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The deal with Ericsson will boost Airtel’s network and operational efficiencies.mint
The deal with Ericsson will boost Airtel’s network and operational efficiencies.mint

Competition with cash-rich RIL takes a toll on Airtel share price

  • Airtel reported a sharp increase in the subscriber base in broadband (mobile and fixed) segment
  • Its consolidated Ebitda rose over 11%, compared to the 2-3% hike analysts had estimated

At first, any sign of trouble at Vodafone Idea Ltd would result in a rally for Bharti Airtel Ltd. In fact, the tougher the Supreme Court acted against telcos, the higher Airtel’s shares rose. In mid-February, Airtel’s one-year returns stood at over 100%, making it the biggest gainer among Nifty stocks. The narrative was that the Indian telecom market was quickly turning into a duopoly, and that Airtel would be a key beneficiary.

But after Reliance Industries Ltd (RIL) went on its relentless fundraising drive, the narrative has quickly changed. Airtel shares have underperformed RIL by 45% since. Investors now almost expect a near-monopoly position for RIL subsidiary Jio Platforms Ltd (JPL).

“Bharti’s massive underperformance recently has been on account of what we term ‘but it competes with RIL’ concerns. At the core, this concern is really an ‘RIL is gunning for an eventual ultra-dominant, near-monopoly or monopoly position’ concern," Rohit Chordia and Aniket Sethi, analysts at Kotak Institutional Equities, said in a 28 October note.

Diverging fortunes
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Diverging fortunes

According to the report, investors frame these concerns in different ways—“RIL has fresh funds, it will burn cash again" is a view which got reinforced when it announced new content-rich postpaid plans and a drop in its fixed broadband tariffs. Another concern being expressed is “RIL will bid aggressively for 5G spectrum and Bharti will have no option but to match the bid".

“(Investors are) ignoring the fact that only a very small proportion of funds infused into JPL have been retained at the JPL level... (there is no) deliberation on why an RIL, which is now a clear revenue market share leader, should pay up for 5G spectrum despite a favourable spectrum demand-supply equation for RIL and Bharti," Kotak’s analysts counter.

But perhaps the best counter came from Airtel itself, when it announced stellar results for Q2. It reported a sharp increase in the subscriber base in both the mobile broadband and fixed broadband segments, and consolidated Ebitda rose over 11%, compared to the mere 2-3% increase analysts had estimated.

“Bharti’s continued solid execution and the fact that it is actually ‘competing well with RIL’ is a moot point (investors should note) as well," Kotak’s analysts say. Besides, its net debt-to-Ebitda is at less than three times, and its financial position is much stronger than those of other telcos that have struggled to withstand Jio’s onslaught. But investors seem to be in no mood to relent.

Airtel shares continue to trade about 35% below the median target price of 27 analysts, according to Bloomberg data. In contrast, the rally in RIL shares has forced analysts to play catch-up and regularly increase their target price.

The trend is a telling commentary on how the competition dynamic in India’s telecom market is perceived.

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