ARPU gain hopes turn Street upbeat on Airtel

Valuations, ability to manage debt are investment arguments

The stock of Bharti Airtel gained nearly 4.5 per cent as brokerages have turned positive on the stock.

While the sector is likely to face some pressure over the next couple of quarters following Reliance Jio’s pricing action in January, analysts said Airtel is best positioned to benefit once the declining trend of revenues reverses in the second half of FY19.

Analysts at Morgan Stanley said there was a low probability of Jio taking further price cuts in its 4G smartphone plans. This can lead to an increase in average revenue per user (ARPU) of incumbents in the second half FY19. With Jio also focused on showing a consistent improvement in ARPU and in profitability, an ARPU upgrade cycle could happen beyond FY19, they said.

Another trigger for Airtel is its ability to protect its turf so far and maintain its leadership.

Analysts at UBS said Airtel had defended its market share and had the spectrum, capacity and willingness to invest that hold the key to emerge as a winner once the dust settles.

Though industry revenues declined, Airtel’s revenue market share improved 33 basis points ( bps) sequentially to 31.5 per cent in the December quarter. Jio has gained 383 bps on a sequential basis to 15.3 per cent even as incumbents gained 33-43 bps.

Analysts don’t see much of a threat from JioPhone. Given that incumbents have introduced low- end smartphones, the chances of churn are lower.

However, the concern remains if Jio drops the condition of an upfront payment of ~1,500 and offers phones on subsidies. This will skew benefits in favour of JioPhone. Given the large non-4G base of incumbents such as Airtel, how this ARPU battle unfolds will be watched out for.

Airtel’s financial strength, the best among incumbents, is another investment argument. Its net debt to operating profit at 3.2 times FY19 estimates is manageable and is expected to fall as ARPUs begin to inch up towards the end of FY19.

With the Africa business self sustaining with $500 million free cash flow in the nine months of FY18, coupled with listing possibility and a majority stake sale in Bharti Infratel, the company has enough avenues to spruce up its balance sheet and bring down debt or invest aggressively to expand its 4G network.

The company has 259,000 3G/4G base transceiver stations (BTS), the most among incumbents and Reliance Jio. It is the BTS that facilities the communication between a mobile phone and a network. Valuations, too, are supportive at over 6-7 times FY20 enterprise value to operating profit.