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Buy Bharti Airtel, target price Rs 620: Motilal Oswal

The brokerage says its estimates do not capture the potential upside for the company from incremental ARPU growth or market share gains.

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Last Updated: Mar 31, 2020, 01.47 PM IST
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Motilal Oswal has a buy rating on Bharti Airtel with a target price of Rs 620( an upside of 44 per cent over a CMP of Rs 429 ).

The brokerage sees limited impact of Covid-19, currency and crude price swings on the Bharti stock and believes that it is best hedged to face regulatory woes. Given the Covid-19 lockdown in India, net subscriber adds (average 2-3 months) have stalled and got impacted by 1-2 per cent. With physical recharges being unavailable, there has been a shift to digital recharges (from 15 per cent in the last 1-2 years to 35-40 per cent currently). In the current environment, more tech-savvy data subscribers with higher ARPUs and longer-term recharges of 90 days may see lower impact.

The company’s share price moved up by 2.16 per cent from its previous close of Rs 431.05. The last traded price is Rs 440.35. Incorporated in 1995, Bharti Airtel has a market cap of Rs 234179.80 crore.

Investment Rationale

Bharti has extended free incoming calls until April 17, 2020 with an additional Rs 10 talk-time. This could impact 1QFY21 revenue/EBITDA by Rs 2.2 billion/ Rs 1.8 billion, about 1-2 per cent. Against this, increased data consumption should see upgrades in recharge values, thus, mitigating the impact. In the fourth quarter of Y20/ first quarter of FY21, 13 per cent/19 per cent revenue growth has been estimated on a quarter-on-quarter basis.

The brokerage does not expect any material investments in 5G to happen over the next 3-4 years as (a) new use cases for 5G are few and far, and (b) incremental consumer benefit is limited, as data speed could easily be dealt by 4G investments.

The brokerage says its estimates do not capture the potential upside for the company from incremental ARPU growth or market share gains, but factor in the AGR liability impact of Rs 343 billion (company estiates) against Department of Telecommunications’ (DoT) figure of Rs 445 billion. In either case, there would be EBITDA growth opportunity. EBITDA of Rs 621 billion (based on ARPU workings) could generate FCF yield (post interest) of 11 per cent.

Thus, 10 times EV/EBITDA could derive a target price of Rs 910 after factoring in the impact of Bharti Infratel. Further, this does not capture the potential deleveraging benefits. The brokerage maintains its buy rating with SOTP-based target price of Rs 620, assigning 11 times (to capture the incremental earnings upside) on India wireless EBITDA and Africa at 6 times.

Financials

For the quarter ended December 31,2019, the company reported consolidated sales of Rs 21947.10 crore, up 3.86 per cent from last quarter sales of Rs 21131.30 crore and up 6.96 per cent from last year same quarter sales of Rs 20519.20 crore. The company has reported net profit after tax of Rs -312.60 crore in the latest quarter.
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