Bharti Airtel Share Price Up 4% As Motilal Oswal Sees 44% Upside On Strong ARPU

Bharti Airtel share price gained 4 percent intraday on March 31, as Motilal Oswal retained a ‘buy’ call on likely strong average revenue per user (ARPU) which has not been captured in the stock price yet.

The stock has fallen around 20 percent from its peak following the coronavirus outbreak and the 21-day lockdown in India to check the spread of virus.

But, the impact of the outbreak and the currency and crude price swing would be limited, as the company was best hedged to face regulatory woes, it said.

“Given the complete lockdown in India due to COVID-19, net subscriber adds (average 2-3 months) have stalled thus impacted by 1-2 percent. With physical recharges being unavailable, there has been a shift to digital recharges (from 15 percent in the last 1-2 years to 35-40 percent currently),” said Motilal Oswal.

“In the current environment, more tech-savvy data subscribers with higher ARPUs and longer-term recharges of 90 days may see lower impact. However, the rest of feature phone subscribers doing monthly recharges (one-third the ARPU of data subscribers) could see some marginal impact.”

To protect the low-income subscribers (80 million), Bharti had extended free incoming calls to April 17, with an additional Rs 10 talk time.

“This could impact Q1FY21 revenue/EBITDA by Rs 220/180 crore ie equivalent to meager 1-2 percent. Against this, increased data consumption should see upgrades in recharge values, thus, mitigating the impact,” said Motilal Oswal, which estimated 13/19 percent revenue growth in Q4FY20/Q1FY21, on QoQ basis.

The brokerage said the sharp depreciation in the rupee against the dollar should increase Bharti’s USD capex/debt and put some of its African business under stress. But it does not expect a meaningful impact.

The dollar denominated India capex by Bharti is around 30 percent. Thus, 10 percent rupee depreciation could have around 3 percent increase, the research firm said.

Similarly, around 28 percent of its debt is dollar denominated, while India debt is 15 percent.

According to Motilal Oswal, the sharp reduction in crude prices could result in revenue softness in the short term, particularly in Nigeria, Congo and Chad. However, Bharti’s free cash flow (FCF) positive position and lower leverage should have limited impact, said the brokerage.

Bharti remained in a win-win situation, irrespective of the Supreme Court’s outcome on Vodafone Idea’s fortunes, it said.

The government has been pitching for a healthy telecom market (3 private and 1 PSU player), which accentuates the need for Vodafone to stay afloat.

However, Vodafone Idea’s survival would require a sharp ARPU increase (potentially over 30 percent) along with a moratorium on payments to service its

regulatory and debt obligations, which could also benefit Bharti, Motilal Oswal said.

Even in the worst-case scenario of no government support on AGR dues, the brokerage, said Bharti’s financial position was strong enough to withstand the storm, and in fact, could lead to significant market share gain at the cost of Vodafone Idea.

In either case, Bharti could deliver a marked rise in earnings, it said. “We see potential increase of around 39 percent in FY22 EBITDA estimate to Rs 62,100 crore.”

Over the last decade, Bharti has been saddled with high capex, spectrum acquisition cost and depressed EBITDA, which suppressed its FCF.

However, Motilal Oswal expects the potential restoration of the past era (2G) when telcos had the opportunity to monetize investments for a prolonged period.

“With a large part of the heavy lifting toward 4G network in place, incremental capex should be in check, while EBITDA should see a marked improvement. This should provide an opportunity to deleverage the balance sheet. Subsequently, we expect FCF (post interest) to increase to over Rs 30,000 crore in FY22 (if EBITDA grows to Rs 62,100 crore) from Rs 2,500 crore in FY20 and negative in FY19,” it said.

The stock ended the day at Rs 440.6, up Rs 11.35, or 2.64 percent, on the BSE.

―Money Control