Most brokerages have maintained a bullish stance on Sunil Mittal-controlled Bharti Airtel despite the company posting a mammoth pre-tax loss of Rs 31,334 crore for the September 2019 quarter (Q2FY20). The loss is due to a provision for outstanding payments to the central government on account of the Supreme Court judgment on adjusted gross revenues (AGR). The pre-tax loss in the year-ago quarter stood at Rs 1,998 crore.
The numbers were announced post-market hours on Thursday and saw the stock drop to Rs 354 levels on the BSE once the markets opened for trade on Friday. It, however, bounced back as trade progressed and is now inching closer to its 52-week high of Rs 397 touched on October 14, 2019 in the intra-day deals.
“We expect operators to file a review petition in the Supreme Court soon. Post that, given the stretched balance sheet of telcos, we believe that government can be sympathetic to operators. If so, it will likely be in form of deferred payments (annual instalments over a period with a moratorium in near term). A panel is already reviewing other relief measures relating to moratorium on spectrum dues and license fee and this will likely be considered along with the same,” wrote analysts at Jefferies in a November 13 report.
Here’s how leading brokerages across the country have interpreted the recent developments.
Motilal Oswal Securities
Bharti has operationally outperformed our expectation consistently over the last four quarters, maintaining its 4G subscriber base and also revenue market share. Peak capex is behind, and with strong network/spectrum capability, it is well placed compared to peers. Even in the case of limited government relief, it may survive with a potential duopoly structure. The consequent strong growth potential could offset regulatory pressures.
Given the aforementioned strengths, we maintain our positive stance on Bharti Airtel with a target price of Rs 425, ascribing 12x EV/EBITDA to the India business and 5x to the Africa business (given low trading multiples).
The AGR penalty will undoubtedly impact the company’s balance sheet and borrowing costs. Given the quantum of the penalty, Bharti will have to raise capital to keep leverage under check. Nevertheless, the weakening financial viability of Vodafone Idea Limited (VIL) even if the companies get a relief from the government on payment timeline and some potential license fee reduction in the future.
We have assumed that Bharti will gain 40 per cent of VIL’s revenues/subscribers, while JIO might garner a higher share of 60 per cent. Eventually, two large players controlling the telecom market with JIO’s aspiration to become the dominant player will drive tariff increases, which we anticipate from FY22 after a consolidation in FY21. Bharti’s net-debt/EBITDA should rise to ~4x if the entire penalty is paid through debt. Maintain our target price of Rs 434 and overweight stance.
Bharti Airtel (Bharti) reported better-than-expected Q2FY20 numbers with strong growth across key verticals. We believe, the AGR order impacts Vodafone Idea the most, impairing its ability to invest in network. This will provide Bharti an opportunity to boost market share, driving profitability. The stock is trading at an attractive 6.9x FY21E EBITDA. Maintain ‘BUY’ with revised target price of Rs 425 (Rs 414 earlier) as we rollover valuation to FY21E.
Bharti is the only telco to have nil operational cash loss in Q2FY20 and we see this as an advantage over the longer term. AGR case liability speculation has ended and works out to a whopping Rs 343 billion. This excludes liability arising out of acquisitions and spectrum trading on which we await more clarity. We have already built-in a negative impact of Rs 61/share to fair value from AGR liability. We maintain our estimates and target price at Rs 450. Retain BUY.