3QFY23 results update on Bharti Airtel, Motilal Oswal

Steady EBITDA growth; CapEx intensity increases

Consolidated EBITDA grew 5% QoQ, led by a healthy 5%/6% growth in the India Mobile/Africa business, benefitting from SUC gains. However, capex accelerated >50% YoY to INR93b, and the FCF declined to INR33b with a slower pace of deleveraging.

In the near term, the stock should see an overhang with moderate FCF generation, due to softening earnings. This was a result of slower 4G ads, limited tariff hikes, and increased capex intensity toward 5G rollout and rural coverage. However, over the next two years, the company is well poised to gain from sector tailwinds, with an EBITDA CAGR of 13% over FY23-25E, driven by a combination of a) market share gains b) improved ARPU, led by premiumization of customers and tariff hikes and c) non-Wireless segments. We reiterate our Buy rating on the stock.

Mobile India EBITDA is up 5% QoQ (in-line) on SUC benefits and ARPU/subs growth

• Consolidated revenue stood at INR358b, up 4% QoQ (in-line), on a healthy overall business, led by both India Mobile and Africa growing at 2%/6% QoQ, respectively.
• Consolidated EBITDA stood at INR184.5b, up 5% QoQ (in-line), backed by 5%/6% QoQ growth in India Mobile, and Africa, respectively.
• Consolidated EBITDA margin grew 51.5% YoY, up 50bp QoQ on SUC gains in India Mobile (140bp QoQ increase) and consistent Africa margins.
• Subsequently, the reported net profit, post minority, stood at INR15.9b, down 26% QoQ (40% miss). Adjusted for exceptional PAT, post minority, stood at INR19.9b, down 3% QoQ (24% miss).
• Revenue/EBITDA/PAT reported strong growth of 21%/27%/2.4x YoY in 9MFY23.
• India mobile ARPU grew 1.6% QoQ to INR193 and the number of subscribers grew 1.4% QoQ to 332m (added 4m v/s 5m for RJio)
• OCF continues to increase to INR126.5b (up 11% QoQ), but a high capex of INR 93.1b (up 32% QoQ) led to a 24% QoQ decrease in FCF to
• INR33.4b. From the last 4 quarters, the FCF continues to decline from the peak of INR 47b in 4QFY22 to INR33.4b in 3QFY23.

Key highlights from the management commentary

• The company’s key strategic focus will be a) to expand in the revenue-accretive rural market and b) to fast grow in the home and enterprise segment. c) plans to focus on the top 150 cities, offering 40% of the telecom market, d) build a network experience e) plan war on waste.
• The company continues to focus on improving the RoCE from its current 11.9% at the consolidated level vs <9% in India business.
• Net debt should go down, supported by the OCF growth.
• India’s business capex could be INR250b annually for the next three years, with front loading in the initial period due to a) 5G/4G expansion and b) rural expansion which may also increase network cost.

Valuation and view

• In the near term, BHARTI’s earnings should soften on slower 4G ads and limited tariff hikes. This, along with increased capex intensity toward 5G rollout and rural coverage, should moderate FCF generation and the pace of deleveraging.
• Subsequently, we have revised our capex expectation for FY24E to INR359b by 21%. The net debt to has risen significantly to INR2.04t, with net debt to EBITDA standing at 2.8x.
• However, over the next two years, it is well poised to gain from sector tailwinds coming from a combination of a.) market share gains b.) improved ARPU, led by premiumization of customers, tariff hikes, and c.) non-Wireless segments. We reiterate our Buy rating on the stock.
• We expect a consolidated EBITDA CAGR of 13% over FY23-25E and maintain our EBITDA estimates, led by a healthy 14%/13% growth in India Mobile/Africa growth.
• We value BHARTI on an FY25E basis, assigning an EV/EBITDA ratio of 11/5 to the India Mobile/Africa business, and arriving at a SoTP-based TP of INR985. We reiterate our Buy rating on the stock. Near-term valuation multiples have remained under pressure, but long-term growth should garner better valuations.

For the report, http://ftp.motilaloswal.com/emailer/Research/BHARTI-20230208-MOSL-RU-PG016.pdf

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