Broker's take: DBS upgrades Singtel to 'buy' on India associate's mobile tariff hike

DBS Equity Research has upgraded Singtel to a "buy" from "hold" with a target price of S$3.60 after the telco's regional associate Bharti Airtel announced on Monday, earlier than expected mobile tariff increases in India.

Singtel shares are up S$0.04 or 1.2 per cent to S$3.30 as at 11.03am, 3.8 per cent higher than its closing price of S$3.18 on Nov 15, the last business day before Bharti's tariff hike was announced.

The increased tariffs start from Dec 1, 2019, and DBS analyst Sachin Mittal said he expects a sharp rise in regional associates' profit contribution in fiscal 2021.

"It has been the most critical factor in Singtel's share price performance historically. Despite weakness in Singapore and Australia, we raise Singtel's FY21 forecast underlying profit by 2 per cent due to a healthier Bharti," he added.

A 10 per cent mobile tariff hike at Bharti may contribute an additional 3 per cent earnings to Singtel.

Overall, Singtel offers annual earnings growth of 8 per cent over FY20 to FY22, coupled with an over 5 per cent yield, said Mr Mittal.

After Singtel released its Q2 2020 results earlier in November, many forecast a 7 per cent cut to its FY20/21 earnings, in line with DBS's current projections.

The cuts were largely made due to weakness in Australia and Singapore, and the DBS analyst said he does not see further earnings cuts as average revenue per user in India has ample room to rise after having declined 30 per cent over the last three years.

DBS has raised its fair value of Bharti to 500 rupees from 340 rupees earlier, and also raised fellow Singtel regional associate Advance Info System's fair value to 266 baht from 222 baht.

Bharti shares had closed at 426.85 rupees on Thursday, after jumping 8.1 per cent to 444.65 rupees on Tuesday following its tariff hike announcement.

A potential exit from its digital businesses via a sale to a strategic investor or public listing, which Singtel is open to, would also potentially help drive its share price up, said DBS.

Separately, India on Wednesday said it will defer spectrum payments due from telco companies for two years to help an industry ravaged by a years-long price war, mounting debt and a court decision last month demanding US$13 billion in overdue fees.

The moratorium will be for two years beginning in April 2020.