Will Bharti Airtel lift Singtel's earnings?

It could play against Vodafone’s weakness and raise revenue share in the next 12-15 months, an analyst said.

DBS Equity Research expects Singtel’s earnings to rebound in 2020 after contracting in 2019, thanks to the recovery of Bharti Airtel.

DBS Equity Research analyst Sachin Mittal noted that Bharti Airtel is set to gain revenue market share from the ongoing Vodafone-Idea merger, which is fraught with complications caused by vendor and staff issues. It also has a stronger network coverage and capacity, allowing it to raise its revenue share in the next 12-15 months.

“Vodafone is also highly levered with a net debt-to-EBITDA of 6.5x, limiting its potential to counter aggressive pricing measures of Reliance Jio or expand capacity, which the telco is seemingly having issues with. Vodafone is also losing subscribers as it has not adopted cheaper bundled plans due to the lack of capacity,” he said.

The integration of Tata telecom’s spectrum and subscribers, expected to take place over FY2019, should also help Bharti Airtel’s efforts to uplift its revenue share gains and earnings.

However, if competitive pressures in the Indian telecom market persist, with an aggressive Jio continuously driving tariffs lower in a bid to gain revenue share, a potential recovery of Bharti Airtel and consequently a rebound in Singtel’s earnings could be further delayed to FY2021.

Mittal noted that Jio continues to be aggressive in the market, maintaining ~20% lower tariffs versus incumbents as it continues to battle towards gaining further revenue market share by 2021 vs 25% presently.

“However, much of these market share gains will be at the expense of smaller operators and Vodafone-Idea with minimal losses expected from Airtel,” he added. “In our base case, we have assumed that Jio will adopt a more moderate competitive stance and move away from price competition by 2020, once the consolidation of the industry is completed, with the hope of monetising Jio’s subscriber base.”

However, if Jio continues to maintain competitive pressures at the present hyper-intensive levels, even after industry consolidation, Airtel may fail to stage a recovery in earnings, prolonging a rebound in Singtel’s bottomline.

Mittal trimmed their earnings forecast for 2019 by 5% and declared a 6% decline in underlying earnings due to a projected decline in contributions from associates driven by Bharti Airtel and Telkomsel, and intensifying competition in the mobile and enterprise services market in Singapore, that could weigh on core EBITDA.

“The prepaid SIM registration exercise in Indonesia, which concluded in May 2018, has also taken a toll on Indonesian mobile operators and could likely weigh down contributions from Telkomsel further in FY1920F,” he argued. “However, Telkomsel who has been the aggressor so far, plans to raise data pricing by 5-10% post-Lebaran holidays and hopes to sustain higher pricing if other players follow suit.”

The analyst also said the market is attaching a significant valuation discount to the core plus digital business of Singtel, possibly over concerns on the magnitude of losses in the digital segment in the past.