‘Buy’ on Bharti Airtel; firm needs a positive trigger

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Updated: Sep 15, 2020 9:50 AM

Little movement on the expected floor tariff regulation — Trai hasn’t conducted the requisite open house discussion yet; has reservations doing it online — has only added to the anxiety on pricing.

Bharti Airtel, Sterlite technologiesThis 5G-ready and high capacity network will enable Airtel to provide faster delivery of new services while delivering an enhanced user experience

She loves me, she loves me not. We find the fresh pangs of doubt on Bharti’s investment thesis, as reflected in the stock’s sharp recent underperformance, quite intriguing. At a very broad level, the key ‘doubt zones’ are pricing, a large strategic investment by a marquee name in VIL, and accelerated 5G capex cycle and the related heavy cash burn. We take a look at each of these in this note. We do think Bharti’s underperformance cycle could continue in the short term and it would need a positive event trigger (price hike?) to break the cycle. We remain positive. ‘BUY’.

We sense increasing impatience on the Street insofar as the anticipated wireless price hike is concerned. The anxiety is understandable, to be sure. It has been more than nine months since the past round of price hikes. AGR case outcome got cemented in this timeframe and more importantly, worsened (no relief on quantum).

Little movement on the expected floor tariff regulation — Trai hasn’t conducted the requisite open house discussion yet; has reservations doing it online — has only added to the anxiety on pricing.

We appreciate that the latter (delays in floor tariff regulation) is indeed a cause of concern given the important role the exchequer needs to play in taking the sector to right levels of pricing needed to sustain the current market structure (3 private operators plus BSNL/MTNL).

Brings us to the next point, one that remains at the core of our investment thesis on Bharti — lack of pricing uptick will likely drive further consolidation in the market (a two-plus-one construct) with VIL’s survival remaining heavily dependent on sharp jump in industry ARPU levels. Here too, some recent, unauthenticated news flow (link) has created another SLM-SLMN doubt. We discuss this next.

This is the most intriguing of the three SLM-SLMNs, in our view. The argument seems to be this – one or both of the two large US-based corporations mentioned in the link above would take a large, strategic position in VIL, this investment would ease the pressure on VIL’s cash flows, and VIL wouldn’t need price increases for survival, anymore.

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