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Bharti Airtel: FCF growth to pause, ICICI Securities

August 11, 2022

Bharti Airtel’s (Bharti) Q1FY23 print reinforces the company’s execution capability. Mobile revenue grew 19.9% over Q2FY22, which reflects the best tariff pass-through, compared to RJio’s 16.7% and VIL 10.7%. Incremental EBITDA margin was 67.4% for the mobile business, and FCF (post interest) was at Rs70bn. Bharti in concall described its 5G strategy and said it is well-positioned with its mid-band spectrum holding. Company is convinced that non-standalone architecture (NSA) offers the advantages of sweating 4G assets, providing better uplink experience on mid-band, and lowering operating cost (50% less per GB vs SA). Bharti is frontloading capex for next 18 months with the target to rollout 5G services in 5,000 towns by then. However, payback from 5G is still unclear (across telcos globally) and will put pressure on tariff hikes. We have increased our EBITDA estimates by 3.5% each year for FY23E and FY24Eon lower SUC charges, but increased spectrum investment and capex. Our target price for Bharti dips to Rs775 (from Rs812) as we cut our India business FY24E EV/EBITDA multiple to 9.5x (from 10x). Reduce to ADD (from Buy) on risk to FCF.

Bharti well positioned on 5G. Bharti in concall made a case for its strong position in 5G with spectrum holding across C-band and mid-band (1,800/2,100MHz). NSA-5G (non-standalone) uses C-band for downlink, which can propagate 30% more than in standalone (SA). Bharti will use 4G uplink on mid-band where it has 20-30MHz spectrum. This will offer better speed for uplinking compared to 10MHz in sub-GHz, which can produce data speed of only 8-10Mbps. Bharti had saving from not buying 700MHz spectrum and also anticipates operating cost per GB to be at least 50% lower on NSA compared to SA. It would also have the benefit of a better ecosystem in NSA.
Capex to be frontloaded: Post aggressive spectrum investment, we anticipated equally aggressive 5G rollout from Bharti. Company expects its cumulative capex for three years to be unchanged; however, it expects accelerated 5G rollout, hence capex will be frontloaded. It has guided for 5G deployment in 5,000 towns by end-Mar’24. Bharti will benefit from negligible 4G capex and E-band will help it strengthen backhaul. 6-8% of existing handsets in use in India are 5G-enabled, and an incremental 30% handsets shipped are 5G, which will jump sharply on 5G launch. Large data traffic will shift to 5G network over next 18 months.
Economics of 5G is still unclear. Bharti did not reveal much about the economics of 5G. Payback would be covered by potential future tariff hikes, SUC savings and negligible spend on 4G capacity expansion. The moot question is: will 5G services be launched at premium, or will telcos move away from unlimited plans on 4G and make the same available only on 5G? The use-case in 5G is still evolving and benefits of private 5G network are yet to be established. We expect revenue from enterprise customers, to be more gradual as use case develop, and unlikely to contribute any meaningful revenue in foreseeable future.
All segments firing except DTH: 1) Home services: Home broadband customers grew 43% YoY to 4.8mn. Revenue grew by a healthy 42% YoY to Rs9.3bn and EBITDA rose 53% YoY to Rs4.9bn. 2) Enterprise: Revenue and EBITDA grew 15.2% and 15.8% YoY respectively. 3) Payments bank: Active users were up 65% YoY to 44.4mn and revenue grew 52.4% to Rs2.8bn; EBITDA continues to be in the black. 4) Africa: Revenue and EBITDA (in USD terms) grew 13% and 14.4% YoY, respectively.
Mobile revenue grew 27.4% YoY / 3.4% QoQ to Rs182bn: If we compare revenue growth from Q2FY22 to Q1FY23, the period which captures the entire benefit of tariff hikes, we note: Bharti revenue grew 19.9%, RJio 16.7% and VIL 10.7%. This is despite RJio including FTTH and enterprise revenue in total revenue which is growing faster. This shows strong execution for Bharti. In Q1FY23, growth came from ARPU jump of 2.8% QoQ to Rs183, and sub-base growth of 0.4% QoQ to 327mn. Bharti also benefits from steady 4G net add at 4.5mn, and post-paid subs add of 0.2mn to 18.1mn.
India EBITDA grew 4.6% QoQ / 32.6% YoY at Rs119bn driven by India mobile EBITDA growth of 4.6% QoQ / 32.6% YoY to Rs93bn. Incremental EBITDA margin was 67.4%. India depreciation rose 15.1% and interest cost dipped 6% YoY. Interest cost on annual basis was expected to decline due to deleveraging, prepayment of high-cost spectrum debt and return of bank guarantees. Net profit was at Rs9.3bn (down 2.5% QoQ) on lower profits from JV at Rs1.6bn (vs Rs7bn in Q4FY22) and EPS was Rs2.3/sh for Q1FY23.
Strong FCF generation. Net debt dipped to Rs1,195bn, down by Rs40bn. Bharti’s operating cashflow, after lease payment and interest cost, was Rs110bn, up 30% YoY. It had positive working capital, and the company’s FCF after interest cost was Rs71bn. Net debt had increased by Rs20 from interest accrued but not paid for government dues where it enjoys moratorium.
Other highlights. 1) DTH – performance was affected after impact of NTO introduction, and moving away from tariff forbearance regime. TRAI has called for fresh consultation on tariff, and the company remains hopeful. 2) FWA – the operating cost is higher due to US$200 for modem vs home pass cost of US$30 for fibre in India, and take rate of 30%. 3) Bharti’s total postpaid customers were at 29.9mn which includes 18mn for mobile services and remaining 12mn in IoT services (which are categorised in the enterprise segment). 4) Less than 10% of traffic in the US and South Korea flows in SA-5G. These are countries that offer both SA and NSA 5G.