BHARTI AIRTEL- At 6 Year Low.....

The once darling of Indian Markets, Bharti Airtel seems to be on a steady decline. The company posted 10th straight quarterly drop in Profits. And the stock has crashed to a 6 year low.

Have we reached the bottom?

Let’s answer with the help of some borrowed wisdom........

"In a business selling a commodity type product, it's impossible to be a lot smarter than your dumbest competitor. " ------------ Buffett on Airlines

"Producers of relatively undifferentiated goods in capital intensive businesses must earn inadequate returns except under conditions of tight supply or real shortage. As long as excess productive capacity exists, prices tend to reflect direct operating costs rather than capital employed." ----------- Buffett on Textiles

"In many industries, differentiation simply can’t be made meaningful. A few producers in such industries may consistently do well if they have a cost advantage that is both wide and sustainable. By definition such exceptions are few, and, in many industries, are non-existent. For the great majority of companies selling “commodity” products, a depressing equation of business economics prevails: persistent over-capacity without administered prices (or costs) equals poor profitability." ---------- Again on Textiles

So for a business to earn low returns, it needs (i) Undifferentiated Product (ii) Excess Capacity (iii) Low variable cost (for an additional customer) (iv) Low switching cost for customers.

So, where is Telecom in this? In my view, it satisfies all the above criteria & hence should earn low returns. Apart from that, it has the regulator, TRAI, which hurts the companies in whatever possible ways it can.

So, over the long term, there are going to be more losers than winners in Telecom Sector.

Now you may say- Airtel is the strongest. So it will definately be a winner (& not a loser).

But, there is no guarantee that there will be a few winners! What if all continue to earn below average returns?

So, Airtel is an AVOID in my view.

But there is a PRICE at which even the worst business becomes a great INVESTMENT.

Has Airtel reached that Price?

I Don't Know. And if you think that since price is 6 year low & hence its a good Investment now; then, I will say, Even you Don't Know.

FYI- Its still selling at 15+ PE.

Disclosure- No Plan to Invest. But there are some very good investors who are invested. So, I may be wrong also :-)