Roll-out of 5G tech will map Bharti Airtel's stock trajectory: Analysts

Investors need to stay vigilant as payback from 5G is still unclear (across telcos globally), and may put pressure on tariff hikes, analysts cautioned

The near-term trajectory of Bharti Airtel’s stock will hinge on the telecom services provider’s roll-out of 5th generation, or 5G, said analysts. They have minutely trimmed their one-year target prices on the stock, factoring high capital expenditure (capex) over the next 18 months.

Moreover, the strategy of its closest competitor – Reliance Jio (RJio) – will be another key determinant, they added.

During the post-earnings call, RJio said it was looking to migrate to more advanced, standalone architecture (SA) using in-house developed core and network elements on 700MHz coverage layer. On the other hand, Bharti said it would be using a more established non-standalone architecture (NSA) version on top-of 4G coverage layer, leveraging more established network gear vendors.

NSA is a 5G service that does not ‘stand alone’ but is built over an existing 4G network. SA, on the other hand, allows complete independent operation of a 5G service without any interaction with an existing 4G core.

According to Pranav Kshatriya of Edelweiss Securities, it is not the superiority of the technology which matters, but adoption of the ecosystem as it drives down the cost for all the stakeholders.

Bharti Airtel is targeting 5G coverage in 5,000 towns/cities by March, 2024. With the help of NSA architecture, Airtel expects that the 3,300 MHz (uplink) band will allow for a broad spectrum to accommodate increased data traffic of 5G combined with the coverage of mid-band spectrum like 1,800 or 2,100 MHz (downlink).

Additionally, Bharti will benefit from negligible 4G capex and E-band will help it strengthen backhaul. According to industry estimates, 6-8 per cent of existing handsets in use in India are 5G-enabled, and an incremental 30 per cent handsets shipped are 5G, which will jump sharply on 5G launch.

"With the current strategy, Bharti could win the 5G game as it focuses on quality customers who will upgrade to 5G devices faster than anyone else; it enjoys strong enterprise business; has compelling digital capabilities to lead 5G game – omni channel presence; offers Digital services (payment bank, Airtel IQ, Airtel Ads, Wynk etc) which will reduce churn and increased stickiness; and has strong track record," said Dayanand Mittal of JM Financial.

That said, investors need to stay vigilant as payback from 5G is still unclear (across telcos globally), and may put pressure on tariff hikes.

"Payback would be covered by potential future tariff hikes, spectrum usage charges (SUC) savings, and negligible spend on 4G capacity expansion. We expect revenue from enterprise customers to be more gradual, and unlikely to contribute any meaningful revenue in the foreseeable future," said ICICI Securities.

The brokerage has cut target on Bharti to Rs 775 (from Rs 812), and has downgraded the stock to ADD (from Buy) on risk to free cash flows (FCF).

"Concern of intensified 5G-led capex has put pressure on the stock in the last few months. However, the potential FCF of over Rs 30,000 crore may still remain strong if the capex grows in the near term," countered Motilal Oswal Financial Services.

It expects better valuation multiple for the stock given a consistent 20 per cent growth opportunity; low concern on 5G; and the company turning profitable with 50 per cent plus growth due to operating leverage.

During the June quarter of fiscal 2022-23 (Q1Y23), Bharti Airtel’s consolidated net profit jumped over 5.6 times year-on-year to Rs 1,607 crore. Airtel’s consolidated revenue from operations rose 22.2 per cent YoY to Rs 32,805 crore; its average revenue per user (ARPU) grew 2.8 per cent sequentially and by over 25.3 per cent YoY to Rs 183.

Jefferies has tweaked its FY23-25 consolidated revenue/Ebitda estimates by up to 1 per cent but has lowered its net profit estimates by 4-12 per cent to factor Q1 results.

"Over FY22-25, we expect Bharti Airtel to deliver 17 per cent/22 per cent CAGR in revenues/EBITDA - among the highest in telco sector globally," it said.