Bharti Airtel share price: Citi says underperformance is overdone; Bernstein initiates coverage

Bernstein initiates outperform rating on Bharti Airtel share with a target price of Rs 600. It says India remains an attractive market opportunity in Telecom and sees Bharti Airtel as one of the two long term winners. Bharti Airtel share price has corrected by 30% since its peak in May. Bernstein believes this presents a good entry point to accumulate a quality stock. Citi believes Bharti Airtel’s sharp under performance appears to be overdone at this stage.

Favourable Market Structure

India telecom is a consolidating market with Jio and Bharti Airtel (70% market share) and Vodafone bleeding share. Long term market dynamics are positive with rising ARPU (13% CAGR), still-low user penetration (70%) and low smartphone mix (50%). Bernstein expects further consolidation of the market by 2025 with revenue share of Bharti at 31% and Jio at 47%.

Competitor responses

The few near-term choices for operators in the sector come down to pricing. Pricing status quo is net positive for Jio and Bharti and negative for Vodafone (which is desperate for a price hike to stem cash burn). Jio has reached number 1 position and no longer requires price cut. Bharti has no pressing cash flow challenges. Bernstein expects Jio and Bharti to hold the line on pricing in the near term. Vodafone will continue to burn cash.

Vodafone woes to continue

Vodafone lost 4 mn users in July, losing customers for 9 months in a row. AGR case outcome did not bring relief and increased cash flow pressures. A 10 year payment window for $7 bn AGR payment will need a large equity infusion. Investment from U.S. Telecom companies and Internet companies are "moon shots" requiring an appetite for years of billion dollar losses.

Valuation

Bernstein values Bharti Airtel based on our DCF model. They assume continued, weakened presence of Vodafone in the market, with Bharti's revenue share reaching 31% and modest price rises to reach an ARPU of Rs 285 by 2025. This implies a value of Rs 604 pershare. On an EV/EBITDA basis Bernstein values Bharti Airtel at 10.5x FY22 (vs 3 yr. avg of 9x).

Citi believes Bharti Airtel’s sharp under performance which started off with technical factors (promoter stake sale, MSCI cut) and was exacerbated by adverse news flow (Jio’s announcements, AGR relief for Voda Idea, tariff hike delay) appears to be overdone as this stage.

Market share gains and / or tariff hikes

While an imminent increase in tariffs has not been our base case (CIti factors in the next hike in FY22E), the rationale remains intact. There have also been no regulatory developments on floor prices. A delay in tariff hikes and/or in Vodafone Idea’s capital raise should imply continued revenue market share gains for Bharti (Jio / Bharti have gained 6 ppt / 2 ppt over 12M).

Recovery in 4G sub adds to aid ARPUs

Bharti’s 4G subcriber adds had slowed to 2 mn in Q1 FY21 vs. 11 mn average over FY19-20, with the former pulled down by the impact of the lockdown. June / July broadband adds were back to the 4m - 5m range, suggesting a pickup in momentum in Q2 which should sustain going ahead as economic recovery gathers pace (and aid ARPU increase in the process even without tariff action).

Digital strategy

Bharti Airtel has thus far provided limited granularity on its digital plans other than focusing on three broad areas

1)      B2B & B2C partnerships (across content, communication, etc.)
2)      Ad-tech (to capitalise on more than 150 mn digital subs across Wynk/Xstream
3)      Own products & services

Citi expects further details on its digital strategy in the coming months & the revenue opportunity it sees.

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Valuation & risks

Bharti  Airtel is trading at 6.5x FY22E EV/EBITDA vs. Jio at 13x implied.

Risks:

1)      5G capex (though timelines on trials & auctions continue to get extended)
2)       Over-ownership (though pending foreign investment approvals could address this)