BofA Securities has downgraded Bharti Airtel’s stock to `neutral’ from `buy’. This development comes in the backdrop of near-term headwinds apprehensions such as rising inflation, mounting diesel prices and the likelihood of the telco’s gearing rising on the back of material overbidding risks in the upcoming 5G spectrum auction in June 2022.
In addition, BofA also added that the rising inflation and weaker rural sentiment would also make it difficult for telcos to push through another tariff hike in the near-term and that the next hike would not happen before October 2022.
Citing the reasons, BofA mentioned that in a rising interest rate environment, BofA sees downside risks to earning per share (EPS)/fair value on the back of increased gearing; and expect the increase in retail diesel price to have an impact on Airtel’s earning before interest, taxes, depreciation and amortisation (EBITDA) margin as most towers run on diesel generators.
Further, BofA added that its sensitivity analysis indicates that a 10 per cent increase in diesel price has a 40-50 bps impact on Airtel’s EBITDA margin. According to BofA, rising inflation would also have an impact on feature phone to smartphone upgrades and net adds.
BofA has given Airtel a neutral rating as in the current market it considers telco earnings to be defensive, and also sees tailwinds from non-cellular businesses like fibre broadband, enterprise, which would limit any material downside.
