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Bharti Airtel acquires Tikona’s 4G business; Time to buy or avoid?

Chillicious News

In a bid to increase its 4G coverage across India, Bharti Airtel acquired Tikona Digital’s 4G airwaves for Rs 1,600 crore to take on Reliance Jio Infocomm as well as the Vodafone-Idea Cellular.

Indian telecom market is seeing rapid consolidation – it may be good for consumers but for companies, it is a different story all together.

Analysts at top global brokerage firms such as Morgan Stanley and CLSA believe that data rollout are likely to post a risk to capital expenditure and hit average revenue per user. It is best to stay put or lighten positions as they maintain underperform rating on the stock.

The acquisitions of Tikona will help Bharti Airtel to get access to Tikona’s 4G airwaves in five circles — Gujarat, UP (East), UP (West), Himachal Pradesh, and Rajasthan.

The Tikona deal, which includes taking on debt of Rs 500-600 crore, will see Airtel net 100 MHz of 4G spectrum in the 2300 MHz (4G) band equally split across the five circles, taking its total 4G holding to close to 880 MHz (including Telenor India), compared with 1,169 MHz for Jio and 1,089 MHz for the Vodafone-Idea combine.

The acquisition will narrow the gap between Bharti’s pan-India 4G spectrum capacity and Vodafone-Idea’s and Reliance Jio’s. Bharti Airtel currently has more 3G/4G capable spectrum compared to Reliance Jio Infocomm.

Morgan Stanley maintains an underweight rating on Bharti Airtel with a target price of Rs 280, which translates into a downside of nearly 20 per cent from current levels.

The global investment bank estimates that the value of the spectrum is likely to be somewhere around Rs 1,400 crore for the remaining life. “In a bid to counter Jio’s offers, aggressive data rollouts to pose risk to capex,” said the report.

There is considerable capex risk and pressure on ARPUs which should keep FCF yield muted, said the Morgan Stanley note. It is noteworthy, Bharti Airtel currently has more 3G/4G capable spectrum compared with Jio Infocomm.

It looks like Bharti Airtel has subsequently followed a strategy of buying out companies with 4G spectrum and this is the fifth such acquisition since 2015, said a report. It had acquired more airwaves in the 4G auctions that took place last year.

CLSA downgraded Bharti Airtel earlier this month to underperform from buy earlier and has also slashed its 12-month target price to Rs 380 from Rs 393 earlier.

Bharti Airtel’s Rs 345 offer of unlimited voice and 1GB data/day blunts Jio’s value proposition. It is worth noting that, Airtel’s new offer will limit churn but will dilute ARPU, said the CLSA report.

The global investment bank lowered FY18-19CL revenue by 10 per cent and EBITDA by 17-19 per cent to factor in ARPU dilution. But, reduction in dual-SIM’s, as well as sector consolidation at a fast pace could provide upside, said the CLSA note.

Disclosure: Reliance Industries, the parent company of Reliance Jio, owns Network 18 that publishes Chillicious.com.