In a head-to-head comparability, Bharti Airtel Ltd. emerges as Jefferies’ most well-liked alternative over Hindustan Unilever Ltd. amongst India’s consumption-focused shares.

Until 2019, Airtel encountered challenges characterised by adversarial regulatory circumstances and rising competitors, whereas margin-led earnings progress propelled HUL’s market cap to a few occasions that of the telecom firm at one level, in response to the brokerage.

Now, the telecom sector is shifting in the direction of a duopoly favoring Airtel, whereas progress and valuations are at odds for HUL, Jefferies mentioned in a Jan. 10 observe. The brokerage is constructive on telecom citing “strong growth outlook and deleveraging potential due to moderating capex.

Jefferies has a ‘buy’ rating on Bharti Airtel with a target price of Rs 1,300, implying an upside return potential of 22%. The research firm rates HUL a ‘hold’ with a target price of Rs 2,800, implying an upside potential of 9%.

HUL commands a third of the market in its categories, with 45% in home care and slightly lower than the company level for beauty and personal care and foods.

Bharti Airtel has near-similar share at the overall level (35%), with broadband and direct-to-home lower than the company level and mobile a tad higher.

Entry barriers are going down in the fast-moving consumer goods industry, as route to market and media fragmentation are creating a level-playing field for the smaller brands, the note said.

In contrast, barriers to entry in the telecom market have significantly increased, with hefty investments required to set up 4G/5G networks, which has led to a wave of consolidation. The sector is likely to remain an effective duopoly, as there is limited threat from new entrants—most global telecom companies have entered only to exit a few years later, Jefferies said.

The total addressable market for both companies is large, with FMCG growth at around 7% and telecom at 5.5% over last 10 years.

This gap has been percolated, with HUL’s growth at 9% (organic) surpassing Airtel’s growth by over three percentage points. However, when excluding pricing growth, Airtel’s growth stands one percentage point higher at 6%.

HUL saw steady margin expansion for most of the last decade, until input price inflation showed up in FY22—point to point, margin expanded by eight percentage points.

In contrast, Airtel witnessed pressures due to competition from Reliance Jio Infocomm Ltd. until FY19, but in the past 10 years, saw a smart 10-percentage-point expansion, according to the note.

“HUL pays substantial a part of earnings as dividends, which isn’t the case for Bharti,” Jefferies mentioned.

Both HUL and Airtel trip on India consumption story, however estimated 15% income progress for the telecom operator is almost twice that India’s largest client items maker over FY23-26, the observe mentioned.

Ebitda progress would largely mirror this development, with HUL (9% CAGR) meaningfully underperforming Airtel (20% CAGR).

Balance sheet deleveraging would additional exaggerate the influence as Airtel’s earnings per share ought to rise over 50% CAGR. While HUL’s earnings per share progress will doubtless mirror Ebitda development. Resultant free money circulate needs to be 3 times larger for Airtel, the brokerage mentioned.