Bharti Airtel-Favourable market positioning, MOFSL

The consolidation in the telecom sector has been favorable for Bharti Airtel (BHARTI) as the company, after many years of weak returns on capital, is now set to see a swing in its fortunes. Consistent market share gains, organic ARPU improvements and controlled costs have boosted Bharti’s EBITDA, offsetting the higher capex internally and continued deleveraging. Over the next couple of years, we believe that BHARTI will continue to benefit from the favorable market construct, which should result in improvements in FCF and ROCE. The company is expected to execute awaited tariff hikes in the next couple of quarters, which could act as a catalyst for the stock, in our view.

Tariff hike to support growth

• We expect the awaited tariff hike (assuming 20%) to take place in the next couple of quarters after the general election, which could increase EBITDA by 12-15%. We currently do not factor in a material price hike in our model. A 20% price hike should increase BHARTI’s ARPU to INR270 in FY26E. At 70% incremental margin, India Wireless EBITDA should rise to INR580b/INR688b in FY25E/FY26E. Factoring in a tariff hike, BHARTI could generate post-interest FCF of INR247b in FY25E and INR350b in FY26E, representing to a 3-5% FCF yield (highest in last 10 years).

Long-term growth story favorable for BHARTI

• Over the last four years (FY20-24E), BHARTI’s India Mobile business posted a CAGR of 17%/29% in revenue/EBITDA, driven by multiple tariff hikes (strong 40% growth in ARPU), market share gains, 2G-to-4G subscriber shift, premiumization toward postpaid, and reduction in spectrum usage charges. However, in the last few quarters, growth has decelerated due to the absence of a tariff hike, slower market share gains and lower mix benefits as the base of 2G tariffs has gone up.
• We believe BHARTI and Reliance Jio (RJio) both should be the key beneficiaries in gaining subscriber/AGR market share: a) the heavy capex by the two strong players, underscoring the opportunity for the monetization of 5G and tariff hikes; and b) once Vodafone Idea’s (VIL) debt moratorium (AGR + spectrum liability) expires in FY26E, its ~INR400b revenue size may offer a strong market share growth opportunity in two years. Further, in the long term, there should be opportunities to monetize heavy investments as the Indian telecom market size of INR2.3t is largely served by merely two sizeable players – RJio and BHARTI, with far lower competitive intensity.

How should VIL fund raise change the landscape?

• VIL has successfully raised INR200b via equity in the combination of FPO and INR20.75b preferential allotment to promoter, Aditya Birla Group (ABG). VIL plans to raise additional INR250b via debt. Following are our views on this fundraise:
• Near-term support for VIL: VIL plans to utilize the funds for capex, which is a welcome move as it should improve its 4G capabilities; however, the magnitude of investment requirement and timelines may be key in arresting its market share loss. Further, VIL needs to significantly increase its EBITDA (INR84b in FY24E pre INDAS 116) to service ~INR300b AGR and spectrum annual instalment in FY26 and INR430b FY27 onward.
• No risk to BHARTI from change in competitive landscape: Unlike the risk of increasing market share competition, we believe the profitability consciousness will provide continued tariff hike opportunities over the next 2-3 years.

5G capex may remain prolonged but the cash flow may subside the impact
RJio and BHARTI together deployed 436k 5G base transceiver stations (BTS) by Mar’24, up 8x from 54k in Jan’23. We expect the large proportion of BTS deployment to be done by RJio as BHARTI has deployed 100k mobile broadband base stations (including 3G/4G/5G) in the last one year. We expect this gap in BTS deployment will keep the 5G capex prolonged and expect the consolidated capex to remain around INR400b for FY25-26. The positive factor is that the operating profit generation would be enough to fund the capex requirement internally, unlike during the 4G investment cycle.

Visibility for high FCF/ROCE
After 10 years, BHARTI is once again in a sweet spot. It is returning to a healthy monetization stage thanks to EBITDA improvement. We estimate Its FCF yield (with tariff hike) at 3-5%, with RoCE at ~13%/15% in FY25/FY26. FCF has increased to INR52b in FY24E, despite 5G capex and deleveraging limited to INR135b. We expect BHARTI’s cumulative OCF/FCF of INR1.3t/INR500b for the next two years. Moreover, inflows from the ~INR210b rights issue could help it reduce debt. Gross/net debt (excluding lease liability) currently stand at INR1.6t/INR1.3t, and we expect net debt to come down to INR500b in FY26. EBITDA improvement, together with a reduction in net debt, could result in ROCE improvement (with tariff hike) to ~15% in FY26E vs. 9.4% in FY24E, after many years of weak RoCE (lower-mid single digit).

Warrants better valuation in future
The stock is trading at 8.8x FY26E consolidated EV/EBITDA, with the India business trading at 11x and Africa at 3x. We factor in 10%/11% consol. revenue/EBITDA growth over FY24-26E (without factoring in tariff hike). Over the next 2-3 years, with a tariff hike, BHARTI has the opportunity to grow its EBITDA by 40-50% and halve its net debt. The company is well poised to gain from sector tailwinds, stemming from 1) market share gains, 2) improved ARPU led by premiumization and tariff hikes, and 3) non-wireless segments, including Home and Enterprise. The key catalysts would be ARPU hike and moderation in capex. We do not expect any major probability of earnings cuts; hence, the risk-reward looks favorable at the current valuation (without factoring in tariff hike). We assign FY26E EV/EBITDA of 12x/5x to India Mobile/Africa businesses and arrive at our SoTP-based TP of INR1,570. We reiterate our BUY rating on the stock. We believe two rounds of tariff hikes over the next two years could take India EBITDA to INR882b and Bharti TP to INR1,700 on 11x EV/EBITDA.

For report, http://institution.motilaloswal.com/emailer/Research/BHARTI-20240425-MOSL-CU-PG012.pdf

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