Brokerages see up to 27 per cent upside in Bharti Airtel after the Supreme Court on Tuesday granted 10 years to telecom firms for paying the Adjusted Gross Revenue (AGR)-related dues to the Department of Telecommunications (DoT). The apex court also asked telcos to pay 10 per cent of the AGR-related dues by March 31, 2021.
ICICI Securities and Motilal Oswal retained their ‘Buy’ rating on the telecom major with a target price of Rs 700, indicating an upside of 27 per cent from the current market price. On the other hand, Julius Baer initiated coverage on the stock with a target of Rs 650.
Motilal Oswal said Bharti Airtel has the best-hedged position. In order to survive, if Vodafone Idea triggers a price hike or if the market turns duopoly, Bharti would benefit significantly in both cases, with a potential EBITDA increase of over Rs 10,000-12,000 crore.
The brokerage house believes that Bharti Airtel is well-placed financially to meet the dues. However, it highlighted that it is unclear whether the upfront amount is part of the payments that have already been made or whether it is incremental.
“We assume it is incremental given that the Supreme Court is aware of existing payments. Bharti and Vodafone Idea would have to pay Rs 4,500 crore and Rs 5,800 crore respectively by March 21 and Rs 3,400 crore and Rs 6,600 crore annually from March 2022 for 10 years. We expect Bharti to be able to manage the payment with free cash flow post-interest of over Rs 10,000 crore and Rs 20,000 in FY21 and FY22, respectively,” Motilal Oswal Financial Services said.
Following the verdict, shares of Bharti Airtel have advanced more than 7 per cent in two trading sessions. The scrip was up 1 per cent at Rs 552 at around 12.40 pm (IST), while the benchmark BSE Sensex traded 0.12 per cent down at 38,853 at around the same time.
ICICI Securities added that the legal tangles seem over now. The brokerage expects the industry, as a whole, to utilise their management bandwidth to expand profitability and cash generation.
“Airtel, with comfortable leverage, superior customer quality is among our top picks. We maintain ‘Buy’ on Airtel with an unchanged target price of Rs 700 per share,” ICICI Securities said.
On the other hand, Julius Baer said the oligopolistic Indian telecom market is currently characterised by consolidated supply, signs of improving pricing discipline and migration to 4G or higher data plans. Also, the lower net subscriber addition due to the Covid-19-related lockdown could be mitigated by substantial rises in voice and data demand due to WFH (work from home) option.
Established in 1995, Bharti is the second-largest telecom operator in the world by subscriber base with a presence in 18 countries. It is also the second-largest telecom player in India and Africa and has operations in 14 countries.
“Following the disruption, Bharti will be a big beneficiary of the consolidation in the sector. The Arpu is set to grow higher as players shift focus from market share to profitability. Furthermore, it has held back its market share, and is delivering on key operating parameters, including the adoption of a technological platform and cross-selling broadband and DTH,” Julius Baer said.