Reliance Jio IPO to be a stock rerating catalyst for Bharti Airtel, says CLSA

Foreign brokerage CLSA said Reliance Jio Infocomm’s (RJio) planned initial public IPO will be a stock rerating catalyst for Bharti Airtel Ltd, as it suggested a 'Buy' on both Bharti Airtel and RJio parent Reliance Industries Ltd (RIL). RJio and Bharti Airtel are two of the most direct ways to invest in India’s digitalisation, CLSA said in its latest note.

"While RJio is currently unlisted, investors can gain exposure through its parent Reliance Industries, which we rate a BUY. We also recommend BUY-rated Bharti Airtel. We believe RJio’s leadership and big vision for digital services warrant a valuation premium," CLSA said.

CLSA said with a likely RJio IPO ahead, which the RIL management talked of in 2019 would be a rerating catalyst for Bharti. Its target of Rs 1,110 for Bharti translates to 10 times EV/Ebitda for India operations. In the upside case, Bharti Airtel could reach $90 billion market capitalisation at 9.5 times consolidated Ebitda, it said.

CLSA values RJio in its Reliance Industries SOTP at a $111 billion enterprise value, based on 11.5 times EV/Ebitda, 60 per cent higher than the 33 per cent equity sale that raised $20 billion in 2020. RJio’s planned IPO will also be a valuation catalyst for Bharti Airtel, it said, while suggesting a target of Rs 1,110 on Bharti Airtel and Rs 3,060 on RIL.

CLSA noted that while RJio has more subscribers at 46 crore, Bharti Airtel has the highest average revenue per user (ARPU) at Rs 203. "Although RJio’s 4G rollout hit smaller operators, unable to transition to 4G, Bharti ramped up its own 4G services and offered a premium product, enabling this incumbent’s market share to hit new highs," CLSA said.

CLSA said Reliance Jio and Bharti Airtel command a dominant 78 per cent share and 80 crore subscribers in India’s mobile market. It expect RJio’s leadership and

Bharti’s execution to lead the sector to $38  annual revenue by FY26. In a bluesky scenario, CLSA expects the duo’s revenue could rise 50 per cent to $47 billion by FY26, in case they achieve 90 per cent combined market share and reaches an ARPU of Rs 300.

"In addition, a boost from 5G’s fixed wireless access (FWA) and industrial internet could further accelerate growth. We rate both Bharti and RJio parent Reliance Industries BUY and believe RJio’s planned IPO will be a stock rerating catalyst for Bharti Airtel," CLSA said. 

CLSA said Bharti and RJio enjoyed similar 18-19 per cent growth annually in mobile revenue over FY20-23, but Bharti India’s growth pulled ahead in H1FY24. Nevertheless, it expects RJio’s greater investment to pay off with faster Ebitda growth over the next three years.

"However, Bharti is more efficient at allocating capital. We expect it to book a higher ROCE than RJio and forecast $10 billion annual operating cashflow by FY26," it said.

 

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