Bank of America Merrill Lynch (BofAML) upgraded Bharti Airtel's rating to 'buy' from 'neutral' despite intense competition in the sector from Reliance Jio. It also raised the stock's target price to Rs 400 per share from Rs 360 earlier.
According to the brokerage, post the recent rights offering/Africa IPO, they expect Bharti’s balance sheet to be strengthened and consider it to be in a good position to improve its momentum in the core cellular business. They also find Airtel well-positioned to capitalize on any weakness at Vodafone Idea (VIL) as it focuses on integrating its networks post-merger and expect its market share to remain stable at 30-31 percent from FY20 to FY24.
Bharti Airtel rose nearly 4 percent in intra-day deals on Tuesday post the upgrade. The stock has risen 16.5 percent in 2019 as compared to around 70 percent fall in Vodafone Idea. Meanwhile, Sensex has gained around 4.5 percent in this period, while, BSE Telecom has plunged 5 percent in 2019.
Recently, Vodafone Idea reported a loss in its Q1 earnings, which dragged the stock to its all-time low of Rs 6.56 per share on BSE. The company has posted net loss at Rs 4,873.9 crore in the Q1FY20 against loss of Rs 4,881.9 crore in the quarter ended March 2019. The revenue fell to Rs 11,269.9 crore in the June quarter as against Rs 11,775 crore in the January-March quarter.
Post the earnings, Jefferies retained its 'underperform' rating on Vodafone Idea as it missed on revenues and margins led by downtrading and delayed impact of minimum recharge plan. With balance sheet stretched and capex trailing peers, Jefferies expect a further loss of market share to below 20 percent for Voda Idea in the medium term.
BofAML also considers Vodafone Idea's Q1 revenue weakness to be a company-specific issue and do not expect Bharti to show any weakness in its 1Q numbers.
Reliance Jio’s (RJIO) launch in FY17 unleashed one of the most brutal price wars in India’s telecom market. Consequently, industry ARPU plunged 38 percent, leading to a total industry size shrinking to Rs 1.4 lakh crore from Rs 1.8 lakh crore.
For the month of May, Jio added 8.2 million subscribers and 8.3 million in June. Meanwhile, Bharti Airtel saw an uptick and added 2.6 million subscribers in May.
BofAML does not expect Bharti to lose material share to Jio in the high margin enterprise business given the sticky nature of business. They consider the telco earnings to be defensive in light of the current slowdown.
"We expect Vodafone Idea's network to take 8-9 months to stabilize and see room for both Bharti and Jio to gain market share. In our base case, we also do not factor any potential stake sale at its tower-co Bharti Infratel for the next 12 months at least," they added.
Downside risks for Airtel remain material market share loss to Jio, another
round of tariff cuts and higher broadband/corporate revenue decline led by Jio entry, BofAML noted.
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