Investors place their bets on Airtel as Jio impact seen waning

While Reliance Jio Infocomm Ltd has been making all the moves in the marketplace to grab customers with its cutprice offers, investors have stayed buoyant about its main rival Bharti Airtel Ltd.

The telecom market leader’s stock has gained 38% year to date, outperforming the BSE Sensex’s 16% gain with a promise of even better times to come. Stock analysts have stayed bullish on the company and despite this outperformance, analysts see a further 16% gain from the current levels over a 12-month period, which indicates an upswing in its earnings on the expectations that Jio will have to slowly raise its pricing and end promotions by the end of this fiscal.

They also expect Bharti to benefit from SIM card consolidation due to a shift from standalone packs to bundled products. Consolidation among telecom operators offers Airtel an opportunity to increase its market share.

“We believe earnings visibility for Bharti is a lot better now, with the industry approaching the end of severe competitive intensity. We believe most negative catalysts for Bharti are now behind us (the last big one being Jio phone launch), and expect revenue growth and margins to start picking up. We thus argue Bharti should indeed trade at a higher multiple vs. its recent history,” Manish Adukia and Piyush Mubayi, analysts at Goldman Sachs Global Investment Research, said in a report titled Winter is receding. They revised the target price for Bharti Airtel to ₹487 and recommended a buy on the stock which closed at ₹409.50 on Monday.

Of the 34 brokers tracking the Airtel stock on Bloomberg, as many as 15 recommended a buy rating, 11 asked its investors to sell the stock and eight have a hold rating.

“Jio has started to raise its effective prices, and this bodes well for incumbents; we believe the wireless telecom industry is now at the tail end of a period of competition and forecast Bharti’s wireless Ebitda to grow at a 14% CAGR (compound annual growth rate) over the next two years,” Adukia and Mubayi said.

Ravi Menon, an analyst at Elara Capital, has a more technical view on Jio’s impact waning. In a note on August 8, he said it is obvious that running a pure 4G network will result in lower operating cost than a mix of 2G, 3G and 4G.

However, the cost advantage may be minor with the new rollout strategy being adopted by incumbents such as Vodafone that are choosing to deploy 4G long term-evolution (LTE) technology by installing new single radio access network (SRAN). Vodafone has already used the SingleRAN deployment strategy for rolling out 4G LTE in Europe and has found this providing lower total cost of ownership.