Shares of Bharti Airtel extended their fall for the second consecutive session in Wednesday’s trade after global investment bank JPMorgan downgraded the telecom operator. JPMorgan said it has downgraded Airtel to underperform from overweight and slashed its target price to Rs 710 from Rs 860 earlier.
The stock fell 4.07 per cent to hit a day low of Rs 760.60 today over its previous close of Rs 792.85. The scrip has lost 7.16 per cent in two days.
“We believe higher 5G capex, a lack of tariff hikes and deflation in premium ARPUs (Average Revenue Per Units) will drive down ROICs (Return on Invested Capitals). Bharti’s shares bake in modest FY24E capex, a 10 per cent tariff hike and continued ROIC expansion in FY24 that are all at risk,” JPMorgan stated.
“The expectation in 2022 was another round of tariff hikes that also led to a rally in Airtel’s stock price. However, that didn’t come through. Instead, 5G spectrum auctions at relatively expensive prices pushed back tariff hikes as Bharti and (Reliance) Jio both focus on rolling out 5G services in order to get a first-mover advantage,” the global investment bank noted.
JPMorgan’s take on earning revenue from 5G
“Another elephant in the room remains the lack of convincing monetization drivers for 5G capex. The consumer use cases are limited, while enterprise use cases have not been developed. The high capex keeps ROICs under pressure, so telcos will have to find a way to monetize 5G,” it said.
JPMorgan cited three options. First, from direct tariff hikes; second from indirect tariff hikes with the removal of base plans; and third from cost per GB reductions, driving greater data consumption. “The last option is a risk for 4G-only players,” the investment bank noted.
How much do the US and Europe charge for 5G services?
In the US, T-Mobile and AT&T did not charge extra for 5G, while Verizon did charge $18 extra to provide 5G services on existing plans, JP Morgan said. In Europe, operators have not charged any premium for 5G services, it added.
Q3 FY23 preview
The global investment bank expected Airtel to report a 1 per cent sequential (quarter-on-quarter) growth in its India wireless business, led by a 2 per cent increase in ARPU. JPMorgan said subscribers would be increased by 2.4 million.
SA vs NSA debate
In the 5G space, SA stands for standalone and NSA is for non-standalone. “In India, Bharti has opted for NSA, while Jio has opted for SA. While it remains too early to call for categorical success in any of the approaches, most global incumbents have chosen NSA due to lower initial capex and ability to sweat legacy infrastructure investments better. Jio’s SA choice, with 20MHz in 700MHz and >100MHz in the C-band, promises better in-building coverage and latency in the near term. Speed experience at the low bands can improve over time,” JPMorgan said.
“Only 25 per cent of existing handsets support career aggregation between 700 and 3500 MHz bands needed for adequate coverage in SA 5G. However, Bharti’s speed advantage is likely to dissipate once standards evolve to let SA 5G deployments also use LTE bands over the medium term, and Bharti will need to acquire more spectrum or densify its network,” it further stated.
On Wednesday, a total of 1.85 lakh shares changed hands on BSE, which was around three times compared to Airtel’s two-week average volume of 63,000 shares. Turnover on the counter stood at Rs 14.15 crore, commanding a market capitalisation (m-cap) of Rs 4,25,769.13 crore.
The stock finds support at Rs 760. “Bharti Airtel looks bearish with strong support now at Rs 760. A close below this level could lead to targets of Rs 710-686 in the coming days. Rs 826 will remain strong resistance,” said AR Ramachandran from Tips2trades.
Airtel’s 14-day relative strength index (RSI) came at 33.63. A level below 30 is defined as oversold while a value above 70 is considered overbought. The company’s stock has a negative price-to-equity (P/E) ratio of 277.64.
Meanwhile, Indian equity benchmarks were trading on a lower note in late-morning deals amid a volatile session.