Bharti Airtel-Strong FCF generation, ICICI Securities

Bharti Airtel’s Q4FY22 print reinforces our view that it is at an inflexion point from decisive revenue market share gain and organic deleveraging. In the past two quarters, Bharti’s mobile revenue grew 16%, while RJio’s grew only 11.6% – tariff hike flow through. Growth will slow down in FY23 due to lower 4G subs net add on higher handset price which should salvage as prices get absorbed; Bharti will need another price increase to cross Rs200 ARPU in next 12 months. Non-mobile business performance is now drawing attention, and rightly so on strong and consistent EBITDA growth. Bharti’s FCF generation has grown to Rs58.5bn in Q4FY22, and if we adjust for negative working capital (seasonality), it has reached quarterly run-rate of Rs70bn. This should help deleverage in coming quarters; near-term bump includes 5G spectrum auction. However, Bharti has cash infusion pending from Google and partly paid rights issue. We have marginally tweaked our EBITDA estimate and our SoTP-based target price now works out to Rs812 (earlier: Rs850). Maintain BUY.

• All segments firing except DTH: 1) Home services: Home broadband customers grew 46% YoY to 4.5mn. Revenue grew by a healthy 46% YoY to Rs8.8bn despite reset in ARPU; EBITDA rose 43% YoY to Rs4.8bn. 2) Enterprise: Revenue and EBITDA grew 12.9% and 10.7% YoY, respectively. 3) Payments bank: Active users were up 26% YoY to 37mn and revenue grew 53% to Rs2.7bn; EBITDA margin continues to expand. 4) Africa: Revenue and EBITDA (in US$ terms) grew 17.7% and 17.1% YoY, respectively.
• Mobile revenue grew 25% YoY / 9.5% QoQ to Rs176bn: This, compared to RJio‘s 20% / VIL’s 6.6% YoY, implies Bharti’s market share win continued. Growth came from ARPU jump of 9.7% QoQ to Rs178, and sub-base growth of 1% QoQ to 326mn. It also benefits from steady 4G net add at 5.2mn, and post-paid subs add of 0.2mn to 17.8mn. Q4FY22 ARPU reflects a significant portion of benefit of tariff hike taken in Nov’21 of 20% in prepaid category as its ARPU has increased 18% vs Q2FY22, adjusted to lower days. Bharti needs another tariff hike for ARPU of >Rs200 and it is possible in FY23.
• India EBITDA grew 9.9% QoQ / 27.5% YoY at Rs114bn driven by India mobile EBITDA growth of 12.3% QoQ / 33% YoY to Rs89bn. Incremental EBITDA margin was 64.1% and was impacted by higher SG&A cost. India depreciation and interest cost rose 15.4% and 5.1% YoY, respectively. Interest cost on annual basis is expected to decline by Rs16bn due to deleveraging, prepayment of high-cost spectrum debt and return of bank guarantees. Net profit rose 84% QoQ to Rs9.5bn, and EPS was Rs2.4/sh for Q4FY22.
• Strong FCF generation. Net debt marginally dipped to Rs1,235bn due to Indus stake purchase and AGR interest cost recognition. Bharti’s operating cashflow after lease payment and interest cost was Rs131bn, up 47% YoY. It had negative working capital on seasonality due to advance payment of levies to government which will reverse in next quarter, and despite that the company’s FCF after interest cost was Rs58.5bn which it should use to reduce debt in coming quarters.
• Other highlights. 1) DTH – performance 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) home – company has expanded presence in cities by 556 to 847 in past 12 months on the back of innovative LCO partnership model; it expects total FBB customers to rise to 40mn (from 27mn now) for industry, and plans for a substantial share in incremental subs; 3) enterprise – excluding voice services, data services is growing in teens and much faster. It is significantly aided by change in distribution structure, and strong product portfolio. Bharti has enough headroom for growth in large enterprise market, and RJio expansion is unlikely to change the trajectory; 4) mobile – rising 4G smartphone prices, and focus on high-end phones have impacted shipment of entry level 4G phones. Bharti believes the situation will salvage and customers will buy higher-priced phone as connectivity and data are essential services. 5G rollout in urban areas should have accelerated the rollout for FY25 as 5G enabled handset penetration crosses 14-15%; 5) Indus gets 50-60% share of tower rolled out by Bharti, and it includes macro and leaner towers. Operating cost on leaner towers is <30k/month vs >70k/month on macro towers. Energy cost rise is a headwind for network cost; and 6) company had total cost saving of US$1.2bn in past few years.

Read more – https://www.communicationstoday.co.in/bharti-airtel-strong-fcf-generation/

CT Bureau