Airtel vs Reliance Jio: Why Street continues to have faith in Bharti Airtel

Among other things, Bharti Airtel has maintained subscriber and revenue market share and stands to benefit when tariffs start to rise

Despite a poor December quarter performance marked by a 15 per cent fall in average revenue per user (Arpu) and a 93 per cent drop in India mobile profit before interest and taxes (PBIT), brokerages believe Bharti Airtel is well placed to ride out the Reliance Jio (RJio) pricing aggression.

 
Given the recent price cuts by RJio and indications that an Arpu increase for the sector is still a couple of quarters away, there are a few moving parts that could help boost the company’s financials. The first is the completion of two of the company’s acquisitions--Telenor and Tata Teleservices.
 
Analysts believe Telenor and Tata Teleservices will add Rs 30 billion to the India wireless operating profit of Bharti Airtel. This will be nine per cent of the current India operating profit. Analysts at Motilal Oswal Securities have increased the operating profit estimates for FY19 by about two per cent as they believe that an improvement in Africa operations has compensated for the decline in India profitability.
 
The other trigger is Bharti Airtel’s ability to maintain market share, despite average tariffs being at a premium to RJio. While RJio is estimated to have expanded its revenue market share, that has been at the expense of smaller operators. Bharti Airtel’s revenue market share has, in fact, improved by 130 basis points since the start of Jio’s commercial operations three quarters ago.
 
Its strong sequential broadband net additions and a rise in data usage in the December quarter underlines Bharti’s ability to scale its network and tactically match Jio’s price aggression to defend its subscriber base and revenue market share, according to Deutsche Bank. Eighty per cent of the company’s total sites are 3G/4G-equipped, compared with 71 per cent a year ago.
 
Bharti’s ability to spend more than other incumbents such as Idea Cellular and Vodafone (India operations) is cited as another reason why it will benefit quite a bit from the data explosion and revenue accretion expected to unfold going ahead. Bharti’s leverage when compared with other peers is much lower which should help it spend more; the company is spending Rs 250 billion each in FY18 and FY19 to bring its network up to speed.
 
The biggest trigger for the stock, however, remains the rise in tariffs. Most analysts believe the industry revenue will fall about 15 per cent in FY18 but will rise in FY19. This is on the back of RJio’s goal of reaching 50 per cent revenue market share by FY21, against less than 14 per cent now. “Jio reiterated its FY21 industry revenue guidance, which reinforces our confidence that pricing could potentially go up sometime in CY18,” say analysts at Goldman Sachs.
 
While the near term could see pressure on its revenues, Bharti Airtel will benefit from improvement in Africa, as well as an uptick in pricing in India in the second half of CY18.