 per cent, many experts felt it
would create a huge dent on HDFC’s housing business and the HDFC stock
tanked, of course amidst plummeting stock markets, and lost more than 10 to 15
per cent and touched a low of Rs 1,200 on 20.11.08. But in its business place,
nothing has happened to HDFC as had been feared by the experts. It’s no
wonder the stock is quoting around Rs 2,650, giving a decent return of 120 per
cent in less than a year.

Even during 2007, following the sub-prime market crisis in the US, market
experts like Ramesh Damani and Rakesh Jhunjhunwala had opined that large IT
companies, like, Infosys, TCS, Wipro and HCL Tech would face severe dent in
their businesses and face margin pressure. But on the contrary, these large IT
companies have successfully weathered the sub-prime crisis by doing some
internal adjustments, cost cuttings and other measures. Who ever has cosied up
to these frontline IT stocks during the highest pessimism have been rewarded
handsomely.

Successful companies have their own DNA and have the capacity to bounce
back from their lows and reward patient investors with decent returns.

Bharti Airtel has been rated as a successful because:

It predicted the preference for GSM instead of CDMA

It initiated the first round of consolidation in the telecom space

It with stood the travails of Indian Policy successfully

It invented outsourcing in telecom-SUCCESSFULLY outsourced its
operations – network management to Nokia and information technology to
IBM

Has priced itself more competitively without being the lowest tariff player

It has put in strong team; process; distribution; branding and consumer
insight practices

Has the lowest debt-equity ratio of 0.12

Rama Krishna Vadlamudi, BKC, Bombay. November 2nd, 2009 Page 12 of 17

Please read the Author’s Disclaimer at the end
Due to a variety of factors, Bharti Airtel Limited has received investors’ wrath of
late. The main reasons are: the perception that Telecom Sector would witness a
price war and affecting the profits, the calling off its merger efforts with MTN of
South Africa is seen as a negative by many, competition from smaller players like
Tata Docomo which has come out with a ‘per-second billing’, delay in 3G rollout
and some regulatory issues pertaining to audit of Telecom Companies.

Due to competition, Airtel has announced its own ‘one paise per second’ billing
plan joining the bandwagon in the process which may affect its pricing power and
revenues in the next one or two few quarters. But, the company is place in a best
situation to deal with competition head-on and likely to decimate smaller players
in the process. It has made a capital expenditure (net of depreciation and
amortization as shown in a table above) of more than Rs 47,000 crore since
inception. No other player can reach or afford such a capex plan.

The company is diversifying itself into other verticals such as DTH, enterprise
solutions, mobile banking and others which may provide additional revenue
stream in future. Moreover, the company is an innovator in the market and has
developed extraordinary execution skills.

One interesting trend is that many existing subscribers belonging to rival

operators have taken an additional SIM card from Tata Docomo for its ‘one paise
per second scheme’ for SMSes and phone calls in addition to their existing
phones. Does that mean that there is additional biz for telecom players? May be,
new subscribers would go only for the one paise per second schemes. What's
the reach of the new players, their connectivity and service quality needs to be
evaluated in future. I think telecom sector is still in an evolving stage and there're
more surprises in store for investors and competitors alike in future. Nobody is
able to foresee the big opportunities it may throw open in the next two to three
years. Can we take contrarian call on Bharti Airtel? Will it be able to withstand the
competition from ohter players and survive like, an Asian Paints, or a Coca-Cola
for that matter? Or, will it go the way HUL had suffered between 2000 and 2008
at the hands of much smaller players? I think Telecom Sector is different from
FMCG. Anyway, as I said earlier it's too early to foresee clear trends in Telecom
Sector. In uncertain times, it’s the big player with deep pockets that will call the
shots ultimately. As such, stay with the ‘men’ not the ‘boys.’

THE OVERHANG OF BHARTI-MTN MERGER:

If you believe, the diversification into other countries will not benefit the company,
you’d better stay out of its equity shares. In India, we’ve seen that diversifications
and foreign acquisitions into other countries have been very tortuous. As we’ve
seen in the case of Tata Steel, Tata Motors, Suzlon Energy, Dr Reddy’s Labs,
etc. Investors need to watch out carefully for any possible acquisitions, merger
news from the company as it may severely impact their investments. In fact, the

Rama Krishna Vadlamudi, BKC, Bombay. November 2nd, 2009 Page 13 of 17

Please read the Author’s Disclaimer at the end
diversification or merger/acquisition could be the biggest risk for investors going
forward. Any such moves may have long-term impact which as small investors
may not be able to fathom correctly due to several complexities involved.

VALUATION and PROSPECTS:

At the closing market price of Rs 293 on October 30th, 2009; Market capitalization
of Bharti Airtel Limited works out to Rs 1.10 lakh crore as at the end of October
2009. Based on free float, the market cap is around Rs 36,500 crore and the
company’s weight in Sensex is 3.27 per cent and Nifty50 is 2.75 respectively.
The price-earning ratio is 12.25 based on trailing four quarter earning per share
(EPS) of Rs 23.90 on face value of Rs 5 per share (in July 2009, the share was
split from Rs 10 face value to Rs 5). Its price-book value is 3.19 with a book
value of Rs 91.94 per share. The company consistently maintains an operating
profit margin of around 40 per cent in the past five years despite severe
competition in the market and entry of new players. However, going forward, the
company has to make a sacrifice in its OPM in order to retail market share as
well as decimate weak competitors (may be, strong ones also depending on the
competitors’ strategies also) in the process. Last year, the company announced
unprecedented tariff cuts in certain plans. The company maintains an RONW and
ROCE of around 33 per cent (2008-09) despite the paid-up capital being Rs
1,900 crore. However, RONW has been on the decline in the past two years due
to increased capital expenditure by the company and competition from numerous
players. Overall, the company has got a strong balance sheet with robust cash
flows. The dividend yield is 0.34 per cent.

Low-beta stock: Its latest beta is around 0.83 indicating that its price volatility is
lesser compared to the volatility in benchmarks, like, Sensex and Nifty. Low-beta
stocks are more suitable to small and long-term investors. But, there’s no
guarantee that it will remain the same as India itself has become an extremely
high-beta market making small investors more nervous in the process. In the last
three to four weeks, the stock has been witnessing unabated selling making its
beta higher in the process.

MY TAKE ON BHARTI AIRTEL STOCK

The company’s Price-Earnings Ratio is at around 12.25 at the current market
price of Rs 293 as on October 30th, 2009. It price-book value is around 3.19. Its
operating profit margin is 42 per cent, which is quite good in a business with stiff
competition. The company has a strong balance sheet and its CASH HOLDING
is at Rs 6,470 crore as on 30.9.09. It’s generating enormous free cash flows net
of capital expenditure. It’s in the best position to leverage its strengths and
decimate smaller players in the process. But, it’d take some time for it to regroup
its energies and mount an onslaught on its competitors and consolidation is
evitable ultimately.

Rama Krishna Vadlamudi, BKC, Bombay. November 2nd, 2009 Page 14 of 17

Please read the Author’s Disclaimer at the end
The company has got the best business model, resources, management team
and huge network to face any kind of competition. Investors with a three-year
outlook can consider investing in its equity shares at the current market price of
Rs 293. Small investors should not try to time the market. But, they should be
mentally prepared for a fall of 20/30 per cent from the current level. And they
should not worry too much about the price fluctuations if they want to make safe
money in the long-term. By any reckoning, the current market price offers a good
entry point and small investors should start nibbling away at the shares in
instalments at different price levels so that their acquisition cost will be low and
reasonable. This stock is suitable for investors with long-term horizon of at least
three years. It’s likely to give long-term decent returns to investors. If you’re
looking for spectacular return in one month or even one year, DON’T BUY THE
STOCK.
DATA SOURCE: NSE, BSE, CAPITAL MARKET, Company’s website, etc

References:

1. Valuable Inputs from PN Rao, Ratna KPS, Ravi TM and Suryadeep B

STING ALL OF YOU!

FINALLY, HAPPY INVESTING ALL OF YOU!

SOME ABBREVIATIONS:

ARPU (for Mobile and Telemedia Services): Average revenue per customer per month is
computed by: dividing the total revenues, excluding equipment sales during the relevant period by
the average customers; and dividing the result by the number of months in the relevant period.

ARPM (Average Rate Per Minute): Average Rate Per Minute is computed by: Dividing the total
revenues by total minutes.

Book Value Per Equity Share: Total stockholder’s equity as at the end of the relevant period
divided by issued and outstanding equity shares as at the end of the relevant period.
Cash Profit From Operations: It is not a US GAAP measure and is defined as operating income
adjusted for depreciation and amortization, pre-operating costs, interest expense and interest
income.

DTH Direct to Home broadcast service

Earnings Per Basic Share: It is computed by dividing net profit attributable to ordinary
shareholders by the weighted average number of ordinary shares outstanding during the period.

EBITDA Earnings/ (loss) before interest, taxation, depreciation and amortization. It is not a US
GAAP measure and is defined as operating income adjusted for depreciation and amortization
and pre-operating costs.

EBITDA Margin or EBITDA / Total Revenues: It is computed by dividing EBITDA for the relevant
period by total revenues for the relevant period.

Rama Krishna Vadlamudi, BKC, Bombay. November 2nd, 2009 Page 15 of 17

Please read the Author’s Disclaimer at the end
IPTV Internet Protocol TV: IPTV is the method of delivering and viewing television programmes
using an IP transmission and service infrastructure, which can deliver digital television to the
customers. IPTV when offered using an IP network and high speed broadband technology
becomes interactive because of availability of return path and is capable of providing Video on
Demand (VOD), time shifted television and many other exciting programmes.

Market Capitalization: Number of issued and outstanding shares as at end of particular date
multiplied by closing market price as on that particular date

Debt-Equity Ratio: It is computed by dividing net debt as at the end of the relevant period by
stockholder’s equity as at the end of the relevant period.

Return On Capital Employed (ROCE): For the full year ended March 31, 2006, 2007, 2008 and
2009, ROCE is computed by dividing the sum of net profit and finance cost (net) for the period by
average (of opening and closing) capital employed. For the quarterly computation, it is computed
by dividing the sum of net profit and finance cost (net) for the preceding (last) 12 months from the
end of the relevant period by average capital employed. Average capital employed is calculated
by considering average of quarterly average for the preceding (last) four quarters from the end of
the relevant period.

Return On Net Worth (RONW): For the full year ended March 31, 2006, 2007, 2008 and 2009, it
is computed by dividing net profit for the period by the average (of opening and closing)
Stockholder’s equity. For the quarterly computations, it is computed by dividing net profit for the
preceding (last) 12 months from the end of the relevant period by the average Stockholder’s
equity for the preceding (last) 12 months. Average Stockholder’s equity is calculated by
considering average of quarterly average for the preceding (last) four quarters from the end of the
relevant period.

OTHERS:

CDMA: Code Division Multiple Access

COAI Cellular Operators Association of India
DoT Department of Telecommunications
DTH Direct To Home
IPTV Internet Protocol Television
ISP Internet Service Provider
IUC Interconnection Usage Charges
MNO: Mobile Network Operator
MNP: Mobile Number Portability
NLDO National Long Distance Operator
TDSAT Telecom Disputes Settlement & Appellate Tribunal
TRAI Telecom Regulatory Authority of India
UASL Unified Access Service License
USOF Universal Service Obligation Fund
GSM Global System for Mobile Communications
IGAAP Generally Accepted Accounting Principles in India
USGAAP United States Generally Accepted Accounting Principles

Rama Krishna Vadlamudi, BKC, Bombay. November 2nd, 2009 Page 16 of 17

Please read the Author’s Disclaimer at the end
FLASH NEWS!

Singapore Telecommunications (Singtel) is increasing its stake in Bharti Airtel Limited by

an additional 1.52 per cent stake or 7.30 lakh shares at a cost of Rs 3,000 crore
(depending on the future market price) in three instalments over an 18-month period.
Singtel holds an effective stake of 30.43 per cent in Bharti Airtel taking its total share
holding to 31.95 per cent. The usual caveat is institutional investors have deep pocket
and come with a very long-time horizon. They can absorb substantial erosion in their
capital in the short time in order to make huge profits over longer time intervals. Their
time horizon may not be suitable to other small investors. This analysis has been
initiated much before this FLASH NEWS hit headlines yesterday. This is to inform the
readers that my analysis is no way influenced by this piece of important news for the
stock. THE analysis is aimed at small investors; not at HNIs and institutional players —
for they have their own methods of looking at markets slightly differently.

AUTHOR’s DISCLAIMER: This should not be construed as a recommendation by

me. The author holds a small stake in the company’s equity shares and as such
it’s safe to assume that the author has a vested interest in the stock price and
general market going up. The views of the author are personal. Readers or
investors must consult their certified financial advisor before taking any decision
on their equity investments and the investment should be in line with their risk
profile & risk appetite and their general market perception. Any equity investment
should be within their overall ASSET ALLOCATION, which is extremely vital.

Rama Krishna Vadlamudi, BKC, Bombay. November 2nd, 2009 Page 17 of 17

Please read the Author’s Disclaimer at the end