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Bharti Airtel – It’s darkest before dawn

We see the negativity on Bharti Airtel’s (Bharti) stock price overdone as our thesis on the company remains unchanged with respect to EBITDA / FCF growth driven by large tariff hikes (else VIL may not remain a going concern). Bharti’s sound ability to execute in the market, and its incremental AGR (incl. NLD) is narrowing the gap with market leader. The announcement on new postpaid tariff and low-end smartphone launch is unlikely to derail Bharti’s EBITDA / FCF growth in our view. Further, the upcoming spectrum auctions are getting delayed due to various issues and have not received Union Cabinet approval as yet. Positive catalyst could be in clarity on floor price which, if in favour of operators, could lead to significant rerating of Bharti. Operators are yet to file for review or curative petition on the AGR case and any positive outcome can reduce the AGR burden. Our target price for the stock remains unchanged at Rs655. Bharti remains our top pick in the sector. Our estimates have changed slightly on model update on basis of annual report.

– When (if at all) and how much, will be the tariff hike? TRAI chairman Mr. P.D. Vaghela took charge on 1-Oct-20 and we should soon see progress on the floor price consultation paper (wherein only open-house discussion was pending) before the regulator publishes its recommendations. Operators may wait for clarity on floor price as its implementation in their favour may pave way for the next tariff hike, which would be sustainable, and provide level playing ground for Bharti and VIL. Else, VIL is ready to take tariff hike first, which should be followed by other operators as in Dec’19. Our estimate shows VIL may require a tariff hike of >50% (adjusted for organic ARPU growth and fund raising) while we have built-in only 25% and 37% ARPU growth (over Q1FY21-FY23E) for Bharti and VIL respectively in our estimate. We see upside risk to our ARPU estimate for Bharti.

– Competitive intensity to rise again? 1) The market leader, Reliance Jio, needs low-end smartphone to retain featurephone subs who are coming for refund from Sep’20. It has 100mn such subs and their retention would be the priority. The quantum of subsidy on smartphone will also depend on ARPU commitment. Therefore, low-end smartphones will come either with limited subsidy on handset and affordable tariffs, or deep discount on handset but higher ARPU commitment. Unlike featurephone, smartphone may not affordable on both handset and tariffs. This will significantly limit impact on Bharti and VIL. 2) New postpaid plans with lucrative content bundling may not significantly dent Bharti’s postpaid sub-base. Retail contributes only 30% of postpaid connections and these subs are least price-sensitive. Previously too, when the market leader did steep cuts in postpaid tariff, Bharti did not see much impact on its sub-base. These events are unlikely to change our assumption of large tariff hikes in the near term.

– Three-player market – is Bharti the loser? Our base case assumption always was of India remaining a market comprising three private players, and we have consistently maintained stable AGR market share for Bharti. We don’t see much risk to our estimate even if VIL turns a strong third operator. In fact, Bharti’s incremental AGR (incl. NLD) has significantly narrowed the gap with market leader, which indicates much higher incremental market share (thus, our assumption of stable market is conservative). Further, Bharti has seen highest conversion of tariff hike to revenue growth, which means it would gain on every tariff hike. We don’t see three private player market as threat to Bharti’s AGR market share assumption.

– New capex cycle – 5G? The upcoming spectrum auctions are getting delayed due to inclusion of 5G spectrum. We see DoT negotiation on availability of 5G spectrum with defence and department of space. Though Bharti has spectrum renewal in Sep’21, it already has excess spectrum in the circles concerned due to merger / acquisition of Tata Tele, Telenor, and Videocon. We see Bharti’s renewal payout at only Rs58bn. Market leader will have a large spectrum renewal burden as it would need to renew 850MHz of Reliance Communications’, which is coming up for renewal. We don’t see risk to network capex as 5G capex is expected to pick up when 4G capex will drop, hence keeping the network capex envelope stable. This implies much stronger FCF generation for Bharti in the coming years.

Shares of BHARTI AIRTEL LTD. was last trading in BSE at Rs.424.35 as compared to the previous close of Rs. 432.35. The total number of shares traded during the day was 710532 in over 15796 trades.

The stock hit an intraday high of Rs. 437.5 and intraday low of 423. The net turnover during the day was Rs. 305096533. Equity Bulls

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