Bharti vs. Idea: How the valuations stack up?

In our previous articles we went through the market share of Bharti and Idea and realized that Bharti is the undisputed market leader in the Indian mobile markets. In the next article we compared the operational numbers for both the companies. Here again Bharti has been leading in the numbers but Idea has been slowly and steadily narrowing the gap. In our final piece in the series, we would focus on the valuations and what the future holds for the two companies Let's first see how the stock prices of the two companies have performed. Though Bharti Airtel has been around for a while, Idea Cellular came up with an IPO only in Mar-07. Therefore, our analysis would be done from Mar-07 onwards

Source: ACE Equity

Clearly, both Bharti as well as Idea have underperformed the broader markets from September 2009 to date. But the interesting thing to note here is that both stocks have pretty much moved in tandem with each other till recent times. Very recently, the stock of Idea has outperformed that of Bharti Airtel.

A major reason for this is the general negative sentiment surrounding the telecom sector and an even more pronounced negative sentiment surround the incumbent Bharti. As competition on the tariff front started to wane of, it severely hurt the prospects of the smaller companies which were competing purely on the price front and hence bleeding in their financials. At the same time, companies like Idea Cellular took a bold step to start increasing tariffs gradually. Despite this, the company's active subscriber base continued to expand. In fact, the company gained favorably on the MNP (Mobile Number Portability) front. By the end of FY12, the Supreme Court cancelled the 2G licenses of the new players. This again worked in the favour of Idea's stock price as it became one of the favoured ones to gain from the plight of the losing companies. Experts and investors expect the company to gain the subscriber shares from the companies whose licenses have been cancelled. Another aspect that worked in the favour of the company to some extent was the slower than expected turnaround in Bharti Airtel's African operations. As investors continued to grow wary of the incumbent, they started to focus more attention on the other listed player i.e. Idea Cellular. This has shown in the recent outperformance of the stock vis-a-vis the incumbent. However, it would be important to compare companies on the basis of their valuations.

Valuations		Bharti	Idea
Market cap	Rs. M	1,253,185	330,388
Price to earnings*	Times	26.9	43.6
Price to book value*	Times	2.5	2.6
Price to sales*	Times	1.8	1.8
EV/EBIDTA*	Times	8.5	9.5

* Based on trailing 12 months' data  Prices as on April 4, 2012 Source: Company data

The valuations of Bharti Airtel are clearly more attractive than that of Idea Cellular.

Financials:

Let us see how the two companies stack up in terms of their financials.

Growth		Bharti	Idea
Revenues	%	34.00%	37.30%
EBITDA	%	28.10%	26.80%
Net Profits	%	10.50%	15.70%

*CAGR growth from FY07 to FY11

Key Ratios		Bharti	Idea
Return on Equity	%	9.50%	5.90%
Net Debt to Equity	Times	1.5	1

* As on end of December 2011 Source: Company data

Though Idea has delivered superior growth numbers but when it comes to returns to the shareholders, Bharti emerges as a clear leader. But Bharti has much more debt on its books as compared to Idea. One of the reasons behind this is the acquisition made by the company in Africa. Despite the visible turnaround in operations, Africa business has not really panned out at the pace that the company had initially estimated. It is important to note that the company has plans to repay the debt through the internal accruals soon.

The path forward

Going forward, the future for both the companies is attractive. Though the growth in the Indian telecom sector may not be as spectacular as that seen in the past, but even then there is still plenty of steam left. Data services, value added products and 3G are expected to drive the next phase of growth for the sector. Both the companies have already launched their 3G services and have signed the roaming agreements with operators in circles where they do not have 3G spectrum. (Important to remember that these roaming agreements have been questioned by the telecom regulator).

For Bharti in particular, the African operations have started to yield positive results albeit at a slower pace than what was initially estimated by the management. At some point of time in the future, these operations would start to incrementally contribute towards the company's operations. Idea on the other hand has operations limited to the country. To that extent its growth would be decided by the fate of the overall sector.

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