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The environment for stock investing is likely to remain challenging at least for the next few months if not longer. Macro headwinds in the form of persistent inflation, northward movement in interest rates for the foreseeable future, combined with likely slowdown in global and domestic growth, will continue to exert downward pressure on stock prices. Cautious approach and careful stock selection, something that we have been re-iterating since start of the year at BL Portfolio, remains the way forward till macro issues get sorted out.
In this context, Bharti Airtel (Airtel) appears to be a good stock for accumulation as market correction plays out. Airtel has cyclical and structural positives working in its favour. During periods of economic and market stress, well-managed and well-capitalised telecom companies are viewed as defensive and safer bets. Airtel falls in that category. As India’s only surviving private telecom company (in original form) over the last two decades, it ranks high in terms of being well managed. It is also well capitalised with leverage at manageable levels. An example of its defensive characteristics is evident from its outperformance over the broader markets and benchmark indices during the Covid-induced market crash of March 2020. Airtel stock corrected by around 27 per cent from its highs in February 2020 versus the Nifty 50 correcting by 40 per cent. More importantly, Airtel recovered faster and moved past its February 2020 highs by May 2020 as investors viewed telecom as a defensive bet amidst uncertainty, while Nifty 50 crossed its pre-Covid peak only in November 2020.
Besides being cyclically better positioned, Airtel also has good medium-term and long-term structural positives in its favour. In an increasingly connected world and internet-based economy, use case for telecom services in multiple services can see sustained growth over the course of the decade. The current decade will see a wave of 5G/broadband-enabled digital themes such as using drones for delivery, virtual reality, industrial automation, internet of things, SaaS, deployment of driverless cars and trucks etc. Telecom companies will be one of the key beneficiaries of these themes.
From a near-term perspective, structural positives are in the form of increase in average revenue per user (ARPU), further solidifying its position in the Indian telecom market dominated by two players. While chances for Vodafone Idea to revive remain, it still is a weak third player as of now. Airtel has utilised this opportunity to strengthen its position in the Indian market and can continue to do so, going forward. In terms of ARPU, the company has managed to show good improvement on the metric in recent quarters. While current concerns on inflation can bring a pause to this trend, the medium-term trend remains up.
Airtel currently trades at one-year forward EV/EBITDA of 8.1 times (Bloomberg consensus), cheaper versus its five-year average of 8.7 times. This offers favourable risk versus reward opportunity in the stock given the factors discussed above, which is also expected to play out in its improving financial performance over the next few years. Consensus expectations are for its FY22-24 EBITDA to grow at a solid CAGR of 18 per cent. This makes its current valuation attractive. At BL Portfolio, we had given a Buy recommendation on Airtel in April 2021, when it was trading at ₹533 and one-year forward EV/EBITDA of 8 times. We now recommend Accumulate on dips due to the current market environment.
Business and recent performance
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 such as DigitalTV/DTH, home services, etc. It currently has around 31.5 per cent of the mobile subscriber market share in India vs Jio’s 35 per cent. While Jio’s market share has remained constant versus same time last year, Airtel has increased its market share from 30 per cent at the same time last year.
In its recent analyst day held in March 2022, the company provided insights on its growth strategy, going forward. The company remains focused on premiumisation across its B2C and B2B offerings. Airtel ARPU in India business at ₹178 is higher than that of Jio’s ₹167.6. That this is despite having only 64 per cent of its customer base in 4G versus 100 per cent of Jio customers in 4G, is reflective of its premiumisation strategy in the mobile market with scope for further progress as it targets its customers on 3G networks to upgrade to smartphones/4G.
While wireless remains the main business, there is scope for growth and synergies across its product lines over the next few years.
Over the last one year, besides improving market share, Airtel has also improved its financial performance and metrics across the board. APRU improved to ₹178 in India from ₹145 same time last year. In recently concluded March 2022 quarter, EBITDA margin has improved to 51 per cent from 49 per cent and it reported revenues of ₹31,500 crore and EBITDA of ₹15,998 crore. These were up by 22 and 27 per cent respectively y-o-y. For the full year, the company reported consolidated revenues of ₹1,16,547 crore and ₹58,110 crore – growth of 16 and 26 per cent respectively.
Leverage metrics have also improved through a combination of better financial performance and rights issue initiated last year. The company’s net debt to EBITDA (Q4 EBITDA annualised) is at a very comfortable 2.51 times, giving sufficient scope for investing to grow and compete aggressively.
Risks
One risk that investors need to watch out for is the upcoming 5G spectrum auctions. In case the bidding for spectrum waves turns out be more aggressive than expected, these can impact financial and operating performance. The pay-offs for 5G investments will also be long dated. However, from a long-term investor perspective, any correction related to 5G auctions can also be used as accumulation opportunities.
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