Analysts keep faith in Airtel despite lowest quarterly profit in 15 years

A surprise in the January–March 2018 (Q4FY18) quarter numbers, merger of Bharti Infratel & Indus Towers to create world's largest non-Chinese tower firm and Telecom Disputes Settlement and Appellate Tribunal (TDSAT) interim stay on the Telecom Regulatory Authority of India’s (Trai’s) predatory pricing order had a positive impact on Bharti Airtel at the bourses on Wednesday.

The stock closed 3.4 per cent higher at Rs 420 levels on the BSE. In comparison, the S&P BSE Sensex ended 0.3 per cent lower at 34,501 levels, while the S&P BSE Telecom index surged 0.7 per cent to 1,332 levels.

Even as the company reported the lowest quarterly profit in 15 years, analysts say the performance in the recently concluded quarter was more resilient relative to expectations. The numbers, which came in after market hours on Tuesday, saw Bharti Airtel take a hit from Reliance Jio-led low tariffs and a cut in international termination rates (ITR).

“The poor (financial) performance is likely to continue for at least a year. Mobile penetration in India seems to have peaked out for now, price realisation in the data segment has crashed and competition has increased in the voice segment given the different messaging apps. There is limited scope for margin improvement in the immediate term. The data segment will improve a tad, but will still face competition from Reliance JIO (JIO),” said G Chokkalingam, founder and managing director at Equinomics Research.

Analysts, however, remain bullish on the stock from a long-term perspective despite the likelihood of an increased competition, especially for the data segment going ahead. Nomura, for instance, maintains ‘buy’ rating on the stock with a target price of Rs 505.

This far in the calendar year 2018 (CY18), most telecom stocks have underperformed the markets by falling up to 50 per cent. While the S&P BSE Sensex gained nearly 1.7 per cent in CY18, the S&P BSE Telecom index lost nearly 21 per cent, ACE Equity data shows. Bharti Airtel underperformed both these indices during this period and lost around 23 per cent.

In their recent report, G V Giri and Balaji Subramanian of IIFL have pushed back the recovery hopes for the telecom industry by a year to the financial year 2019 – 20 (FY20). The industry they feel, will continue to be led by JIO that has seen healthy subscriber additions in recent months and may not be in a hurry to stall this momentum. They expect the companies to continue investing in opex and capex over the next few years.

To drive revenue growth, they expect JIO to raise base-pack prices once in FY19, and follow through with content packs to attain average revenue per user (ARPU) uplift. 

“While we expect a more gradual recovery profile, improved market structure and content distribution upsides induce us to maintain our steady-state revenue estimates. As regards Bharti Airtel, the merger of Indus with Infratel would also present de-leveraging opportunities for the company and, hence, it would be able to sustain high capex while keeping leverage under control,” they said in a note.

From year’s perspective, A K Prabhakar, head of research at IDBI Capital believes the telecoms stocks will continue to underperform the markets and the rally in Bharti Airtel seen on Wednesday will be short-lived. After securing market-share, he says, JIO can alter the strategy and chase margins. This will result in the return of pricing power for the industry, which will also benefit Bharti Airtel. 

“The recent results indicate the pressure Airtel is undergoing. I am not bullish on the telecom stocks from a near-term perspective, though it makes sense for the long-term investors to buy on a dip. There is visible growth in the company but margins are eroding. We still don’t know when the players will be able to enjoy pricing power. Investors should look for a turnaround in the sector and buy from a two – three-year perspective. In three years, Airtel can touch Rs 570 levels,” he says.