Bharti Airtel: Consolidation gains key trigger

Improving profitability in Africa, Tata Tele integration benefits and tower asset sale add to positive outlook

Despite a 39 per cent gain for the Bharti Airtel stock in two months, analysts believe it has more legs to run after the integration with Tata Teleservices, revival in Africa and cost control measures. 

The latest trigger has been ongoing consolidation in the industry, the latest being Reliance Communications’ (RCom’s) exit from consumer mobile telephony. The sector had 13 players in 2010 and is expected to be left with four over the next year and a half.

Analysts believe Bharti is positioned to grab market share as smaller operators shut down. This includes the 70 million customers of RCom, who have to port out by Sunday. Smaller operators had gross revenue market share of 14 per cent at the end of the first half of FY18. Bharti’s subscriber and revenue market share at the end of September was 31.5 and 35.9 per cent, respectively, about 200 basis points lower on both parameters than the Vodafone-Idea combine. In the near term, operators will try to be aggressive to increase subscriber base. Average revenue per user (Arpu) is expected to rise over the medium term, on the back of consolidation, higher data usage and bundled plans. Analysts at Nomura expect Bharti to be a big beneficiary of the accelerated industry consolidation and normalising competitive intensity in the wireless space, which will result in revenue and subscriber market share gains and recovery of Arpus. 

The other trigger is restructuring and rationalisation in its Africa operations, currently under 25 per cent of revenue. The company has been struggling to improve its revenue market share and profit. Six years after it acquired Zain’s Africa assets, it is looking at rationalisation of costs at the network, as well as sales, general and administration expenses. Cost control and rationalisation have started reflecting on profit, with operating profit margins improving from 19 per cent in FY16 to 32 per cent at the end of September. A focus on bundled plans helped Arpu increase to $3.22 in the September quarter, after falling for consecutive quarters. While operating performance has improved, the Street will look out for traction in revenue growth, as sales are stuck at $750-800 million per quarter over the past five quarters. 

Majority stake sale of its tower assets is another trigger. Also, those of other non-core assets should help bring down debt, which is just under Rs 1 lakh crore, with net debt to operating profit at a manageable ratio of three. 

While the stock has run up quite a bit, given the medium-term outlook and integration benefits from the Tata Tele merger over the next year, investors with a two-year time frame could consider it.