Valuation of Airtel

Table of Contents

Executive Summary        1

Industry Analysis        2

Firm Competitive Advantage Analysis        3

Bharti Airtel:        3

Idea Cellular:        3

Tata Telecommunications:        3

Peer ratio analysis:        4

Financial statement Ratio-based Analysis        5

Forecasted Financial Statements and Analysis        6

Forecasted Income Statement:        6

Forecasted Balance Sheet:        6

Recommendations        6

Appendices:        8

Executive Summary

“Economic worth” of a company is determined by the valuation of the company. Corporate valuation is an indispensable part financial exercise for M&A, raising capital and for meeting regulatory requirements.

This report comprises of industry overview, investigation of Telecom sector and a company overview of Bharti Airtel. It consists of analysis of the firm and industry, key strategies undertaken and the competitive landscape advantage that the firm enjoys over the peers like, Idea, Reliance Communication and Tata Telecommunication.

Further, the report comprises of Ratio analysis of the firm. It additionally comprises of cost of debt and cost of equity computations to discover cost of capital for Bharti Airtel Limited.

The third part comprises of valuation of firm by using Dividend discount model and Discounted cash flow method to find out the intrinsic value of the firm. Relative valuation and Enterprise Value have also been evaluated in this segment.

The report ends with recommendations based on the valuations from the previous segments of the report.

Industry Analysis

The telecom industry lies at the heart of today’s increasing digital society. Today, mobile phones are the most powerful and transformational device. Increasing smartphone penetration and internet access in both the urban and rural areas is leading to increased consumer connectivity. Further, the recent demonetization move by the Government of India has fueled the digitization in banking and setting up of payment banks in the country. Digitization of payments presents a huge opportunity in India.

With the entry of Reliance Jio, the Indian telecom market moved towards unlimited voice, bundled with large blocks of data. ‘Free pricing’ during the year, by Reliance jeopardized the financial health of the telecom industry. Its prolonged free trial periods created a massive pressure on the industry revenues and margins. By the end of the year, Reliance Jio finally announced the launch of its paid services and it is expected that the market will return to normalcy.

India has the world’s second highest number of internet users with 432 Mn users as of Dec 2016, the customer base has grown by 12.81% from 1,058.85 Mn to 1,194.58 Mn in FY 17. The urban tele-density stood at 171.80%, whereas the rural tele-density stood at 56.91%, as on March 2017. Excluding metros, Himachal Pradesh has the highest tele-density at 147% followed by Tamil Nadu at 128.40%. Among the three metros, Delhi tops with 257.76% tele-density. On the other hand, the service areas, like Bihar, Assam, Madhya Pradesh and Uttar Pradesh have comparatively low tele-density.

The Indian internet user base is expected to reach 450-465 Mn by June 2017. Internet penetration in urban India stands at around 60% whereas in rural India penetration is only 17%. In urban India, the Internet user base grew by 7% to 263 Mn for YoY period ended October 2016, and rural India’s Internet user base grew by 22% to reach 157 Mn between the same period. Low penetration, especially in the rural area shows a robust growth prospect.

Increased smartphone penetration in the country will drive the growth of the mobile broadband penetration in India. Currently, the mobile broadband penetration stands at 20% and is expected to grow in the coming years. In the first quarter of 2017, smartphone shipments in India grew by 14.8% YoY to 27 Mn as per IDC. The ‘Make in India’ programme by the Indian Government has boosted the production of mobile phones in the country. It crossed the 100 Mn mark and is set to touch the 500 Mn mark in the next two years. The focus is on affordable smartphones for all.  

Strong data network along with swift customer service experience will be the key growth drivers of the industry in urban India. With favorable government regulations and fast changing highspeed 4G ecosystem, in the coming years, the Indian telecom sector is expected to witness a surge in data consumption. Technological shift towards mobile broadband, reduction in data tariffs, and availability of affordable smartphones, is expected to increase the 4G connection base. It is forecasted that the 4G connection base would grow from 3 Mn at the end of 2015 to 280 Mn by 2020. Data traffic is expected to grow by a CAGR of 63% over the period 2015 – 2020

Firm Competitive Advantage Analysis

Bharti Airtel:

Bharti Airtel is the leading telecom player in India and is ranked third worldwide. Bharti Airtel has presence in 17 countries across South Asia and Africa. It is a leading telecommunications player with headquarters in New Delhi, India. It ranks amongst the top 4 mobile service providers globally in terms of subscribers. The company's services in India include 2G, 3G and 4G wireless services, fixed line services, high speed DSL broadband, IPTV, DTH, enterprise services including national & international long distance services to carriers. In the rest of the geographies, it offers 2G, 3G wireless services and mobile commerce. It is the only player in India with pan India 4G/3G spectrum in 22 cities. It has 126 3G+4G carriers, highest in the industry. Airtel has the largest revenue and subscriber market share in the telecom industry. They also have a large distribution platform with add on services like payments bank. Airtel is the only operator to leverage quad play – Mobile, Fixed Voice, Broadband and DTH.