Telecom stocks are in focus after the recent Bombay High Court decision that set aside the Telecom Department’s one-time spectrum charge demands on Bharti Airtel and Vodafone Idea. Nomura sees the move as materially positive for both, but they expect more pronounced financial significance for Vodafone Idea. However, the international brokerage house has a ‘Buy’ rating on Airtel.
What’s driving the divergence in Nomura’s recommendation for these two stocks? The brokerage house does not expect “provision reversals to be booked immediately, and we believe management might want to ascertain the likelihood of a final favourable outcome.”
Here is a detailed analysis of Nomura’s investment rationale for both stocks and expectations for Bharti and Vodafone Idea.
Nomura on Bharti Airtel: ‘Buy’
Nomura has a ‘Buy’ rating with a target price of Rs 2,220 per share. This implies a 25% upside for the Bharti Airtel share price from current levels.
According to its FY25 annual report, against the original demand of Rs 8,410 crore, Bharti Airtel has already provided for a portion of the principal (Rs 1,810 crore) plus accumulated interest on it (Rs 9,950 crore), for a total provision of roughly Rs 11,760 crore on consolidated accounts.
Nomura pointed out that the remaining principal of Rs 6,610 crore is carried as a contingent liability and has not been provided for. For Bharti Airtel, the brokerage house believes that there could be a potential writeback of Rs 11,760 crore.
Since this is a non-cash accounting adjustment and Bharti Airtel’s solvency and cash generation have never been in question, the Japanese brokerage house believes that this is a mildly positive outcome, and they do not expect any meaningful impact on financials or share price.
As per their estimates, the stock is trading at 8.3x FY28 EV/EBITDA estimates and “which we think is attractive for a business with 13% EBITDA/operating FCF CAGRs.”
However, Nomura believes that higher-than-expected competitive intensity, leading to delays in tariff hikes or lower-than-anticipated tariff hikes, poses a key risk to their upside estimates.
Nomura on Vodafone Idea: ‘Neutral’
On to the other key telecom sector operator- Nomura has maintained the ‘Neutral’ rating on Vodafone Idea with a target price of Rs 12.60 per share. The Nomura target indicates no near-term upside potential for the shares.
The company has recognised Rs 7,580 crore (as per its FY25 annual report) against the matter. It also carries a contingent liability of Rs 3,350 crore on its books. However, Nomura pointed out that the situation is slightly complicated for Vodafone Idea as the provisioned amount includes one-time spectrum charges pertaining to both former Idea and Vodafone before the merger.
The judgment on June 8 provides relief to only the erstwhile Idea’s portion of one-time spectrum charges liability, while the former Vodafone’s liability hearing is currently pending in the Supreme Court.
Nomura sees a potential reversal of Rs 7,580 crore for Vodafone Idea as more meaningful in relative terms given Vodafone Idea’s negative net worth and cash flow challenges. However, one must remember that the one-time spectrum charge relief is a small part of Vodafone Idea’s total liabilities, which are dominated by large AGR and spectrum liabilities.
Successful raising of debt capital and industry tariff hikes, along with meaningful subscriber gains, are seen as key triggers going forward.
Conclusion
However, the Japanese brokerage house highlighted that while the Bombay High Court ruling removes a long-standing legacy overhang for both operators, it is a High Court decision that can be appealed in the Supreme Court. Investors need to take that into account.
Disclaimer: This article provides factual analysis only and is not, and should not be construed as, an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a SEBI-registered financial advisor.
