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Bharti Airtel: Raises expectation bar, and also beating it!

Bharti Airtel’s (Bharti) reported growth of 11.9% YoY in mobile revenue and 15.2% YoY in non-mobile revenue in Q1FY24, indicating it has been winning market share across businesses in India. Digital business, though small, is growing well across CPaaS, financial services, cyber securities, data centre and cloud. Bharti’s India EBITDA has grown 19.1% YoY (RJio’s at 14.7%) despite starting to charge 5G-related cost in a few circles which is commendable. Bharti’s incremental EBITDA margin in India business was 66%, and war-on-waste has significantly supported in curtailing network and SG&A costs. Despite elevated India capex of INR 93bn, Bharti has reduced net debt by INR 38bn QoQ. Its FY24 capex guidance remains unchanged at INR 280-310bn, and will normalise in H2FY24. We have cut our EBITDA estimates for FY24E/FY25E by 4-5% factoring in Nigeria currency (Naira) devaluation. However, our SoTP-based target price has been increased to INR 1,060 (from INR 960) as we have raised India EV/EBTDA multiple to 10.5x (from 9.5x). Maintain BUY. Key risks: 1) market share loss in India mobile business, and 2) rise in competitive and regulatory intensity.

All segments firing – except DTH
1) Home services: The number of home broadband customers grew 34.8% YoY to 6.5mn. Revenue grew 25.4% YoY to INR 11.6bn and EBITDA rose 18.9% YoY to INR 5.9bn. 2) Enterprise: Revenue and EBITDA grew 15.8% and 17.4% YoY to INR 50.5bn and INR 20bn, respectively. 3) Payments bank: Active users were up 21.7% YoY to 54mn and revenue grew 40.5% YoY (5.6% QoQ) to INR 4bn; EBITDA was INR 313mn, up 2.6x YoY. 4) Africa: Revenue and EBITDA (in USD terms) increased 9.5% and 10.3% YoY to USD 1.4bn and USD 675mn, respectively.

Mobile revenue jumped 11.9% YoY / 4.3% QoQ to INR 204bn
This was in comparison to RJio’s revenue growth of 2.8% QoQ / 9.9% YoY which also includes FTTH and enterprise. RJio added 9.2mn subs, while Bharti added 3.2mn subs and 5.6mn 4G subs. RJio’s ARPU grew 2.7% YoY vs Bharti’s 9% YoY. Bharti benefited from 2G to 4G transition, and strong post-paid sub-base (up 13.5% YoY despite RJio’s aggression). Bharti is consistently winning market share and narrowing its gap vs RJio. In Q1FY24, Bharti’s mobile ARPU rose 3.3% QoQ to INR 200, and sub-base grew 1.0% QoQ to 339mn. Bharti’s 4G net add was 5.6mn, taking the total to 230mn, and post-paid subs add was 0.8mn to 20.5mn, and including M2M, it rose 4.8mn to 40.4mn.

India EBITDA grew 5.6% QoQ / 19.1% YoY to INR 142bn
This is driven by India mobile EBITDA growth of 6.1% QoQ / 19.7% YoY to INR 112bn. Incremental EBITDA margin for mobile business was 76% which benefited from stable SG&A, and network cost optimisation. This appears even better considering Bharti has already started charging 5G-related cost to P&L in a few circles. In comparison, RJio’s EBITDA rose 3% QoQ/ 14.7% YoY. India depreciation rose 7% YoY/ 3% QoQ on rise in amortisation (5G spectrum) while interest cost increased 7.3% QoQ to INR 35bn. Net profit increased by 9.4% QoQ to INR 24bn and EPS was INR 6/sh. India capex stood at INR 93bn (34% of revenue) in Q1FY24.

FCF generation was INR 74bn despite higher capex
Net debt dipped by INR 38bn to INR 1,488bn. Bharti’s operating cashflow, after lease payment and interest cost, was INR 143bn, up 31% YoY. It had working capital benefit of INR 22bn vs adverse impact of INR 28bn in Q4FY23, and its FCF after interest cost was INR 74bn. The lower debt reduction can be explained by: 1) Increase in debt from interest accrued but not paid (which does not pass through the cashflow statement) and 2) spectrum-related pay outs.

Other highlights

  • War-on-waste: Bharti is re-engineering its towers wherein it plans to realign costs for 50k towers from high-cost locations. It has been aggressive on tower-related cost where monthly expenditure is >INR 100k. Further, most rural sites are coming with much better efficiency, particularly, on power cost. Bharti has also reduced commissions which has kept SG&A cost stable;
  • Airtel Black and Family plan for post-paid subs have significantly boosted propositions, and have attracted more post-paid subs;
  • Company is not looking to launch any products competing Jio Bharat as it believes these are voice customers, and market has enough supply of feature phone. Feature-phone subs base contributes 18% of revenue and customers’ handset replacement cycle is four years;
  • Bharti’s rural 4G expansion is 60% complete, and expects the remaining to complete by Nov-Dec’23. The revenue per site has been marginally better than estimate for these sites, and the cost has been lower than projected as it has no diesel sites and is using renewal energy source;
  • Data off-load by 5G customers on 5G network is 30%. 5G shipment is still sub-optimal at 48% of total handset shipped into India;
  • Bharti is testing FWA using spectrum slicing in two circles. NSA-5G has also allowed spectrum slicing through limited compared to SA-5G. However, considering 5G network capacity utilisation is low, spectrum slicing provides no material advantage;
  • 5G rollout on like-to-like basis adds 4-5x data capacity. Bharti has stopped any capacity led 4G deployment;
  • Bharti’s digital business had strong performance across CPaaS, financial services, cyber security, cloud and data centre. In financial services, it aided loan disbursement of INR 4.5bn and made net profit of INR 0.75bn; and
  • Despite high capex of INR 93bn in Q1FY24, company’s guidance for FY24 remains unchanged at INR 280-310bn.

For report,

ICICI Securities

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