Brokerage firm BofA Securities has downgraded shares of Bharti Airtel to neutral from buy indicating that earnings may face some headwinds in the near term.
The brokerage, however, refrained from cutting its price target of Rs 810 on the stock as it believes the telecom sector is a strong defensive play in the current volatile market.
Shares of Bharti Airtel have outperformed the wider market in 2022 as they rose more than 10 percent compared to flat-to-negative returns for the Nifty 50 index.
“We believe rising inflation and weaker rural sentiment will make it difficult for telcos to do another rate hike in the near term,” BofA Securities said in a note on April 28. The brokerage expects hike after October.
Further, BofA Securities sees risk of higher capital expenditure as Bharti Airtel gets ready to bid for 5G spectrum later this year. “In a rising interest rate environment, we see downside risks to EPS/fair value (earnings per share) on the back of increased gearing,” the brokerage said.
On the margin front, Bharti Airtel is expected to see some compression due to rising diesel prices. Diesel is used in running telecom towers by telecom operators.
According to an analysis by BofA Securities, a 10 percent rise in retail diesel prices could crimp Bharti Airtel’s margins 40-50 basis points. Soaring global crude oil prices and shrinking global inventory for diesel have resulted in sharp rise in domestic price of the fuel.
“We believe rising inflation would also have an impact on feature phone to smartphone upgrade and net additions,” BofA Securities said.
Against the murky earnings backdrop, BofA Securities argued that the company’s present valuations of 8.8 times two-year forward enterprise value-to-operating profit fairly compensates for long-term positives.On April 27, shares of Bharti Airtel ended 0.5 percent lower at Rs 752.50 on the National Stock Exchange.
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