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Bharti Airtel: Growth moderates; low CapEx aids FCF

Bharti reported a moderate growth in 2QFY24, with India Mobile EBITDA up 3% QoQ on a 1.5% ARPU increase. Consol. EBITDA was flat QoQ, mainly due to the Naira devaluation. CapEx declined in 2Q after increasing consistently (India CapEx at INR57b vs. INR105b in 1Q). As a result, FCF rose to INR54b vs. INR35b in 1Q, enabling a deleveraging of INR14b.

In the near term, Bharti could see soft earnings growth and subdued FCF growth due to a limited potential for a tariff hike, market share gains and 4G-led mix benefits, along with high CapEx, including upcoming spectrum renewal. However, over the next 2-3 years, Bharti is well poised to gain from sector consolidation and tariff hikes. Retain BUY on the stock.

India Mobile and Africa EBITDA (CC) growth at 3%/6% QoQ

  • Currency devaluation impact: Consol. revenue/EBITDA were hit by a 16% currency devaluation in Africa, resulting in a 1% drop in revenue to INR370b. Conversely, India/Africa CC revenue grew 2%/6% QoQ and EBITDA was up by 2%/7% QoQ (in line).
  • India growth moderates but matches RJio: India Mobile’s revenue/ EBITDA growth softened to 3% each (vs. 6% QoQ EBITDA growth in 1Q), led by a 1.5% ARPU increase (4G and postpaid-led mix benefits and higher no. of days) and 1% subscriber growth, partly offset by higher network opex with aggressive site adds.
  • Home business was the silver lining, with 4% QoQ EBITDA growth (led by subscriber additions). The business has continued to grow steadily for the last 12 quarters. It has expanded to 1,234 cities vs. merely 100 cities in FY20, with 2.5x growth in subscribers in the last three years.
  • Moderation in CapEx  improves FCF and deleveraging: CapEx declined INR105b QoQ (partly seasonal), which led to FCF generation of INR54b (post-interest). Subsequently, it repaid deferred spectrum liability. Net debt (excl. lease liability) reduced by INR13.6b to INR1,475b. If CapEx has peaked out, it could drive FCF further. Debt could be further reduced by 10% through INR160b in rights issue call money.
  • Superior network capability: Bharti’s data traffic and subscribers are each still >50% below RJio’s. Yet, it continues to add strong broadband/overall sites (23k/11k), along with accelerated fiberization.
  • Soft revenue growth ahead: Given the limited potential of tariff hikes, market share gains and 4G-led mix benefits, growth should moderate going ahead. However, long-term consolidation in the market holds Bharti in good stead.

Key highlights from the management commentary

  • The monetization levers remain intact, aided by 1) a shift from feature phone to smartphone and from prepaid to postpaid, 2) data monetization and 3) price hikes. Bharti has achieved its ARPU goal of INR200 and now targets a long-term goal of INR300.
  • CapEx is expected to moderate in coming years as most of the CapEx will peak out in FY24, but the company may spend on spectrum renewal in the next fiscal. Radio CapEx is high because of the rollout of 5G and new 4G sites.
  • Bharti has paid out a substantial portion of 2015 spectrum charge, carrying a 10% coupon rate. The outstanding balance is INR100b. Incremental FCF will be utilized for spectrum repayment and dividends.
  • ARPU increased by INR3 in 2Q, out of which INR1.8 could be from one extra day and INR1.2 from organic growth. In addition, the delta between the 2G base plan (INR179) and the 4G entry-level plan (INR239) reduced to INR60, which left the lower upside compared to previous quarters.

Valuation and view

  • In the near term, BHARTI’s earnings could soften to a QoQ growth rate of ~2% vs. average 5% seen in the last eight quarters. It could be attributed to moderating growth from 4G mix benefits, low probability of tariff hikes and softening market share gains.
  • These factors, along with increased CapEx intensity (INR377b in FY24E and INR394b in FY25E) for the 5G rollout, rural coverage and possible spectrum renewal spend, should moderate FCF generation and the pace of deleveraging in the near term. Subsequently, the stock may remain range-bound in the near term.
  • However, over the next 2-3 years, it has the opportunity to grow its EBITDA by 40-50% and halve its net debt. It is well poised to gain from sector tailwinds coming from a combination of 1) market share gains, 2) improved ARPU led by premiumization of customers and tariff hikes, and 3) non-wireless segments, including Home and Enterprise.
  • We value Bharti on FY25E basis, assigning an EV/EBITDA ratio of 10x/5x to the India Mobile/Africa business, and arrive at our SoTP-based TP of INR1,070. We reiterate our BUY rating on the stock.

For report,

Motilal Oswal

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