Among telcos, Airtel wins big

The stock has gained 43% YTD against 20% jump in RIL and 15% fall in Voda Idea

The relief package announced for the telecom sector is said to be primarily aimed at providing financial relief to Vodafone Idea that is struggling to survive because of mounting losses and a steady decline in subscriber base. The stock market reaction to the government support, however, suggests that equity investors expect Bharti Airtel to gain the most from it.

Airtel was among the top-performing index stocks on Wednesday and ended the day with gains of 4.8 per cent against a 4 per cent surge in the share price of Vodafone Idea and a 0.5 per cent rise in Reliance Industries (RIL).

With this, the Airtel share price has gained 43 per cent since the beginning of the current calendar year against a 15 per cent decline in the Vodafone share price and a 20 per cent rally in RIL.

Airtel closed on Wednesday at ~727.5 per share against ~421 per share at the end of December 2020. In the same period, Vodafone Idea declined from ~9.6 to ~9.05 as of Wednesday, while RIL moved up from ~2,234 to ~2,379.4. PIL is the owner & promoter of Reliance Jio; the telecom business accounted for around a third of RIL’S consolidated profits in FY21.

Thanks to the rally in its share price, Airtel is now the ninth biggest company at the bourses with a market capitalisation of ~3.99 trillion as of Wednesday; it briefly crossed the ~4-trillion mark (~4.036 trillion) intraday. Two years ago, the company was ranked 15th on the league table with a market capitalisation of ~1.88 trillion (September 2019).

The relief package should sharply improve the cash flow of Vodafone Idea, giving it breathing space for steadying its operations. But the package will also provide Airtel with the financial flexibility to step up investment in growth plans and get more aggressive in the marketplace. It's the same for Reliance Jio, which is now the most profitable and well-capitalised operator among the three.

Analysts attribute the better showing by Airtel to a strong buying interest among domestic and international institutional investors. “Institutional investors are betting on a sharp turnaround in Bharti Airtel earnings over the next few years due to its strong balance sheet and ability to raise market share as Vodafone Idea loses its subscriber base," says Shailendra Kumar, CIO, Narnolia Securities.

This institutional faith has allowed Airtel to raise nearly ~1 trillion worth of fresh equity and debt in the past three years; the company plans to raise additional equity worth ~21,000 crore through a rights issue. In contrast, Vodafone Idea is struggling to raise additional capital. The company last raised equity capital nearly three years ago.

Many analysts believe that access to capital and financial headroom provided by the relief package may allow Airtel and Reliance Jio to continue to grab market share from Vodafone Idea.

The bet on Airtel’s future has also led to a big gap between its current earnings and market capitalisation. At its current stock price, the stock is trading at 390x its earnings in trailing 12-months, making it one of the most expensive large-cap stocks.

Only time will tell if Airtel will be able to deliver the growth in the earnings that investors expect from the company.