Nomura raises Bharti Airtel target price post tariff hike, sees 14% upside

Nomura on Bharti Airtel: Telecom giant Bharti Airtel has implemented a broad increase in tariffs, affecting both prepaid and postpaid plans with hikes ranging from 13 per cent to 21 per cent, effective July 03, 2024. 

The move follows a similar action by Reliance Jio, showcasing a concerted effort within the telecom sector to stabilise and enhance pricing structures, analysts noted.

That said, international brokerage firm Nomura analysts remain optimistic, projecting a 14.3 per cent upside in Bharti Airtel's stock, and reiterating a 'Buy' recommendation with a revised target price of Rs 1,650, up from Rs 1,550.

“The outlook for Bharti remains robust, underpinned by robust consolidated earnings before interest, taxes, depreciation and amortisation (Ebitda) growth of 19 per cent compound annual growth rate (CAGR) over FY24-27F stemming from healthy average revenue per user (ARPU) and subs growth; net debt having peaked out, given completion of the 5G rollout, declining capex and robust operating cash flows, and improvement in return ratios. We believe Bharti will continue to benefit from its higher-quality subscriber base vs peers and be able to leverage its significant digital and enterprise initiatives in a 5G landscape, which will enable its transition from a telco to a tech company in the coming years,” Nomura said in a note.

For Reliance Industries, Nomura said, “We reiterate our Buy rating for RIL with a sum of the parts (SoTP)-based target price (TP) of Rs 3,450. We expect RIL to benefit from a healthy 15 per cent Ebitda CAGR over FY24-26F, value unlocking in consumer-facing businesses, strong growth in new energy and sharp uptick in free cash flow (FCF) and return ratios.”

Tariff adjustments

Bharti Airtel has implemented increases across its range of monthly plans, with lower-end plans seeing hikes of 13-17 per cent, while longer-duration packs spanning 56/84 days have been raised by 17-21 per cent.

In the post-paid segment, tariff adjustments range from 10-20 per cent, with popular plans seeing increases of 10-13 per cent. 

Notably, Bharti has kept its entry-level voice prepaid plan unchanged at Rs 155, which includes unlimited voice and 1GB data, following a significant 57 per cent increase in January 2023. Daily data prepaid plans now start at Rs 299, compared to Jio's Rs 249, while entry-level post-paid plans begin at Rs 449.

For unlimited 5G data plans, Bharti has not revised its entry-level tariffs yet, whereas Jio has raised its threshold by 46 per cent to Rs 349. Bharti currently boasts a considerable 20 per cent of its subscribers on 5G, with strong growth in new additions anticipated.

Despite these adjustments, analysts highlighted Bharti Airtel maintains a premium of 17-20 per cent over Jio, down from previous levels of 25-27 per cent, indicating a narrowing pricing gap between the two major players. 

Additionally, Bharti's management targets an exit ARPU of Rs 300 in FY26, potentially necessitating another tariff increase of approximately 20 per cent in the next fiscal year. This tariff repair initiative, analysts believe, is expected to bolster industry earnings and improve overall sector health.

Looking forward, Nomura analysts anticipate continued tariff hikes driven by a favourable market structure with three major players. 

However, potential risks highlighted by analysts include heightened competitive pressures, which could delay or limit expected tariff hikes, as well as increased operational expenses impacting margins. 

Additionally, risks include higher-than-anticipated subscriber churn, post-tariff adjustments and variable performance in non-core business segments or adverse currency movements affecting international operations.