Airtel needs more than a Google unit

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Shares of Bharti Airtel Ltd were up 3% following the announcement of its deal with Google on Friday. The internet giant will invest up to $ 1 billion in a partnership with Airtel. As part of the deal, Google will buy 1.28% of Airtel for $ 700 million at ₹ 734 per share.

This is a sentimentally positive development. According to analysts, Google’s investment in Airtel confirms its confidence in the Indian partner and would help Airtel accelerate its revenue growth from the non-mobile and commercial segments. Additionally, as analysts at ICICI Securities Ltd stated in a Jan.30 report, “Although (Google’s) investment in Bharti is lower than (that of) Reliance Jio, the partnership will help Bharti compete with JioPhone Next’s. RJio in the coming quarters. “Investors will recall 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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High expectations

Therefore, the deal with Google is not yet to significantly shift Airtel’s needle on its earnings. Simply put, a 1.28% stake is tiny for Google to become a significant strategic partner. Additionally, the lack of a detailed strategic plan and exclusivity in the partnership prevented some analysts from changing their earnings estimates. For example, analysts at Edelweiss Securities Ltd say they will await more information and even execution before incorporating the potential benefits of this deal into their estimates. “Although the press release cites ambitious goals to accelerate the growth of India’s digital ecosystem, it does not mention specific plans. Historically, telecom operators have played an almost negligible role in phone penetration as consumers typically purchase telecom services and phones separately, ”Edelweiss analysts said in a Jan.28 report.

Note that the deal also includes an investment of up to $ 300 million to implement potential multi-year business deals. This will include investments to expand Airtel’s offering through innovative affordability programs.

In this context, what are the triggers for investors in the Airtel stock? “The catalyst for the Airtel stock from here on out would be further consolidation in the Indian telecommunications sector and the consequent improvement in market share, the continued strong growth of the 4G subscriber base, the sharp decline in the price of the 5G spectrum, the rate hike in the postpaid segment and the translation of the recent rate hike towards strong revenue growth and Ebitda, ”said Kunal Vora, head of Indian equity research, BNP Paribas. Ebitda is short for earnings before interest, taxes, depreciation and amortization.

Airtel outperformed Reliance Jio and Vodafone Idea Ltd in terms of revenue growth (on a sequential basis) in three out of four quarters through the September quarter (Q2FY22). Analysts expect Airtel to beat its competitors on quarter-over-quarter revenue growth in the third quarter as well. However, the impact of recent tariff increases would be modest. According to Vora, in 2019, when the industry experienced a price hike, Airtel experienced the highest growth in subsequent quarters. In November, Airtel announced a 20-25% increase in prepaid rates, while colleagues Vodafone Idea and Jio followed suit, increasing rates by up to 21%. Over the past three months, Airtel stock rose 6.41%, while the Nifty50 index fell 1.88%.

To be sure, while Airtel appears to be in the best position among competitors, there are some risks that investors need to watch out for. One is moderation in adding 4G subscribers due to the higher rates that damage accessibility. Aggressive offers for the 5G spectrum and any disruption caused by JioPhone Next price changes are other risks, Vora points out.

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