Airtel needs more than a Google drive
Premium- An equity stake of 1.28% is minuscule for Google to turn a meaningful strategic partner of Airtel
- More consolidation in the telecom sector and improvement in market share will catalyze Airtel stock
Bharti Airtel Ltd’s shares have risen 3%, following the announcement of its pact on Friday with Google. The internet giant will invest up to $1 billion in a partnership with Airtel. As part of the deal, Google will buy 1.28% stake in Airtel for $700 million at ₹734 per share.
This is a sentimentally positive development. Google’s investment in Airtel validates its belief in the Indian partner and would help Airtel in accelerating its revenue growth from non-mobile and commercial segments, reckon analysts. Additionally, as analysts from ICICI Securities Ltd said in a report on 30 January, “Though (Google’s) investment in Bharti is lower compared with (that of) Reliance Jio, the partnership will help Bharti compete against RJio’s JioPhone Next in next few quarters." Investors would remember that in July 2020, Reliance Industries Ltd announced a ₹33,737 crore investment by Google for a 7.7% stake in Jio Platforms.
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As such, the Google deal is not expected to significantly move the needle for Airtel on its earnings as yet. Simply put, an equity stake of 1.28% is minuscule for Google to become a meaningful strategic partner. Further, the lack of a detailed strategic plan and exclusivity in the partnership has kept some analysts from tweaking their earnings estimates. For instance, analysts at Edelweiss Securities Ltd say that they will await more information and also execution before incorporating the potential benefits of this deal in their estimates. “While the press release cites ambitious goals of accelerating growth of India’s digital ecosystem, it does not mention specific plans. Historically, telecom operators have played almost a negligible role in handset penetration since consumers typically purchase telecom services and handsets separately," said Edelweiss’ analysts in a report on 28 January.
Note that the deal also includes an investment of up to $300 million towards implementing potential multi-year commercial agreements. This will include investments in scaling Airtel’s offerings through innovative affordability programmes.
Against this backdrop, what are the triggers for investors in the Airtel stock? “The catalyst for the Airtel stock from hereon would be further consolidation in the Indian telecom sector and consequent improvement in market share, continued strong growth in 4G subscriber base, sharp reduction in price of 5G spectrum, tariff hike in the postpaid segment and the translation of recent tariff hike into strong revenue and Ebitda growth," said Kunal Vora, head of India equity research, BNP Paribas. Ebitda is short for earnings before interest, taxes, depreciation, and amortization.
Airtel has outperformed Reliance Jio and Vodafone Idea Ltd on revenue growth (sequential basis) in three out of four quarters until the September quarter (Q2FY22). Analysts expect Airtel to beat its peers on quarter-on-quarter revenue growth in Q3 as well. The impact of recent tariff hikes would be small, though. According to Vora, in 2019, when the industry had taken a price hike, Airtel reported the highest growth in subsequent quarters.In November, Airtel announced a 20-25% increase in prepaid rates, while peers Vodafone Idea and Jio followed suit, raising rates by up to 21%. In the past three months, the Airtel stock rose by 6.41%, while the Nifty50 index fell 1.88%.
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To be sure, while Airtel seems to be best placed among competitors, there are some risks investors need to watch out for. One is the moderation in 4G subscriber addition owing to higher tariffs hurting affordability. Aggressive bidding for 5G spectrum and any disruption caused by changes in JioPhone Next pricing are other risks, points out Vora.
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