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Google deal: Positive but short on details

Bharti Airtel (Bharti) has inked a USD1bn deal with Google, wherein Google will acquire 1.28% of equity in Bharti for USD700mn at INR734 share apiece. Google will also invest up to USD300mn towards implementing commercial agreements aimed at accelerating access and digital inclusion across India’s digital ecosystem.

Although equity infusion helps reduce debt, the amount isn’t big enough in the overall scheme of things. Strategically, the current focus is on making smartphone affordable, wherein telecom operators have had limited role. Historically, investments by a tech major in a telecom company have not yielded any edge. Hence, while we remain positive on Bharti, we do not see this deal providing a significant benefit.

Bharti and Google partner to help grow India’s digital ecosystem

Bharti and Google have announced a partnership, wherein Google will invest up to USD1bn as part of its Google for India Digitization Fund. The deal includes investment of USD700mn to acquire 1.28% ownership in Bharti and up to USD300mn corpus for potential commercial agreements, over the course of the next five years. The partnership will currently focus on enabling affordable access to smartphones across price ranges. Also, they will explore building on their existing partnerships to cocreate India-specific network domain use cases for 5G and other standards, and help accelerate the cloud ecosystem for businesses across India.

Ambitious goals; nitty-gritty awaited

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. Even so, a successful implementation will benefit both companies, for the time being, we refrain from knee-jerk optimism. To be sure, there can be strategic synergies on the India-specific network domain use cases for 5G as well as growing the cloud ecosystem in India. We will wait for the go-to-market strategy and pricing before revising estimates.

Outlook and valuation: A lot hinges on tariff hike; maintain ‘BUY’

While the partnership with Google and the equity infusion is positive, we see limited impact just yet. We await more information and also execution before incorporating the potential benefits in our estimates.

We maintain our positive stance on Bharti due to its high-quality subscriber base and strong investments in the network, and an industry structure that’s conducive for tariff hikes. At 7.6x FY23 EV/EBITDA, the stock looks attractive considering strong EBITDA growth expectations given high odds of tariff hikes. All in all, we maintain ‘BUY/SO’ with a DCF-based TP of INR866. Accelerated 5G rollout remains a key downside risk to our hypothesis as it would lead to higher spectrum and infrastructure investments, thereby driving up leverage.

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