Airtel best play on data boom: CLSA

Second foreign brokerage after JP Morgan to raise price target

Global brokerage CLSA on Friday upgraded Bharti Airtel, terming it the “best play on India mobile consolidation and data boom”.

The brokerage increased the price target on the stock to Rs 640, implying a 27.5 per cent upside over the last closing price of Rs 502.

CLSA is the first foreign brokerage after JP Morgan to have raised its price target of Bharti Airtel this week.

On Wednesday, the US-based brokerage upgraded the stock to ‘neutral’ from ‘underweight’ and has increased price target to Rs 500 from Rs 290.

“India’s mobile consolidation and data boom have revived Bharti Airtel’s growth. The industry leader should enjoy a 21 per cent CAGR (compound annual growth rate) in India mobile Ebitda (earnings before interest, tax, depreciation, and amortisation) over FY18-21, its domestic non-mobile businesses add scale, while Africa has turned profitable and free-cash flow positive,” said CLSA analysts Deepti Chaturverdi and Akshat Agarwal in a note.

The Indian telecom space is seeing consolidation with smaller players either merging or shutting shop amid heightened competition trigged by the disruptive entry of Reliance Jio, the telecom arm of the country’s largest company, Reliance Industries.

“(In) India mobile consolidation has accelerated with the sector heading towards a three-player oligopoly. Consolidation and Reliance Jio’s tariff revisions should improve pricing, while rising 4G data adoption and unlimited plans will boost ARPUs (average revenue per user),” says CLSA.

“We forecast mobile-data subscribers to grow by 75 per cent to 707 million by FY21 to 52 per cent penetration. With (a) spectrum and execution edge, Bharti Airtel will remain the industry leader and deliver a 13 per cent mobile-revenue CAGR and 21 per cent mobile Ebitda Cagr over FY18-21CL,” adds the brokerage.

The street has already started pricing in some of the positives. Since October 1, shares of Bharti Airtel have rallied 30 per cent, while the benchmark Sensex has gained 6 per cent during the same period.

“To us, ongoing developments are clearly positive for Bharti and the larger incumbents. Smaller players seem forced into a state of accelerated irrelevance with the speed of consolidation proportionate to the degree of RJio-induced stress, in a manner of speaking… we believe the Street has substantially assumed a benign operating environment continuing,” said JP Morgan analyst Viju K George said in a note dated November 8.

Besides the domestic telecom business, other areas too are providing a kicker to Bharti Airtel. The company also has been divesting its assets to reduce debt. During the September quarter, Bharti Airtel pared its holding by 3.65 per cent to 58 per cent (currently worth Rs 45,630 crore) in its tower arm Bharti Infratel.

“Bharti Airtel’s focus on India non-mobile businesses is high-margin enterprise and convergence services which enhance scale and profitability. Bharti Africa has turned profitable and free-cash flow positive. Its margins have jumped 12ppts to 32 per cent and improvements are sustainable, led by cost controls and $3.3 billion in strategic asset sales. Further asset sales cannot be ruled out,” says CLSA.