Bharti Airtel Is Well Positioned To Gain From Telecom Revival: Morgan Stanley

Morgan Stanley is ‘overweight’ on Bharti Airtel Ltd. as its strong balance sheet can absorb new capex cycle and generate better return ratios and on cheaper valuations.

“Unlike in the previous cycle, when competition and a new capex cycle coincided, this time Airtel is well-positioned to absorb the incremental investments related to 5G without compromising its balance sheet strength,” the financial services provider said in a May 22 report.

Bharti Airtel, it said, is also in a strong position to gain from the industry’s average revenue per user growth of 50% over the next four-five years, supported by an attractive market structure with two strong players and two weak players, along with favourable regulations. “We expect Airtel to continue to gain both subscriber and revenue market share, driving a 20% Ebitda CAGR.”

Morgan Stanley initiated coverage on the telecom company with a price target of Rs 840 apiece, an implied upside of 25%.

“On an adjusted debt basis (including perpetual bonds), the stock is trading at 7.7x F23e EV/Ebitda versus a historical average of 8x,” it said. “Our price target implies a similar multiple on FY24 earnings, and Ebitda growth of 20% should drive share price returns.”

Besides, institutional investors’ positioning is neutral but could increase given defensive earnings in an uncertain macro environment, the report said.

Revival In Telecom Industry

India’s wireless telecom services industry has been in a repair phase since late 2019, Morgan Stanley said.

The government’s relief measures over the last two years such as deferred spectrum payments, reduction in spectrum usage charges, a moratorium of four years on spectrum and adjusted gross revenue payments have catalysed the revival in the industry, according to the report. The consolidation of market share within the two strong players also helped.

“With a favourable market structure and supportive regulations, we expect wireless telecom services revenues for the industry to grow to 1.6x of the current size over the next five years,” it said. “The industry was in a downturn from FY16 after the onset of new competition (Reliance Jio) until FY19. Since the industry repair phase began, revenues have started to move up and we expect FY22 to come back to FY16 levels.”

Morgan Stanley expects this “phase to continue even beyond FY22, driving superior growth rates over the next five years compared with the last five. We expect industry revenues to grow 1.6x by FY27 to $39 billion (about Rs 3.02 lakh crore)".

It also estimates Bharti Airtel’s ARPU could rise from Rs 163 in FY21-22 to Rs 248 in FY26-27 compared with the industry’s growth from Rs 131 in FY21-22 to Rs 205 in FY26-27.

In a bull case, the research house sees potential for a multiple rerating of the stock, assuming ARPU of Rs 250 is achieved well before five years, return on capital employed improves to the late teens over the next three years, and 5G investments accelerate market share gains in urban areas.

Strong Players To Gain

According to Morgan Stanley, scale and balance-sheet strength have made the strong players stronger over the last two years. “This is visible in significant subscriber and revenue market share gains by both Bharti Airtel and Reliance Jio over FY20-22.”

“The cumulative increase in subscribers, revenue and profit over the last two years (since the first tariff hike was taken in November 2019) has been the highest for Bharti Airtel,” it said. “We expect the same phenomenon to be repeated over the next two years as the weaker player will find it challenging to invest in the business due to a constrained balance sheet.”

Morgan Stanley expects Bharti Airtel’s revenue market share in the domestic wireless business to improve to 37% in FY24 from 35% in FY22. An improvement in its domestic wireless business ARPU will generate high incremental Ebitda margin and free cash flow to support future investments.

Other Highlights From Morgan Stanley Report

• ‘Overweight’ rating reflects Airtel’s strong positioning in telecom.

• Expects Bharti Airtel to bring down consolidated net debt to $21.2 billion by FY23-24.

• Bharti Airtel will have the potential to monetise some of its assets (as publicly stated by the company). This can help lower the capital intensity of the business.

• Expects Bharti Airtel’s RoCE to improve to 16% by FY23-24 from 9% in FY21-22.

• Expects Bharti Airtel to hike tariff next in November or December; every tariff hike will set a higher floor for the stock.

• Expects Bharti Airtel to deliver better revenue and profit growth than the industry average and gain market share.

• Key catalysts include: potential tariff hikes later this year.

• Key risks include: higher-than-expected capex in FY23, delays to price hikes, and requirements for further investments in group companies like Indus Towers.

Of the 35 analysts tracking Bharti Airtel, 32 maintain a ‘buy’, two suggest a ‘hold’ and one recommends a ‘sell’, according to Bloomberg data.

The average of the 12-month consensus price target implies an upside of 28.4%. The stock has gained 0.6% in 2022 so far compared with a 6.3% loss in the benchmark Nifty 50.