Security Analysis of

Bharti Airtel
Fundamental and Technical Analysis

9/13/2010

Fundamental Analysis
Fundamental analysis is the examination of the underlying forces that affect the well
being of the company, industry groups and companies. As with most analysis the goal is
to develop a forecast of future price movement and profit from it. At the company level,
fundamental analysis may involve examination of financial data, management, business
concept and competition. At the industry level their might be an examination of supply
and demand forces of the products. For the national economy fundamental analysis might
focus on economic data to asses the present and future growth of the economy.
Fundamental analysis is a method of evaluating a security by attempting to measure its
intrinsic value by examining related economy, financial and other qualitative and
quantitative factors. Fundamental analysis attempts to study everything that can affect the
securities value including macro economic factors and individual specific factors.
Three phase of the fundamental analysis
A. Understanding of the Macro Economic environment and developments
(Economy analysis)
B. Analyzing the prospectus of the industry to which the firm belongs(Industry
analysis)
C. Assessing the projected performance of the company( Company analysis)

Economic Analysis
The purpose of analyze economic condition of the country in fundamental analysis to
asses the general economic situation both within the country and inter nationally.

The economy is like the tide and the various industry groups and individual companies
are like boats. When economy expands most industry groups and companies benefits and
grows. With the decline in the economy, most sectors and companies usually suffer. The
stock market does not operate in a vacuum it is an integral part of the whole economy of
a country, more so in a free economy that of United States and to some extent in mixed
economy like ours.

To gain an insight into the complexities of stock market, one needs to develop a sound
economic understanding and be able to interpret the impact of important economic
indicators on stock markets.

The following are some important factors which should be taken into account while
doing fundamental analysis:
• Economic Growth
• Per capita income
• Industrial Production
• Inflation
• Interest Rates
• Foreign Exchange Reserves
• Budgetary Deficit
• Domestic Savings and Investment
• Tax Rates
• Infrastructure
• Political Situation

Indian Economy Analysis

India’s GDP Growth rate

• India Gross Domestic Product (GDP) expanded at 8.7% over the last 2 quarters.

• The India Gross Domestic Product is worth 1.250 trillion dollars or 1.96% of the
world economy, according to the World Bank.

• India's diverse economy encompasses traditional village farming, modern

agriculture, handicrafts, a wide range of modern industries, and a multitude of
services. Services are the major source of economic growth, accounting for more
than half of India's output with less than one third of its labor force.

India GDP Growth Rate chart

Year Mar Jun Sep Dec Avera

ge
2010 8.6 8.8 8.70
2009 5.8 6 8.6 6.5 6.73
2008 8.5 7.8 7.5 6.1 7.48

Source: Tradingeconomics.com

INTERPETATION:-
India's economy expanded 8.8% in the second quarter from a year earlier, compared to an
8.6% on-year expansion in the first, lifted by robust activity in manufacturing.
Agricultural output along with strong development in the Industrial and Mining sector
has helped to boost the Indian economy. Agricultural output rose 2.8 per cent y-o-y
thanks to improved harvests. Industrial production increased by 12% and in the mining
sector by 9%. This increasing rate shows good prospectus for investors in
future and investor can get benefit by investing in Indian company.

India’s Inflation Rate

Inflation rate refers to a general rise in prices measured against a standard level of
purchasing power. The most well known measures of Inflation are the CPI which
measures consumer prices index, and the GDP deflator, which measures inflation in the
whole of the domestic economy. India's diverse economy encompasses traditional village
farming, modern agriculture, handicrafts, a wide range of modern industries, and a
multitude of services. Services are the major source of economic growth, accounting for
more than half of India's output with less than one third of its labor force. The economy
has posted an average growth rate of more than 7% in the decade since 1997, reducing
poverty by about 10 percentage points.

India Inflation Rate chart

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2010 16.2 14.8 14.8 13.3 13.9 13.7
2 6 6 3 1 3
2009 10.4 9.63 8.03 8.7 8.63 9.29 11.8 11.7 11.6 11.4 13.5 14.9
5 9 2 4 9 1 7
2008 5.51 5.47 7.87 7.81 7.75 7.69 8.33 9.02 9.77 10.4 10.4 9.7
5 5
Source: Tradingeconomics.com
Interpretation:- As graph shows that inflation rate is rising year by year. Inflation in
economy is not good from investor’s point of view. When inflation rate rises it become
the reason of extra costs to business, thereby squeezing their profit margin and leading to
real decline in profitability and thereby reducing the dividends on variable income
securities. The inflation peaked in the last quarter of FY ending 2009 and has decreased
slightly after that due to the steps taken by RBI for tightening the monetary policy.

Analysts believe that inflation is likely to remain firm in the medium-term mainly due to
last year's lower base effect and other driving factors like high food price inflation,
recovery in the global economy and ample liquidity.

Impact on equity market: The rise in the inflation rate impacts the market sentiments.
Higher inflation and monetary policy tightening measures will fuel negative sentiments in
the markets as a higher interest rate regime will result in higher cost of borrowing funds
for the companies. This would have an immediate impact on the valuations of capital
intensive companies and sectors in the stock markets.

On the other hand, it will be more difficult for the government to implement some of the
reforms measures such as reducing the subsidy on fuel products. This will mean a higher
fiscal deficit and therefore add to the negative market sentiments.
India Interest Rate

India benchmark interest rate stands at 3.25 percent. In India, interest rate decisions are
taken by the Reserve Bank of India's Central Board of Directors. The official interest rate
is the benchmark repurchase rate.

India Interest Rate chart,

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2010 3.25 3.25 3.38 3.63 3.75 3.75 4.08 4.5
2009 4.5 4 3.75 3.38 3.25 3.25 3.25 3.25 3.25 3.25 3.25 3.25
2008 6 6 6 6 6 6 6 6 6 6 6 5.5
Source: Tradingeconomics.com

Source: Tradingeconomics.com

Interpretation:- Data here shows that the interest rate are rising again with the
strengthening economy after the drop in the year 2009. The interest started rising after
the raise in the key interest rates by RBI to curtail rising inflation rate. As a consequence
it will be more expensive to raise money from banks.
India’s Current Account

Current Account is the sum of the balance of trade (exports minus imports of goods and
services), net factor income (such as interest and dividends) and net transfer payments
(such as foreign aid). The balance of trade is typically the most important part of the
current account. This means that changes in the patterns of trade are key drivers in the
current accounts of most of the world's economies. However, for the few countries with
substantial overseas assets or liabilities, net factor payments may be significant. Positive
net sales to abroad generally contribute to a current account surplus; negative net sales to
abroad generally contribute to a current account deficit. Because exports generate
positive net sales, and because the trade balance is typically the largest component of the
current account, a current account surplus is usually associated with positive net exports.
The net factor income or income account, a sub-account of the current account, is usually
presented under the headings income payments as outflows, and income receipts as
inflows. Income refers not only to the money received from investments made abroad
(note: investments are recorded in the capital account but income from investments is
recorded in the current account) but also to the money sent by individuals working
abroad, known as remittances, to their families back home. If the income account is
negative, the country is paying more than it is taking in interest, dividends, etc. For
example, the United States' net income has been declining exponentially since it has
allowed the dollar's price relative to other currencies to be determined by the market to a
point where income payments and receipts are roughly equal of trade forms part of the
current account, which also includes other transactions such as income from the
international investment position as well as international aid. If the current account is in
surplus, the country's net international asset position increases correspondingly.

India reported a current account deficit equivalent to 13.0 Billion USD in March of 2010.
India is leading exporter of gems and jewelry, textiles, engineering goods, chemicals,
leather manufactures and services. India is poor in oil resources and is currently heavily
dependent on coal and foreign oil imports for its energy needs. Other imported products
are: machinery, gems, fertilizers and chemicals. Main trading partners are European
Union, The United States, China and UAE .
India’s Current Account

Year Mar Jun Sep Dec

2010 -13
2009 4.7 -4.5 -8.8 -12.2
2008 -1.5 -3.3 -12.6 -11.7
Source: Tradingeconomics.com

Interpretation: - India’s current account shows negative current account. Means import
is greater than export. Investor doesn’t take it positively. As compare to previous year
negative balance payment has increased.
 Industry Analysis

The purpose of industry analysis is to review prevailing conditions within specific

industry and its segments. The company's industry obviously influences the outlook for
the company. Even the best stocks can post mediocre returns if they are in an industry
that is struggling.
“It is often said that a weak stock in a strong industry is preferable to a strong stock in a
weak industry.”
To assess the industry group potential, an investor would want to consider the overall
growth rate, market size, and its importance to economy. While the individual company
is still important, its industry group is likely to exert as much as, or more, influence on
the stock price. When stock move the usually move as groups; there are very few lone
guns out there. An understanding of the industry sector involved, including the maturity
of the sector and any cyclical effects that the overall economies have on it, is also
necessary.
The followings are some important factors which should be considered in
Fundamental Analysis
• Growth: A growing industry gives room for profitability.
• Profitability: Average profitability of the industry should be attractive.
• Demand-Supply: the wider demand supply gap, the better is the industry’s
fortune in the future
• Entry barrier
• Competition and Market share:
• Technology trends
• Government Policy
• Capacity Utilization
• Bargaining power of buyers
 Indian Telecommunication industry

Indian Telecommunication industry, with about 464.82 million mobile phone connections
(June 2009) , is the third largest telecommunication network in the world and the second
largest in terms of number of wireless connections. For the past decade or so,
telecommunication activities have gained momentum in India. Efforts have been made
from both governmental and non-governmental platforms to enhance the infrastructure.
The idea is to help modern telecommunication technologies to serve all segments of
India’s culturally diverse society, and to transform it into a country of technologically
aware people.

' Telecom Industry in India ' is regulated by 'Telecom Regulatory Authority of India'
(TRAI). It has earned good reputation for transparency and competence.

Two types of players exists in ' Telecom Industry India ' community –

• State owned companies like - BSNL and MTNL.

• Private companies like - Reliance Infocomm and Tata Teleservices, Hutchison-

Essar, Bharti Tele-Ventures, Escotel, Idea Cellular, BPL Mobile, Spice
Communications etc.

Telecom industry in India has a big market potentiality and is a fast growing sector.
Government of India is eager to reconstitute this telecom industry by enacting effective
policies for more investments from foreign companies, which results in a very
competitive and deregulated market in the world.
Policies of telecom industry in India

Government of India implemented the unified access licensing regime, which enables
basic and cellular mobile service to use any modern technology. In 1997,
Telecom Regulatory Authority of India (TRAI) was formed to facilitate the
growth of the telecom sector in India.

Major services and market potentiality of Telecom industry in India

Telecommunication sector in India is primarily subdivided into two segments, which are

• Fixed Service Provider (FSPs) and

• Cellular Services.

Telecom industry in India constitutes some essential telecom services like

• Telephone,

• Radio, Television

• Internet.

Telecom industry in India is specifically emphasizing on latest technologies like

• GSM( Global System for Mobile Communications),

• CDMA(Code Division Multiple Access),

• PMRTS(Public Mobile Radio Trunking Services),

• Fixed Line and WLL(Wireless Local Loop ).

Growth of Telecom Industry in India

The total telephone subscriber base reached 671.69 Million taking the Tele-density to
56.83 in June 2010 further securing its position as the second largest wireless network in
the world. Of the total subscription wireless subscription accounts 635.51 Million and
Wireline subscription which has been constantly declining accounts for only 36.18 mn
accounts.
Economic Survey 2008-09 Growth

Source : Department of Telecommunications point to point

450
Fixed line
400
350
CDMA
300
250
GSM
200
150
Wireless(CDMA
100 &GSMA
50
Gross Total
0
Mar-06 M ar-09 Mar-08 Feb-09

Interpretation :- Graph shows that India telecom industry is growing in CDMA, GSMA
and wireless (CDMA & GSMA) sectors . It shows overall upward trend of growth rate in
these sectors. It will beneficial for investors to invest in telecom industry as it is a
growing industry. Future prospects are good in this industry.
 Company Analysis

The purpose of company analysis to analyze the financial and non-financial aspects of a
company to determine whether to buy, sells, or holds onto the shares of a particular
company

After determining the economic and industry conditions, the company itself is analyzed
to determine its financial health. This is usually done by studying the company's financial
statements. From these statements a number of useful ratios can be calculated. The ratios
fall under five main categories: profitability, price, liquidity, leverage, and efficiency.
When performing ratio analysis on a company, the ratios should be compared to other
companies within the same or similar industry to get a feel for what is considered
"normal." These are quantitative factors of company analysis; there are also some
qualitative factors which should be considered also.

Find out as much as possible about the company and their products.

Do they have any “core competency” or “fundamental strength” that puts them ahead of
all the other competing firms?

What advantage do they have over their competing firms?

Do they have a strong market presence and market share? Or do they constantly have to
employ a large part of their profits and resources in marketing and finding new customers
and fighting for market share?

Following are some more important aspects about company

Shareholding pattern

Growth

Technology
Expansion Plan

Profitability

Capital History

Marketing Capabilities

Most important its financial statement

After you understand the company & what they do, how they relate to the market and
their customers, you will be in a much better position to decide whether the price of the
companies stock is going to go up or down.

So fundamental analysts use different tools and ratios to compare all sorts of companies
no matter what business they are in or what they do!

Financial ratios

A financial ratio is an expression of the relationship between two selected items from the
income statement or the balance sheet. Ratio analysis helps you to evaluate the weak and
strong points in your financial and managerial performance. Financial ratio analysis is
calculation and comparison of ratio which are derived from the information in a
company’s financial statements. The level and historical trends of these ratios can be
used to make inferences about a company’s financial condition its operations and
attractiveness as an investment.

1. Balance sheet ratio analysis

Current ratio

Quick ratio

2. Income statement ratio anlysis

 Gross margin ratio

Net profit margin ratio

3. Management/efficiency ratios

Inventory turnover ratios

Account receivable ratio

4. Overall profitability analysis

Return on assets ratio

Return on investment ratio

5. Market test or valuation ratios

Earning per share

Company Analysis of Bharti Airtel

• Bharti Airtel (BSE: 532454), formerly known as Bharti Tele-Ventures LTD (BTVL) is
India's largest cellular service provider with more than 110 million subscribers as of
Sep 2009.
• With this, Bharti is now the world's third-largest, single-country mobile operator and
sixth-largest integrated telecom operator.
• It also offers fixed line services and broadband services.
• It offers its TELECOM services under the Airtel brand and is headed by Sunil Bharti
Mittal.
• The company also provides telephone services and Internet access over DSL in 14
circles.
• It also acts as a carrier for national and international long distance communication
services.
• The company has a submarine cable landing station at Chennai, which connects the
submarine cable connecting Chennai and Singapore.
• The businesses at Bharti Airtel have always been structured into three individual
strategic business units (SBU's)
- Mobile Services, Airtel Telemedia Services & Enterprise Services.
• The mobile business provides mobile & fixed wireless services using GSM technology
across 23 telecom circles while
• The Airtel Telemedia Services business offers broadband & telephone services in 95
cities and has recently launched a Direct-to-Home (DTH) service, Airtel digital TV.
The company provides end-to-end data and
• Enterprise services to the corporate customers through its nationwide fiber optic
backbone, last mile connectivity in fixed-line and mobile circles, VSATs, ISP and
international bandwidth access through the gateways and landing station.

Globally, Bharti Airtel is the 3rd largest in-country mobile operator by subscriber base,
behind China Mobile and China Unicom.

Market share of different Telecom Operators in India

In India, the company has a 24.6% share of the wireless services market, followed by
17.7% for Reliance Communications and 17.4% for Vodafone Essar
 Bharti Airtel
24.6
Reliance
40.3 Communicationa
Vodafone Essar

Others
17.7
Slice 5
17.4

Company Analysis of Bharti Airtel by using different Ratios

1. Balance sheet ratio analysis

 YEAR March 05 March 06 March 07 March 08 March 09 March 10

RATIOS
Current Ratio 0.47 0.44 0.47 0.57 0.69 0.72
Quick Ratio 0.49 0.45 0.47 0.55 0.65 0.72

Interpretation :- Bharti airtel’s both current and quick ratios are moving upward means
shows increasing trends. These shows company has good liquidity position. Company is
able to pay day to obligations of company.

2. INCOME STATEMENT RATIO ANALYSIS

YEAR March 05 March 06 March 07 March 08 March 09 March 10

RATIOS
Gross profit
24.29 23.14 27.47 29.08 29.33 27.97
Ratio
Net profit
14.83 17.80 22.46 23.99 22.58 26.4
Ratio
Interpretation :- High income ratio shows company is at good profitability condition.
As we see that net profit ratio in 2009 decline. But this is minor decline. This is due to
high inflation rate and global meltdown. But company did not effected very much.

3. MANAGEMENT/EFFICIENCY RATIOS

YEAR March 05 March 06 March 07 March 08 March 09 March 10

RATIOS
Inventory 1307.05
257.80 634.52 373.35 453.06 547.83
Ratio
Account
receivable 11.38 12.57 14.31 12.28 12.78 15.3
ratio
Interpretation :- High inventory turnover ratio and high debtor turnover ration shows
the management’s efficiency in using inventory and collecting debts respectively. Bharti
airtel’s both ratios are high in 2009 as compared to previous years. Company is efficient
in using inventory properly and company able to collecting cash from debtors on time. In
this way it shows good prospectus for investors to invest in this company in future.

4. OVERALL PROFITABILITY NALYSIS

YEAR March 05 March 06 March 07 March 08 March 09 March 10

RATIOS
Return on
asset Ratio 8.36 10.36 14.51 15.17 15.54 96.25
Return on
investment 22.47 27.47 35.35 30.94 28.13 25.78
ratio

Interpretation :- High return on asset ratio shows that company’s overall profitability is
goods. Bharti airtel’s this ratio is high in 2010 as compared to previous years. So its
overall profitability is good whether its return on investment ratio has reduced by .03
point. It may be due to inflation and global meltdown reason.
5.MARKET TEST OR VALUATION RATIOS

YEAR March 05 March 06 March 07 March 08 March 09 March 10

RATIOS
Earnings per
6.53 10.62 21.27 32.90 40.79 24.82
share ratio

Interpretation :- High earning per share is considered good from investor’s point of
view. Bharti airtel’s this ratio is increasing year by year but as fallen for the year ending
March 2010. It shows that investors has good prospectus in bharti airtel if they will
purchase is share.
Calculation of Intrinsic value for March FY2010

Using following Information to find intrinsic value:

Current Year 2010

PE ratio (Average 5 years) 14.08
Current EPS 24.82
Current Price 349.55
Divident Payout ratio(Average) 5.22%
EPS Growth Rate 13.17%
ROI expected (> than inflation) 14%
Investment Horizon 2020

Step One: Forecasting Share Price

First of all, forecasting share price ten years down the road. In this case, I project the
price for the next ten years using EPS growth rate of 13.17 per cent per year.

Forecasted Share price in 2020 = EPS after 10th year * Average PER

= 24.82*((1+0.1317)^10)*14.08 = Rs 1204.25

Step Two: Forecast Total Future Value

Secondly, we need to calculate the total future value. This must include the potential
dividend as well.

Dividend Payout = Total Dividend/ Total EPS

Year Projected
EPS in Rs
2010 24.82
2011 28.09
2012 31.79
2013 35.97
2014 40.71
2015 46.07
2016 52.14
2017 59.01
2018 66.78
2019 75.58
2020 85.53
Total EPS 546.50

Total Dividends = 546.50 * 5.22% = Rs 28.52

Future Value2020= Forecasted Stock price + Total Dividends = Rs. 1232.77

Step Three: Calculate Intrinsic Value

Intrinsic Value = Future Value 2020 / ROI^(no. of Years)

= 1232.77/(1+.14)^10

= Rs. 332.53

Step Four: Compare with Current Stock Price

Current Stock Price = Rs. 349.55

Intrinsic value is less than market price therefore investors are suggested to sell the share
or observe weather there is a bullish trend in the market which will drive up the prices
further. If a so investors can wait for a little while before selling the share
 Technical Analysis
Technical analysis is a security analysis discipline for forecasting the direction of prices
through the study of past market data, primarily price and volume. Technicians say that a
market's price reflects all relevant information, so their analysis looks at the history of a
security's trading pattern rather than external drivers such as economic, fundamental and
news events. Price action also tends to repeat itself because investors collectively tend
toward patterned behavior – hence technicians' focus on identifiable trends and
conditions.

Technical analysts seek to identify price patterns and trends in financial markets and
attempt to exploit those patterns. While technicians use various methods and tools, the
study of price charts is primary. Technicians especially search for archetypal patterns,
such as the well-known head and shoulders or double top reversal patterns, study
indicators such as moving averages, and look for forms such as lines of support,
resistance, channels, and more obscure formations such as flags, pennants, balance days
and cup and handle patterns.

Technical analysis is frequently contrasted with fundamental analysis, the study of

economic factors that influence prices in financial markets. Technical analysis holds that
prices already reflect all such influences before investors are aware of them, hence the
study of price action alone. Some traders use technical or fundamental analysis
exclusively, while others use both types to make trading decisions.

In the following section Technical analysis method is used to analyze the movement in
the stock price of Bharti Airtel in the period of January 2010 – Present (9 th
September,2010)
 1. Line Chart

The chart above shows that the price of the Bharti Airtel shares has varied between the
support and resistance line drawn at Rs 261.55 and Rs 328.65 respectively. When the
security is tested several times between support and resistance line without being broken,
then the trader can decide to lock profits as the security moves towards the support point
as it is unlikely that it will move past this level.
 2. Candlestick Chart

The above chart again can be used to find the support and resistance line which is at the
price point of Rs 261.55 and Rs 328.65 respectively. The chart also shows the volume
traded each day. Any price movement with high volume of trade is seen as more stringer
and relevant move than a similar move with weak volume. This statement can be proved
by the graph above.

Notice the volume on the date marked 12/5/2010. There is a 8.3% drop in the price which
is followed by high volume of share trade. The new reduced price of security so achieved
is maintained for a considerable period of time with few ups and consequent drops until
9/7/2010 where again the increase in the price is accompanied with huge volumes.
Conclusion

On the basis of this assignment’s data we can say that there will be benefit to investors to
invest their money in telecom industry because telecom industry is growing industry.
And Indian government is also providing various facilities in the development of telecom
industry. In India BHARTI AIRTEL is growing company. On the basis of its various
ratios like Current ratio, Quick ratio , Net profit margin ratio, Inventory turnover ratios,
Account receivable ratio, Return on assets ratio, Return on investment ratio, Earning per
share we can say that company has good profitability condition, good liquidity position,
good market condition because earning per share is increasing every year.

However based on the intrinsic value it would be preferable for investors to sell the share
as intrinsic value is less than the current market price.

But based on the Technical analysis it can be seen that the price of the share is set to rise
further and new support and resistance line will be discovered in few weeks. Therefore
investors can hold the share for a while keeping an eye on the share price movement of
Bharti Airtel as well as on the other telecom companies and sell the share when the price
reaches the new resistance line