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The Indian telecom sector has gone through a consolidation phase from a 10–12 players industry a decade back to now just four players. Of the four telecom operators the top two accounts for over 70% of the market share. The telecom industry is on the cusp of a major change in market construct amid concerns over Vodafone Idea (VIL) survival.

“Jio and Bharti Airtel could gain disproportionately – VIL has a significant ~25% market share (255.4m subscribers), which provides the two telecom giants the opportunity to capture a large pool of subscribers,” said Aliasgar Shakir, Research Analyst at Motilal Oswal.

That apart the sector is keenly awaiting a tariff hike to achieve profitability, the big market share gain opportunity could effectively imply gains equivalent to a 19% tariff hike on the EBITDA growth opportunity, stated the report released by Motilal Oswal.

Collateral damage

The incremental subscriber/revenue growth from VIL could increase opex/capex for Bharti Airtel and Jio due to loss of network sharing benefits, but the resultant gains from market share could be far higher and offset it. For Bharti, the network cost increase of 2–3% (2k/3k per site) due to the cut in VIL’s tenancies, and in the form of incremental capex of ~Rs 10,000 crore for 15–20% of fresh site additions to accommodate the traffic load on the network. Against this, overall incremental EBITDA (earnings before interest tax depreciation and amortization) of over Rs 8,900 crore should still be significantly higher to manage the above mentioned incremental impact. Jio may also see some amount of increase in network cost, given its sharing pacts with Bharti Infratel and intensifying capex, but gains could be far higher, noted the report.

Stock view

Over the last 10 years, the Telecom industry ROCE (return on capital employed) has been in the low single digits. However, a disproportionate increase in revenue from incremental market share could drive asset turnover and benign competition could improve profitability.

Bharti Airtel | Target price: Rs 750

Motilal Oswal sees a potential re-rating upside in both the India and Africa businesses, on the back of steady earnings growth and attractive valuations. It values the stock on FY23E, assigning EV/EBITDA (Enterprise value to earnings before interest tax depreciation and amortization) of 11x to the India Mobile business and 5x to the Africa business, arriving at SOTP (sum of the parts) target price of Rs 750. These do not factor in any upside from tariff hikes or sharp market share gains – potentially due to VIL’s eventual outcome of financial stress, which could provide an incremental upside of Rs 175/share at current valuations.

Jio | Target price: Rs 1,316

Motilal Oswal assigns a rich 20x EV/EBITDA multiple on FY23E while maintaining its target price of Rs 1,316 factoring in a 34% stake sale. Thus, RJio’s value in RIL’s share comes to Rs 875/share (for its 66% stake). It believes the incremental EBITDA opportunity from the consolidation could provide impetus to the valuation. RJio’s rich valuation factor in its dominant position in the market and its foray into digital, along with the cross-sell opportunity. However, Motilal Oswal is of the opinion that, the incremental EBITDA growth potential of Rs 8,900 crore would certainly offer a strong upside.

Note: Jio is not listed on exchanges and is a subsidiary of Reliance Industries.

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