Vodafone Idea’s market share erosion will continue, says Goldman Sachs

Vodafone Idea will see an accelerated market share erosion to Bharti Airtel and Reliance Jio if wireless tariffs don’t move up, Goldman Sachs said in a report

The cash-strapped telco’s current EBITDA run rate of Rs65 billion annual is about 75-80% lower than what Goldman Sachs estimates the company requires to meet all its payment obligations which start in CY22.

“Thus, if wireless tariffs do not move up, we see accelerated market share erosion from Vodafone Idea to Bharti Airtel and Jio; per our estimate, this could add Rs188 implied value per share to Bharti. We believe one of the two outcomes – tariffs moving up, or market share re-allocation, is highly likely in the short term,” the brokerage said.

Goldman Sachs said that revenue growth trends between Jio and Airtel have now converged. “…we believe this trend will sustain.”

While Bharti stock price is up 25% from its recent lows, its multiples are still 20% lower than its 1HCY20 peak, without any meaningful change to underlying fundamentals, Goldman Sachs said.

“We see this as unwarranted, and reiterate our Buy rating with 26% potential upside to our 12-month target price. We believe Bharti can sustain double-digit EBITDA growth for the foreseeable future (we forecast a 27% FY20-23E EBITDA CAGR), with upside risks from a higher-than-expected tariff hike and market share gains from Vodafone Idea,” Goldman Sachs said.

“We are Buy-rated on Bharti Airtel. Our 12-month DCF-based target price remains Rs635 (WACC of 11.2% and terminal growth rate of 4%). Key risks to our rating and TP include elevated competition in India, headwinds in Africa, regulatory hurdles and spectrum auctions,” Goldman Sachs added. LiveMint