MUMBAI (NewsRise) -- Bharti Airtel emerged the second best-performing stock in India's benchmark Sensex index in 2019, helped by tariff increases and government relief for the sector, but further gains are likely limited as burgeoning debt and humongous payments owed to authorities pose a looming threat.
Shares of Bharti Airtel, backed by billionaire Sunil Bharti Mittal and Singapore Telecommunications, advanced 56% this year, compared with a 41% slump last year. Bharti's gains were in sharp contrast to rival Vodafone Idea, which plunged 74% this year. The Sensex has gained more than 14%.
Bharti's shares have been rallying ever since telecom companies in India raised tariffs earlier this month. That was the industry's first price hike in more than three years after Reliance Industries-backed Reliance Jio Infocomm entered India's wireless market.
Further, the shares got a boost after the Indian government offered a breather with a two-year moratorium on the payment of spectrum charges, as well as extended by one more year the imposition of interconnect usage charge that operators pay each other for calls made from one network to another.
"Recent developments in the Indian wireless industry offer promise of strong multi-year operating earnings growth phase driving return to healthy return ratios," Kotak Institutional Equities said in a report earlier this month. "That said, we would still be wary of throwing caution to the wind."
According to the brokerage, it is still not clear if the recent pricing uptick is "another false positive or start of a nice multi-year run."
Bharti, nearly a third owned by Southeast Asia's biggest wireless carrier Singapore Telecom, and larger rival Vodafone Idea earlier this month increased pre-paid call tariffs by more than 40%.
In contrast, Jio said it will hike call tariffs by up to 35%, a 7% to 20% discount to comparable plans of Bharti and Vodafone Idea, implying the price competition is far from over.
"Question marks on sane competitive behavior sustaining and absorption of price hikes are valid ones even as we are fairly sanguine on the latter," said Kotak, which has a 'Cautious' rating on the stock.
Further, the Supreme Court ruling upholding a government demand that wireless carriers pay $13 billion in dues and penalties over a dispute in the way the industry calculated the adjusted gross revenue or AGR poses a looming threat on the industry next year.
Bharti's total AGR liabilities stood at nearly $4.8 billion which it has to pay next month. The company and Vodafone Idea have filed a petition with court seeking a review of its October ruling. Bharti had in March raised $4.6 billion and is now in the process of raising another $3 billion in debt and equity in a bid to bolster its balance sheet.
"This rally is purely driven by the breather offered by the government," said R.K. Gupta, managing director of Taurus Mutual Fund. Gupta raised concerns about the high level of debt at Bharti at around $16 billion, saying it is likely to increase further when the company mobilizes more funds to buy spectrum in the fifth-generation cellular network auction scheduled later next year.
"Unless the tariffs are increased substantially, it will be difficult for Bharti to service that kind of high debt."
--Dhanya Ann Thoppil