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- NSEI:AIRTELPP
A Look At The Fair Value Of Bharti Airtel Limited (NSE:AIRTELPP)
Key Insights
- Using the 2 Stage Free Cash Flow to Equity, Bharti Airtel fair value estimate is ₹1,216
- With ₹1,135 share price, Bharti Airtel appears to be trading close to its estimated fair value
- Analyst price target for AIRTELPP is ₹1,164 which is 4.3% below our fair value estimate
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Bharti Airtel Limited (NSE:AIRTELPP) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!
We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
Check out our latest analysis for Bharti Airtel
Crunching The Numbers
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) forecast
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF (₹, Millions) | ₹412.4b | ₹523.1b | ₹582.9b | ₹623.5b | ₹696.8b | ₹755.9b | ₹816.0b | ₹877.9b | ₹942.1b | ₹1.01t |
Growth Rate Estimate Source | Analyst x15 | Analyst x15 | Analyst x9 | Analyst x2 | Analyst x1 | Est @ 8.49% | Est @ 7.95% | Est @ 7.58% | Est @ 7.31% | Est @ 7.13% |
Present Value (₹, Millions) Discounted @ 12% | ₹367.8k | ₹415.9k | ₹413.4k | ₹394.3k | ₹392.9k | ₹380.1k | ₹365.9k | ₹351.0k | ₹335.9k | ₹320.9k |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = ₹3.7t
The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 6.7%. We discount the terminal cash flows to today's value at a cost of equity of 12%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = ₹1.0t× (1 + 6.7%) ÷ (12%– 6.7%) = ₹20t
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= ₹20t÷ ( 1 + 12%)10= ₹6.3t
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is ₹10t. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of ₹1.1k, the company appears about fair value at a 6.7% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.
Important Assumptions
We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Bharti Airtel as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 12%, which is based on a levered beta of 0.800. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
SWOT Analysis for Bharti Airtel
- Earnings growth over the past year exceeded the industry.
- Debt is well covered by cash flow.
- Dividends are covered by earnings and cash flows.
- Earnings growth over the past year is below its 5-year average.
- Interest payments on debt are not well covered.
- Dividend is low compared to the top 25% of dividend payers in the Wireless Telecom market.
- Annual earnings are forecast to grow faster than the Indian market.
- Current share price is below our estimate of fair value.
- Revenue is forecast to grow slower than 20% per year.
Moving On:
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For Bharti Airtel, we've put together three further elements you should further research:
- Risks: We feel that you should assess the 2 warning signs for Bharti Airtel (1 is significant!) we've flagged before making an investment in the company.
- Future Earnings: How does AIRTELPP's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
- Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NSEI every day. If you want to find the calculation for other stocks just search here.
Valuation is complex, but we're here to simplify it.
Discover if Bharti Airtel might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
About NSEI:AIRTELPP
Bharti Airtel
Operates as a telecommunications company in India and internationally.
High growth potential with proven track record and pays a dividend.