Emkay Cautious on Telecom Sector, Recommends Sell on Vodafone Idea, Reduce on Bharti Airtel, Buy on Indus Tower

Emkay Global has initiated coverage on Bharti Hexacom with a "Reduce" rating and assigned a "Sell" rating to Vodafone Idea. The brokerage believes the risk-reward for telecom stocks remains unattractive due to tepid growth expectations and expensive valuations. Emkay recommends selling Bharti Airtel and buying Indus Tower.

Emkay Global, a leading financial services brokerage, has initiated coverage on Bharti Hexacom with a "Reduce" rating and assigned a "Sell" rating to Vodafone Idea. The brokerage's cautious stance on the telecom sector is driven by tepid growth expectations and expensive valuations. Emkay recommends selling Bharti Airtel and buying Indus Tower.

According to Emkay, the purchasing power parity adjusted-average revenue in India has made a case for strong Arpu (average revenue per user) growth. However, the brokerage believes that the Arpu in India is only marginally lower than global peers. The gap is expected to narrow further after the tariff hike in the financial year 2024-25 (FY25).

Emkay also notes that telecom service providers have recouped the losses made since Reliance Jio's foray in the market. During FY20-25, the industry saw a 16% CAGR with consistent tariff hikes, recouping its losses. Considering that the losses have been retrieved, Emkay expects the industry growth rate to slow down to previous growth trends.

The brokerage has assigned a "Reduce" rating to Bharti Airtel and Bharti Hexacom given the stocks' expensive valuations. The consolidated valuations at FY27E EV/Ebitda of 10.2x appear reasonable, although these include Ebitda from Indus Towers and Airtel Africa – valuations for both are significantly lower. However, the two stocks' FY27E EV/Ebitda valuations (12.9x for Bharti Airtel India business and 17.1x for Bharti Hexacom) are expensive.

For Vodafone Idea stock, the brokerage has a "Sell" rating with a share price target of ₹6. Emkay remains cautious on the stock given the lack of clarity on the company's plan to repay its debts. Steep adjusted gross revenue (AGR) dues and spectrum liabilities have curtailed Vodafone Idea’s ability to invest in network expansion, resulting in market share loss and insufficient Ebitda generation.

Indus Towers stock remains the brokerage's only "Buy" in the telecom sector given its attractive valuations of 5.7x FY27E EV/Ebitda. Emkay assumes Indus Tower’s Ebitda CAGR to be 9.1% over FY25-28 (excluding provision reversals), with FY26 free cash flow (FCF) yield at 7.0%. The brokerage has a share price target of ₹410 for Indus Tower stock, translating into an upside of 15.5%.

References
[1] https://economictimes.indiatimes.com/markets/stocks/news/expert-take-vodafone-idea-vedanta-among-5-stocks-to-buy-this-week-for-upside-up-to-24-heres-why/articleshow/123498207.cms
[2] https://telecomtalk.info/govt-agr-dues-for-vodafone-idea-airtel/998878/
[3] https://www.business-standard.com/markets/news/emkay-on-telecom-stocks-sell-vodafone-idea-shares-reduce-bharti-airtel-shares-buy-indus-tower-shares-125082600127_1.html