Bharti Airtel’s valuations suggest all is well in India’s telecom industry
Bharti Airtel Ltd appears to be in a bit of a sweet spot as far as news flow goes. No sooner did investors start pricing in benefits of consolidation in its India wireless business, than the company also reported an improvement in the performance of its Africa operations. Earlier this week, the company also announced the sale of a 15% stake in its DTH (direct-to-home) business for $262 million. But with the Airtel stock having risen 70% this year, it is pricing in all this and more.
Airtel retains an 80% stake in the DTH business, which is valued at $1.75 billion. While it’s heartening to note that the company has another source to tap some liquidity, the liquidity from the stake sale is a drop in the ocean when compared with the company’s debt of over $8 billion.
What analysts are quite excited about, however, is the recent improvement in Africa operations. “We believe Bharti is on a good footing to finally deliver on the Africa acquisition promise, thanks to some solid repair jobs undertaken in the past two-to-three years...this reflects well in (a) as many as five markets moving into the 40%+ Ebitda margin zone in 2QFY18 versus zero in FY16, and (b) only four markets staying with sub-20% Ebitda margin versus as many as eight in FY16,” analysts at Kotak Institutional Equities pointed out in a note to clients last week. Earnings before interest, taxes, depreciation and amortization, or Ebitda, is a measure of profitability.
A highlight of Airtel’s September quarter results was the recovery in Africa margins. Despite the improvement, Kotak’s analysts still value the Africa business at around Rs43,000 crore, which is about as much as the debt on account of these operations. As such, equity value attached to Africa is close to nil in Kotak’s books. But the broker’s analysts add, “We see upside risk to our Africa forecasts, especially on profitability.”
The mainstay, at least as far as valuations go, is the India wireless business. The fact that Airtel shares have risen 70% this year suggests hopes are riding high on this business.
While investors may be right in expecting benefits of consolidation, the journey to that state of affairs continues to be a tortuous one. Reliance Jio Infocomm Ltd has only a 12-13% share of the market, and can be expected to remain a disruptive force until it reaches a far more sizeable market share. This can mean cut-throat competition on pricing, while investors seem to be pricing in a benign pricing environment.
Airtel may eventually end up being one of the main beneficiaries of the consolidation in the telecom sector; but investors who are eyeing those spoils should also have the stomach for the bumpy road to get there.