Buy This Large-Cap Telecom Sector Stock For 34% Gains, Given Near 100% Returns In 3 Years

Motilal Oswal Financial Services, a renowned brokerage firm, in its report recommended investors buy the stocks of Bharti Airtel Ltd for a target price of Rs 910/share. Over the last couple of years, though Bharti Airtel's operational performance has been strong, it has lagged in FCF generation and deleveraging which has posed a key concern for the stock. FCF is a key factor in telecom business as technology up-gradation continually keeps capex intensity high.

Stock Outlook & Performance

Bharti Airtel's Current Market Price (CMP) is Rs 681.70/share, opened at Rs 689.80/share on NSE. The CMP is Rs 166.85 above its 52-week low per share level, and Rs 100.10 below its 52-week high per share level. The 52-week low of the stock was recorded on June 02, 2021, at Rs 514.85/share. Whereas, the 52-week high is Rs 781.80/share, recorded on 24 November 202.

The stock over the past 5 years has maintained good returns. Its price has moved up 6.99% in past one week, and 0.5% in past one month, respectively. However, in the past three months, the stock has given a negative return of 8.89%. In the past 1 year, it has given positive returns of 31.02%, in 3 years 98.05%, and in 5 years 80.81%, respectively.

Considering the CMP, and the estimated targeted price of Bharti Airtel Ltd, the stocks of the company can witness a potential jump of around 34% in 12 months.

CMP	Target Price	Potential Gains
Rs 681.70	Rs 910	34.00%

Decadal shift in FCF generation capability

Bharti is entering a phase of high FCF growth. During the last three years (FY19-22), Bharti's EBITDA has jumped over 2x adding Rs 318b as against an average capex (excluding Spectrum) of Rs 233b (flat over the period). This translated into a significant FCF. During the last three years, we saw an EBITDA addition of 1.4x of the annual capex of Bharti (excluding Spectrum). However, Indus and DTH stake acquisitions, AGR payments and liability et al. have led to limited FCF and deleveraging (refer to Exhibit 2). We expect Bharti to generate FCF (post-interest) of Rs 251b/Rs 368b, i.e. 22%/47% of its net debt (post Ind-AS 116) in FY23/24E, respectively.

Industry dynamics turned favorable

The change in market construct (led by sector consolidation) over the last five years has assuaged a big historical concern of the past decade (FY08-18), when earnings were depressed and capex continued to rise leading to high leverage. At present, the sector consolidation has led to: Multiple rounds of tariff hikes, cumulatively >50%, which were unheard-of in the past decade, translating into 39% increase in ARPU for Bharti over FY19-22 (refer to Exhibit 3). Nearly 5.3% market share gains (refer to Exhibit 4). We see three levers of growth for Bharti: a) 4G mix improvement, b) market share gains from VIL, and c) continued tariff hikes. These levers along with incremental margin of 65% should drive 18% EBITDA CAGR for Bharti over FY22-24E.

5G not a concern

One of the key headwinds for Bharti is the fresh round of 5G-led capex. However, we draw comfort on 5G from the three factors mentioned below: Over the last three years, the increase in EBITDA for Bharti has far outpaced the capex need. Bharti has ~Rs 215b of expected funds (Rs 160b of uncalled rights issue and Rs 55b from Google) against an expected spend of ~Rs 150-200b in the upcoming 5G auction. With its EBITDA growth of over 2x in the last three years (FY19-22), Capex amount has now become less impactful - 0.6-0.8x of EBITDA v/s 1.2-1.5x of EBITDA in FY14-15. Further, given that 4G is still not fully monetized and 5G device and band ecosystem are yet to be developed, we should see a staggered growth in 5G over the next 3-5 years, unlike the aggressive 4G capex seen during FY16-20. The impact on operating cash flow from 5G annual installments in 700MHz/3300MHz bands ranges between 2% and 4%.

Improvement in FCF should command better valuation, buy for Target Price of Rs 910/share

According to Motilal Oswal, "The stock is trading at 7x on consolidated FY23E EV/EBITDA with India business trading at slightly below 8x. Historically, Bharti has commanded lower valuations due to intensive competition and high capex intensity that hurt profitability, FCF and return ratios. However, we now expect the stock to command better valuation due to: consistent 18% EBITDA CAGR over FY22-24E, sustainable FCF yield of ~8-9% and leverage position, low concern on 5G-led capex intensity as EBITDA growth has far outpaced capex need, and Bharti turning profitable at the PAT level with high 50%+ growth (over FY22- 24E) driven by operating leverage. We arrive at our SOTP-based Target Price of Rs 910 premised on FY24E EV/EBITDA of 11x for the India Mobile business and 5x for the Africa business."

About - Bharti Airtel Ltd

Headquartered in New Delhi India, Bharti Airtel Ltd is one of the world's leading providers of telecommunication services with a presence in 18 countries across Asia and Africa. Bharti Airtel ranks amongst the top 3 mobile service providers globally in terms of subscribers. The company offers an integrated suite of telecom solutions to its enterprise customers in addition to providing long-distance connectivity both nationally and internationally. The Company also offers Digital TV and IPTV Services. All these services are rendered under a unified brand 'airtel' either directly or through subsidiary companies. The company operates in four strategic business units namely Mobile Telemedia Enterprise and Digital TV. The mobile business offers services in India Sri Lanka and Bangladesh.

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal Financial Services. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.