New Delhi, Jan 11,2023: Bharti Airtel fell sharply by more than 4 per cent on Wednesday after foreign brokerage, JP Morgan downgraded the stock.

JP Morgan said it recently downgraded Bharti from OW to UW with a new price target of Rs 710.

“Our downgrade thesis is driven by three main factors: We don’t expect any tariff hikes to come through in CY23 given the focus of both Jio and Bharti on rolling out 5G services. We expect capex to increase significantly for Bharti as it will have to defend its market share vs Jio, who is going after Bharti’s high end subscribers through its standalone mode of 5G capex. Combination of higher capex and absence of tariff hikes will drive down ROICs as Bharti won’t be able to monetize its significant 5G investments over the next 3 years”, JP Morgan said.

“We cut our ARPU, subscribers and margins for FY23- 25E, which lowered our PT to Rs 710 (from Rs 860). We are significantly ahead of consensus on capex while being below Ebitda and FCF,” JP Morgan said.

“We see 2023 playing out as a two-horse race between Bharti and Jio on who wins the 5G battle and at what costs. We believe Jio is trying to take away the high end ARPU subs of Bharti through its standalone and aggressive 5G capex. For Bharti to defend its share, we believe it will have to increase its capex and match Jio’s that will drive lower free cash flows and declining ROICs for Bharti.

“Though both the operators claim that the overall capex on a 3-year basis won’t change, we believe telcos will be overspending on capex that will start hurting their ROICs, especially in absence of 5G monetization. The elephant in the room is whether telcos will take tariff hikes in 2023”, JP Morgan said.

“We believe right now the focus of both Bharti and Jio seems to be on rolling out 5G services and they have been offering 5G on the same 4G plan packs and hence it seems like monetisation of 5G is still some time away. We believe Bharti’s stock price is building in a 10 per cent tariff hike and if that doesn’t come through over the next three months then it will be a sentiment negative for the stock and could lead to a de-rating,” it added.