Hike in FPI limit, improving outlook positive signals for Bharti Airtel

Shares of the telecom operator hit a seven-month high of Rs 601.8 on BSE

Shares of Bharti Airtel hit an over seven-month high of Rs 601.8, rising 6.4 per cent in intra-day trade on the BSE Sensex on Wednesday, before closing 2.2 per cent higher, even as leading indices ended flat.

The optimism follows the telecom operator’s announcement to the stock exchanges on Tuesday that it has received necessary approvals to increase foreign ownership limits in its subsidiaries to 100 per cent from the current 49 per cent.

As a result, the company is revising its own foreign direct investment (FDI) limit to 100 per cent with immediate effect, as notified to its depositories.

After the revision, Airtel’s weighting in the MSCI should rise, resulting in significant inflows into the stock, say experts. To give context, Bharti Airtel witnessed outflows of nearly $750 million in August last year after MSCI cut its weighting by half in its India and Emerging Market (EM) indices on account of reduction in foreign ownership limit from 74 per cent to 49 per cent.

However, following Tuesday’s development, analysts at Credit Suisse estimate that the increase in MSCI weighting could potentially drive inflows of over $1 billion in the Airtel stock, subject to other variables like share price, assets benchmarked to MSCI EM and MSCI India, among others. While the increase in MSCI weight is a technical event and the stock could benefit in the near term, analysts remain bullish on India’s second largest telecom operator because of improving business outlook.

In calendar year 2020 (CY20), for instance, even as India’s largest telecom operator Reliance Jio gained 400 basis points (bps) in revenue market share to about 37 per cent, Airtel’s was up 200 bps to 32 per cent. Its average revenue per user (ARPU) per month was up by a quarter.

ICICI Securities expects Airtel to lead subscriber addition in the third quarter (Q3FY21) aided by churn at Vodafone Idea and challenges faced by Jio due to the farmers’ protest. “The reported ARPU is likely to witness around 2 per cent sequential growth at Rs 165, aided by higher data-based usage upgrades,” the brokerage said in a results preview.

The brokerage, which has ‘buy’ rating on Airtel with a target price of Rs 700, estimates Airtel’s India wireless revenues to witness 5.3 per cent sequential growth to Rs 14,565 crore in Q3. India non-wireless revenues traction may also remain robust, especially broadband and enterprise. Operating profit margins of India operations are estimated to decline 100 bps sequentially to 44.8 per cent, owing to tower exclusion (but up 50 bps on adjusted basis). Africa business margins are expected to be stable sequentially at 45 per cent. Among key monitorables are commentary on ARPU trajectory and non-wireless business growth.

Analysts at CLSA are also bullish (target price Rs 730) on the company’s growth outlook due to revenue market share gains, healthy 4G subscriber additions, ARPU growth and healthier balance sheet position. “In 2021, 35 per cent growth in Airtel’s data subscribers and tariff hikes will lead to continued growth,” they note. They expect Airtel’s consolidated Ebitda to grow at a compound annual growth rate of 16 per cent during FY21-FY23, driven by a 25 per cent hike in tariffs, and ARPUs to rise from Rs 163 to Rs 191 in this period.

On Wednesday, the company also said Amazon has launched its global first mobile-only Prime Video plan in India through Airtel. Analysts believe such initiatives could help expand customer base, and add incrementally to ARPUs, apart from helping to retain competitive advantage.

To sum up, the AGR (adjusted gross revenue) verdict, index rebalancing and tariff wars have been key overhangs for the stock in the past few quarters. Valuations too have been at a steep discount to Airtel’s historical average. However, with most negatives already discounted, experts say valuations appear attractive despite gains in the past two months.

Based on FY22 estimates, the stock trades at an enterprise value to Ebitda of 8.5 times, a discount to its five-year average of 9.1 times. According to Bloomberg, all 32 analysts covering the stock have a ‘buy’ recommendation with a 12-month consensus target price of Rs 679, indicating a potential upside of 17.5 per cent from the current price of Rs 578.25.