Bharti Airtel: Re-rating on higher data revenues

Analysts believe the company is well positioned to get higher incremental share of the data pie

Bharti Airtel’s stock was up the past couple of trading sessions, after it raised data rates (or reduced discounts) and brokerages upgraded the stock on expectations of higher share of the data business. Airtel has reportedly raised data rates in Delhi and follows Idea Cellular, which recently hiked data rates by about 18 per cent. However, unlike Idea which has a revenue market share of 12.3 per cent and Delhi is one of its smaller revenue generators, it is one of the key circles for Airtel. The market leader has a revenue market share of 36.1 per cent in the circle.

Analysts say this could be the start of data rates rationalising, given lower competition, with smaller players having only a limited presence.

The other trigger is fast-paced growth of the data segment, currently 15-20 per cent of revenues of larger players. UBS believes further re-rating of the stock is likely with data revenues likely to grow five-fold to reach Rs 37,200 crore by 2019-20, increase in revenue market share given 17 per cent of total spectrum and significant cash flow generation. On the voice front, analysts believe there is potential in revenue growth driven by higher voice realisations as well as tractions in the rural segment.

ICICI Securities, too, believes there could be significant gains for the top three operators. They are expected to capture higher incremental mobile broadband market share, with the market expected to grow to Rs 77,100 crore by FY20 from about Rs 26,400 crore in FY15, an annual growth of 24 per cent.

The biggest risk, however, continues to be Reliance Jio. The launch could lead to a decline in data tariffs and loss in market share for Bharti, which has spent substantial sums in acquiring expensive spectrum and will incur higher capex as they expand their network to accommodate higher speeds. Higher competition in data services could lead to a rate cut and higher churn in the second half of FY16. The other risk for Bharti would be if its African business sees deterioration in key operating metrics.

At current prices, the stock trades at 21 times its FY17 earnings and 6.6 times the enterprise value or operating earnings. About 71 per cent of analysts covering the stock have a buy with a consensus target price for recommendations in June at Rs 450, a 10 per cent gain from current levels. Buy on dips.



The biggest risk, however, continues to be RJio as the launch could lead to a decline in data tariffs and loss in market share for players like Bharti which have spent substantial sums in acquiring expensive spectrum and will incur higher capex as they expand their network to accommodate higher speeds. Higher competition in data services could lead to a rate cut and higher churn in the second half of FY16. The other risk for Bharti would be if its African business sees deterioration in key operating metrics.

At the current price, the stock trades at 21 times its FY17 earnings and 6.6 times Enterprise value/Ebidta. About 71% of analysts covering the stock have a buy with a consensus target price for recommendations in June at Rs 450, a 10% gain from current levels. Buy on dips.