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The curious case of Bharti Airtel - Will FIIs ‘recharge’?

In an effort to address the concerns and questions surrounding Bharti Airtel’s stock performance even after the further weakening of VIL’s financial position and selective tariff hikes effected by Bharti recently, we did an analysis of the financial performance and stock price returns of global telcos across 12 markets and 24 companies.

The conclusion is that >60% of these companies have significantly underperformed the respective regional indices over both the near- and long-term, while the remaining ones have managed to outperform only intermittently, implying weak investor interest in this sector globally (Exhibit 10). Although Bharti has seen strong interest from DIIs, FII participation has been sporadic and weak so far (Exhibit 1-3).

* Shareholder returns: Globally, across 12 markets, the stock prices of 24 major telcos have underperformed regional indices- suggesting weak investor interest in the sector. Out of 9 telcos that outperformed over the 10-year period, only 2 companies (one from the US and the other from the Philippines) outperformed over the 2-10 year period as well. All the other telcos have seen significant value erosion across time frames (1-10 years).

* Reasons for underperformance: The global underperformance of telcos can be attributable to the low-single digit growth in revenue and EBITDA in the last 10 years (Exhibits 8-9), capital-intensive nature of the business, fast technology changes, sub-par return ratios, high competitive intensity and capital allocation strategies (Exhibits 4-7).

* The case of Bharti Airtel: While Bharti too is not different from its global peers in longterm (5-10 year) stock underperformance, it has outperformed (by 22-37bps) the Sensex in the last 2-3 years, after tariff hikes and amid the possibility of a duopolistic market post substantial weakening of VIL’s financial position. Bharti’s stock returns are also higher than the global average across all time frames, except on a 10-year basis (Exhibit 10).

* Institutional ownership in BHARTI IN: We analyzed the FII and DII ownership data of Bharti for the last 37 quarters (Exhibit 1-3). It shows that, on an average, FIIs were OW during Q1FY18-Q1FY21 (with a major OW stance in Q3FY18-Q2FY20). However, it is still below their average in Q1FY13-Q4FY16. FII ownership plays a crucial role in share price movement (Exhibit 3-4). In those quarters where FIIs have gone OW or reduced UW, the stock price has delivered positive returns sequentially. On the other hand, DIIs have been consistently OW on BHARTI since Q4FY16, with a significant increase seen from Q1FY21 (could be attributable to buying at the time of stake sale by promoters). Despite ~26% underperformance to the Sensex in the one last year, DIIs have held onto their OW positions, with current levels at an all-time high since FY13.

* Our view: BHARTI remains our preferred bet in the telecom space given superior and consistent execution across business segments and benefits accruing in the India wireless business with the weakening of VIL. Having said that, the tariff hike is of supreme importance for strong FCF generation. Sustained re-rating of Bharti hinges on tariff hike, strict control over capex and capital allocation. Further, looking at the past FII participation trends also matters for better returns. Past trends (10 years) also reveal that the sector provides more trading opportunities than structural shareholder returns for the obvious reasons that we stated above.

* JioPhone Next: Bharti’s stock price movement has been vulnerable to tariff aggression from Jio, with the most recent examples including JioPhone plan changes in Feb’21 and renewed aggression by Jio in post-paid in Sept’20. However, though these moves had no financial impact on Bharti, investors remained cautious after such events. JioPhone Next is expected to be launched on September 10, and it could turn out to be another round of pricing aggression from Jio to accelerate its subscriber market share gains.

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