Why Bharti Airtel stock is a ‘Buy’

Investors with a long-term perspective can buy the shares of Bharti Airtel (Airtel). As India’s surviving private telecom player over the last two decades, it has proved its resilience and emerged stronger versus peers who either went bankrupt, or sold out, or merged (Vodafone and Idea) due to several reasons, including Jio’s entry and aggressive pricing.

It has also successfully tided over the AGR (adjusted gross revenue) crisis. In many ways its story so far epitomises The eye of the tiger as sung by ‘Survivor’! While it may have been over shadowed by Jio, it is on par with Jio on many metrics. Being a dominant player, it is well-positioned to capitalise on India’s booming digitisation trends and also benefit from similar trends in its Africa markets.

Operations

At a consolidated level, Airtel is the largest telecom player based out of India with operations in India (70 per cent of revenue), Africa (29 per cent) and South Asia (1 per cent). Its business encompasses mobile services (around 80 per cent of revenue), enterprise/business services (enterprise connectivity, submarine cables; around 14 per cent of revenue) and other services like DigitalTV/DTH, home services, etc. It currently has around 30 per cent of the mobile subscriber market share vs Jio’s 35 per cent. While in number 2 spot, it has been gaining market share, adding more subscribers than Jio for the last four months.

Broadly, Airtel has been adapting well to the new norm in Indian telecom after Jio’s entry caused a disruption and significantly brought down ARPUs. After initial hiccups, it has actually benefited from the disruption and has been consolidating its position (acquisition of Telenor, Tata Teleservices). Airtel survived the challenges by dint of its managment expertise, larger size and relatively less leverage versus peers.

Financials

The company has shown good improvement on key metrics in recent quarters. In the recent December quarter, total revenue was at ₹26,518 crore (up 23 per cent y-o-y) vs Jio’s ₹19,475 crore. Its India business with a revenue of ₹19,105 crore was on par with Jio. Airtel reported consolidated EBITDA of ₹12,178 crore versus Jio’s ₹8,483 crore. Airtel’s India EBITDA at ₹8,592 crore was slightly above that of Jio and was also better in terms of margins, implying better profitability. Performance across key metrics was also encouraging, with India mobile net additions at 14 million (versus Jio’s 5.2 million) up 293 per cent yoy, and ARPU up 23 per cent to ₹166 (versus Jio’s ₹151).

With improving EBITDA, the company’s leverage profile has also become comfortable with net debt/FY22 EBITDA (Bloomberg consensus) at 2.7 times. It also does not expect capex intensity to change in future even when 5G investments gain traction as it will get offset by reduced investments in 4G. Also, with only four large players in the industry out of which two are on a weak footing (Vodafone Idea and BSNL), bidding for spectrum auctions is unlikely to be as aggressive as in the past. These factors give confidence that leverage metrics will remain under control in future as well.

Valuation

Airtel now trades at an EV/EBITDA (FY22 Bloomberg consensus) of 8 times. This is around 10 per cent cheaper than its 3 year average of around 8.75 times and 10 per cent more than its 10-year average of around 7.25 times.

There is a case for a premium vs 10-year historical valuations for the following reasons: one, Airtel’s earnings are likely to accelerate over the next few years with FY20-23 EBITDA CAGR expected at around 20 per cent, as the company benefits from customers in India and Africa upscaling to 3G/4G services; two, currently India has only two players, Airtel and Jio (Vodafone Idea still plagued by high debt, BSNL revival in doldrums) who are well-positioned to invest and capitalise on accelerating digitisation trends and the need for more and faster connectivity in a world that will be dominated by internet of things; three, in comparison to Jio, Airtel trades at a significant discount (at least 30 per cent). The multiple stake sales in Jio valued Reliance’s telecom business at around 10.5x FY22 EBITDA and the further increase in share price of Reliance post these deals, indicates that the market is valuing it even higher than that.

While PE investors and markets have assigned high valuations to Jio’s nascent businesses like e-commerce and other digital opportunities given its large customer base (400 million subscribers), it needs to be noted that Airtel too can leverage its customer base (India business mobile subscribers at around 340 million) for synergies. For example, Airtel could partner with Jio rivals in e-commerce/fintech to tap synergies.

This apart, the company also has a potential near-term catalyst if the Supreme Court gives a favourable ruling on the application filed by the company highlighting errors in the AGR demand. According to Airtel, its dues must be ₹13,004 crore vs DoT demand of ₹43,989 crore. While the outcome of this is uncertain and can go either way, the current share price does not factor a favourable ruling.

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