This Telecom Sector Stock Is A Buy For 2 Quarters By HDFC Securities

HDFC Securities take on Bharti Airtel:

The company offers a gamut of telecom services ranging from fixed line to broadband to DTH and enterprise services. In the Covid 19 era, there has been seen strong penetration of data even in rural and among low income users.

Key highlights:

• Revenue market share improved to 34.9% as on 30 June, 2021.

• Debt has been limited owing to company’s equity raising, value unlocking in the African subsidiary, Indus Towers, and Bharti Telemedia.

• Tariffs will increase going ahead and ARPU shall rise to Rs. 200/month by end FY22 (vs ARPU of Rs 146 in Q1FY22).

• Transition of company’s 2G and 3G customers to 4G will be ARPU accretive.

• The company has also expanded its spectrum holding by taking over spectrums in auctions. Other than this the company has acquired data centric spectrum from Videocon, Aircel and Tikona and through acquisition of Telenor, and consumer mobile business (CMB) of the Tata Group.

• The company took over subGHz spectrum which improves the overall network coverage services.

• The company came up with the rights issue for raising Rs. 21000 crore.

“The multiple structural and process reforms in the Telecom sector approved by the Union Cabinet in Sept 2021 were much needed to help reduce the regulatory burden on Telecom Service Providers (TSPs). Bharti will now be able to defer around Rs4000 cr towards AGR and Rs7500 cr towards spectrum dues in FY23E and use these to fund its 5G capex”, added the report.

Rationale for investment

Bharti enjoys diversified presence across geographies with non-India operations (primarily Africa) contributing 26% to the consolidated revenues in FY21. The company is collaborating with leading companies for 5G deployment.

“Strong market position in the domestic mobile and non-mobile segment, diversification across businesses, healthy operations in Africa, high financial flexibility makes Bharti Airtel attractive for Investment”, adds the brokerage report. Also an increase in tariffs as well as lesser competition is beneficial for the company with lower leverage as well as improvement in return ratios.

Global telcos have not given ample returns to investors, nonetheless given the market reset, integrated telco nature and ability to drive revenue growth exceeding nominal GDP could help Bharti provide returns to investors over the next few years. “Also growth acceleration in the B2B space by rising demand for cybersecurity, home entertainment, new products like Airtel IQ and Airtel Ads and Africa, can provide superior returns as risks remain contained”, says the report.

Valuation And Recommendation

“We feel investors could buy the stock in the Rs 669-681 band (8x Sept FY23E EV/EBITDA), and add on dips to Rs. 605-617 band (7.5x Sept FY23E EV/EBITDA). Base case fair value of the stock is Rs 733 (8.6x Sept FY23E EV/EBITDA) and the bull case fair value of the stock is Rs 798 (9.2x Sept FY23E EV/EBITDA). At the CMP of Rs 691.4 the stock trades at 8.2x Sept FY23E EV/EBITDA”, suggests HDFC Securities.

Disclaimer:

The above specified scrip is taken from the recommendations of HDFC Securities. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies Pvt Ltd, the author, and the analysts are not liable for any losses caused as a result of decisions based on the article. The above article is for informational purposes only.