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Bharti Airtel Ltd. emerges as Jefferies’ preferred choice over HUL

In a head-to-head comparison, Bharti Airtel Ltd. emerges as Jefferies’ preferred choice over Hindustan Unilever Ltd. among India’s consumption-focused stocks.

Until 2019, Airtel encountered challenges characterised by adverse regulatory conditions and rising competition, while margin-led earnings growth propelled HUL’s market cap to three times that of the telecom company at one point, according to the brokerage.

Now, the telecom sector is moving towards a duopoly favoring Airtel, while growth and valuations are at odds for HUL, Jefferies said in a Jan. 10 note. The brokerage is constructive on telecom citing “strong growth outlook and deleveraging potential due to moderating capex.

Jefferies has a ‘buy’ rating on Bharti Airtel with a target price of Rs 1,300, implying an upside return potential of 22%. The research firm rates HUL a ‘hold’ with a target price of Rs 2,800, implying an upside potential of 9%.

Market Share
HUL commands a third of the market in its categories, with 45% in home care and slightly lower than the company level for beauty and personal care and foods.

Bharti Airtel has near-similar share at the overall level (35%), with broadband and direct-to-home lower than the company level and mobile a tad higher.

Industry Dynamics
Entry barriers are going down in the fast-moving consumer goods industry, as route to market and media fragmentation are creating a level-playing field for the smaller brands, the note said.

In contrast, barriers to entry in the telecom market have significantly increased, with hefty investments required to set up 4G/5G networks, which has led to a wave of consolidation. The sector is likely to remain an effective duopoly, as there is limited threat from new entrants—most global telecom companies have entered only to exit a few years later, Jefferies said.

Growth
The total addressable market for both companies is large, with FMCG growth at around 7% and telecom at 5.5% over last 10 years.

This gap has been percolated, with HUL’s growth at 9% (organic) surpassing Airtel’s growth by over three percentage points. However, when excluding pricing growth, Airtel’s growth stands one percentage point higher at 6%.

Earnings
HUL saw steady margin expansion for most of the last decade, until input price inflation showed up in FY22—point to point, margin expanded by eight percentage points.

In contrast, Airtel witnessed pressures due to competition from Reliance Jio Infocomm Ltd. until FY19, but in the past 10 years, saw a smart 10-percentage-point expansion, according to the note.

“HUL pays substantial part of profits as dividends, which is not the case for Bharti,” Jefferies said.

Outlook
Both HUL and Airtel ride on India consumption story, but estimated 15% revenue growth for the telecom operator is nearly twice that India’s largest consumer goods maker over FY23-26, the note said.

Ebitda growth would largely mirror this trend, with HUL (9% CAGR) meaningfully underperforming Airtel (20% CAGR).

Balance sheet deleveraging would further exaggerate the impact as Airtel’s earnings per share should rise over 50% CAGR. While HUL’s earnings per share growth will likely mirror Ebitda trend. Resultant free cash flow should be three times higher for Airtel, the brokerage said. NDTV Profit

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