Bharti Airtel is heading towards its 52-week high of Rs 612 that it touched in May 2020, after analysts have turned bullish on the stock. Shares of the company rose nearly 5% on Wednesday to hit an intraday high of Rs 599 on NSE.
Just a few months ago, the telecom operator was among the underperforming stocks on the benchmark indices, falling 2% when Sensex rallied 35% in the last six months.
What has changed for the Bharti Airtel's outlook now?
1. Strong earnings outlook
One of the major reasons analysts are bullish on Bharti Airtel is its potential for growth.
For the July-September quarter, the telecom operator reported an addition of 13.9 million users - the most in three quarters - and subscribers moved to higher-paying plans, helping drive up average revenue per user (ARPU) to a three-year high of Rs 162, from Rs 157 in April-June.
Ahead of the release of its Q3 results, analysts expect Airtel to report further growth in ARPU and EBITDA (earnings before interest, taxes, depreciation, and amortization).
ICICI Securities expects Bharti Airtel to lead subscriber addition in the October-December quarter aided by Vodafone Idea churn and challenges faced by the new operator due to farmer's protest.
"The reported ARPU is likely to witness around 2% QoQ growth at Rs 165, aided by higher data-based usage upgrades," the brokerage firm said in result preview.
"We expect India EBITDA margins at 44.8%, down 100 basis points (bps) QoQ owing to tower exclusion (up 50 bps on an adjusted basis). Africa margins are expected to be stable QoQ at 45%. Key monitorables should be commentary on ARPU trajectory and non wireless business," the brokerage added with a 'buy' rating on Bharti Airtel and target price of Rs 700 per share.
ICICI Securities separately said that Airtel will use the upcoming spectrum auctions to align their spectrum portfolio for the eventual launch of 5G and to strengthen their existing 4G services.
The Department of Telecommunications (DoT) is scheduled to conduct spectrum auction across bands on 1 March 2021.
Motilal Oswal Financial Services said it continues to remain bullish on Bharati Airtel given its strong earnings outlook, even without a price hike, and improving RoCE and FCF generation potential. The brokerage expects it to generate post-interest free cash flow (FCF) of Rs 6,400 crore in FY22E after factoring in the spectrum renewal cost of Rs 13,000 crore.
"A price hike, which looked uncertain in the last 6-9 months, has now started to look imminent with the weakening of industry subscriber growth. Our recent interactions with industry experts indicate a potential price hike of 15-20 per cent in the next two months. Competitive pricing in postpaid and FTTH (fiber-to-the-home) segment by peers have had a limited impact on earnings," it said in a December report.
The brokerage has a 'buy' rating on the stock with a target price of Rs 650 per share.
2. Increase in FDI limit
On Tuesday, Bharti Airtel confirmed via a stock exchange filing of receiving approval to revise its foreign investment limit to 100% for its relevant downstream investments.
"Further to our intimation dated January 21 , 2020, we wish to inform you that in compliance of the FDI approval dated January 20, 2020 granted to the Company by the Department of Telecommunications, the Company has received approvals for its relevant downstream investments. Accordingly, the Company is initiating the process to revise its foreign investment limit, as notified to its depositories, to 100% with immediate effect," the company said in its filing.
The approval received by subsidiary entities now would allow Airtel to have foreign investment up to 100%, without its downstream entities becoming non-compliant with any norms.
Morgan Stanley said that it is 'overweight' on the stock with a target at Rs 680 per share adding that approval for enhancing FPI limits for its subsidiaries could help reverse the underperformance.
3. Attractive Valuation
CLSA said that the Bharti Airtel is currently inexpensive (based on Tuesday's closing price) at a 10% discount to its 5-year average EV/EBITDA.
The brokerage not only has a "buy" call on the stock (price target of Rs 730 per share), it is its top pick in the three-player telecom sector.
It adds that Bharti Airtel will see 35% growth in its data subscribers in 2021 and tariff hikes will lead to continued growth.
The article is purely informational and is not a solicitation to buy, sell in securities mentioned in the article. Greynium Information Technologies Pvt Ltd, its subsidiaries, associates and the author do not accept culpability for losses and/or damages arising based on information in this article.