The differential rise in share price and market cap
is due right issue worth Rs 25,000 crore by Bharti Airtel
in April this year which resulted in 28 per cent increase in number of shares in the hands shareholders.
“Risk of a Vodafone Idea (VIL) exit in the near term rose materially post the AGR judgement by the Supreme Court. VIL simply does not have this money. Despite nearly Rs 40 per share hit due to past dues, our Bharti Airtel price target rises to Rs 600 as the benefit of a 2-player market offset,” write analysts at New Street Research led by Chris Hoare.
According to the brokerage Bharti Airtel is in a win-win situation. If sufficient action is taken to offset the Supreme Court or if the ruling is reversed, this is prima facie positive for the stock. If this doesn’t happen, VIL exits and the upside more than offsets the impact of the SC ruling from Bharti’s perspective.
The optimism is clearly visible in its stock valuation. The stock is now trading at 3.2x its underlying book value per share, highest in a decade. The company's peak valuation was in 2007 when it was trading at nearly eight times its book value at the end of March 2007. Analysts say that the commonly used price to earnings (P/E) multiple doesn't make sense due to abnormally depressed valuation in the sector right now.
Bharti Airtel reported net loss of around Rs 25,000 crore on trailing 12 month ending September this year against net profit of Rs 409 crore during 12 months ending March this year. The company’s net worth was however down only 2 per cent during the first half of current fiscal providing it with the staying power unlike Vodafone Idea.
Analysts see further upside in Bharti Airtel stock price as operators raises tariff to absorb some part of the AGR dues.
Mobile operators have announced a tariff hike effective from the December this year and analysts expect Bharti Airtel to gain most from it given that the company is already making cash profits unlike Vodafone Idea. “Factoring in an improving tariff environment, we remain positive on Bharti Airtel with a revised target of Rs 515, implying 22 per cent upside from current levels,” write Deepti Chaturvedi and Akshat Agarwal of CLSA in their recent report on the telecom sector.
Vodafone Idea on the other hand will need a much more aggressive tariff hike to raise enough resources to pay for AGR dues and meet its cash outflows. “VIL would need 65 to 97 per cent rise average revenue per use per month (ARPU) by FY2023E to meet its cash outflow needs under various scenarios of relief on AGR liabilities, per our math. This places Bharti and Jio in a fairly sweet spot, in our view – both gain from either a sharp uptick in industry revenues or a significant consolidation event," says Rohit Chordia and Aniket Sethi of Kotak Institutional Equities in their latest report on the telecom sector.
VIL currently has the lowest ARPU in the industry at Rs 50. Most analysts expect at best 35 per cent hike in ARPU over the next three-years through to FY22, and say this may not be sufficient for Vodafone Idea to pay all its impending dues.