Bharti Airtel: Strong FCF, But 5G Pushes Leverage, Motilal Oswal

November 02, 2022

Mobile India EBITDA up 6% QoQ on healthy ARPU growth

Revenue grew 4% QoQ to INR189.6b in 2QFY23 (in line) on the back of a healthy ARPU growth of 4%. The same was slightly better than RJio’s 3% QoQ revenue growth.
EBITDA rose 6.4% QoQ to INR99.3b (3% above our estimate), with a 120bp margin improvement to 52.4% and an incremental margin of 80%. This is mainly due to the SUC rate, which fell 130bp, benefiting from the 5G auction. An additional 150bp should accrue in 3QFY23. RJio too clocked an incremental margin of 80%, with an EBITDA growth of 5% QoQ.
Net profit post minority grew 33% QoQ to INR21.5b.
Revenue/EBITDA/PAT reported strong growth of 22%/27%/2.7x YoY in 1HFY23.
ARPU grew 3.8% QoQ to INR190.
Subscriber additions were modest at 0.5m v/s 7.7m for RJio.
4G subscriber additions for BHARTI remained moderate at 5m, taking its total subscriber count to 210m (up 2.5% QoQ), or 64% of its total subscribers. RJio added 7.7m 4G subscribers.
FCF stood steady at INR44b v/s ~INR20b YoY. 5G spectrum dues pushed net debt to INR2t, with the annualized net debt-to-EBITDA ratio at 3x v/s 2.5x in 1QFY23. This can reduce by 7-8% (on receipt of the INR160b right issue call money).

Key highlights from the management call

ARPU rose, led by: a) device upgrades, b) data monetization, c) premiumization, and d) other services (Broadband/Airtel Black). The management remains confident of maintaining growth in ARPU.
4G subscriber additions have been soft given the increase in the base price for lower range smartphones and the inflation effect.
The industry gained 40% of new 4G customers from rural areas. An expanding rural coverage, application of data science models, and tracking the revenue opportunity led to healthy earnings.
Capex spends may increase in FY24-25 from current levels. However, the management said sustaining the high capex will depend on the uptake in 5G and its monetization.

Valuation and view

In the last four months, the stock has delivered a 25% return. It is trading at 7x FY23E consolidated EV/EBITDA, with the India business trading at 10x.
We expect 19% consolidated EBITDA CAGR over FY22-24, led by healthy 23%/16% growth in India Mobile/Africa.
We expect a rise in ARPU to act as a catalyst for the stock and see a potential rerating upside in both India and Africa business on the back of steady earnings growth. We value BHARTI on a FY24 basis, assigning an EV/EBITDA ratio of 12x/5x to the India
Mobile/Africa business, arriving at a SoTP-based TP of INR1,010. We maintain our Buy rating. We expect a better valuation multiple, given the consistent 20% growth opportunity. The INR160b uncalled right issue call money should also offset its 5G investments over the next two years.
However, its net debt has risen significantly to INR2t, with a net debt-to-EBITDA ratio of 3x. An upward revision in 5G capex could put pressure on FCF growth and subsequently on the stock in the near term.

CT Bureau