Bharti Airtel’s (Bharti) Q2FY23 mobile revenue grew by a strong 4% QoQ despite there being no tariff hike, while the same for RJio was 3% QoQ – which implies Bharti has garnered a higher market share. Bharti’s incremental EBITDA margin (excluding SUC saving) was lower at ~41% due to higher selling and employee costs. Considering that Bharti is in the process of rolling out 5G services, which will involve higher costs, incremental margins may remain relatively low for the next few quarters, in our view. Mobile revenue growth too may remain restrained due to lower premiumisation benefit and/or absence of tariff hike; we would wait to see 5G-led ARPU upgrade over the next few quarters. Consistency in non-mobile / Africa performance has positively surprised and is now adding significantly to FCF. Bharti has shown good growth in operating cashflow in past few years, but we believe accelerated 5G capex will cap FCF / organic deleveraging till FY24E. We have marginally increased our EBITDA estimates by 1-2% for FY23E/FY24E and the target price to Rs875 (from Rs775) as we raise India EBITDA multiple to 10.5x (from 9.5x). Maintain ADD. Key risks: Slower growth in India mobile revenue, and regulatory factors.
- All segments firing except DTH: 1) Home services: The number of home broadband customers grew 36.4% YoY to 5.2mn. Revenue grew by a healthy 38.9% YoY to Rs9.9bn and EBITDA rose 31.9% YoY to Rs5bn. 2) Enterprise: Revenue and EBITDA grew 16.8% and 14.9% YoY to Rs47bn and Rs18.3bn respectively. 3) Payments bank: Active users were up 60.4% YoY to 50mn and revenue grew 30.8% YoY (8.3% QoQ) to Rs3.1bn; EBITDA was at Rs146mn, up 39.2% YoY. 4) Africa: Revenue and EBITDA (in USD terms) increased by 12.8% and 13.4% YoY to US$1.3bn and US$636mn respectively.
- Mobile revenue jumped 24.8% YoY / 4.0% QoQ to Rs190bn: This was a significant outperformance vs RJio (3% QoQ / 20.2% YoY) despite the latter adding more subs (+7.7mn for RJio vs Bharti’s 4G net add of 5mn). Bharti has benefited from 2G to 4G transition, more postpaid subs base (up 10bps QoQ) and better data monetisation (selling more data top-ups). In Q2FY23, Bharti’s mobile ARPU jumped 3.6% QoQ to Rs190, and sub-base grew 0.1% QoQ to 328mn. Bharti’s 4G net add was at 5.0mn to a total of 210mn, and post-paid subs add was 0.3mn to 18.3mn.
- India EBITDA grew 6.1% QoQ / 21.1% YoY at Rs126bn driven by India mobile EBITDA growth of 6.4% QoQ / 32.9% YoY to Rs99bn. Incremental EBITDA margin was strong at 81% on SUC saving. However, adjusted for the SUC benefit, incremental EBITDA margin was at ~41% due to higher employee and other expenses. Company still has unrealised SUC saving of Rs2.5bn, which will come in Q3FY23. India depreciation rose 4.0% YoY while interest cost was up 21.9% YoY to Rs39bn on higher derivative losses. Net profit was at Rs11bn (down 17.1% QoQ) on lower profit from JVs at Rs3.6bn (vs Rs1.6bn in Q1FY23) and EPS was Rs2.7/sh for Q2FY23.
- FCF generation was impacted by spectrum payment / higher working capital. Net debt rose by Rs378bn to Rs1,573bn. This was driven by spectrum bought in July’22 auctions for Rs430bn while the company received Rs52bn towards share issuance to Google. Bharti’s operating cashflow, after lease payment and interest cost, was Rs143bn, up 31.1% YoY. It had negative working capital of Rs45bn due to vendor financing, and its FCF after interest cost was at a negative Rs44bn. Capex was Rs142bn which included Rs88bn paid upfront for 5G spectrum purchase.
- Other highlights. 1) Digital revenue – Bharti has disclosed its digital revenue for the first time; it stood at Rs9.6bn (Q2FY23 annualised), which was double-digit higher QoQ. This includes revenue from: a) marketplace – including content, and selling financial products, b) ad revenue, and c) Airtel IQ. 2) ARPU additionally benefited from data monetisation wherein the company successfully sold more top-ups for customers who are hitting FUP (fair usage policy). 3) 5G handset upgrade accelerated for NSA-5G with Vivo, Oppo, Realme, and OnePlus having enabled NAS-5G for all 5G models (Samsung is already in the process of completing it, and Apple is expected to complete it by Nov’22). 4) Bharti is testing certain enterprise use cases in SA-5G, and mmWave-based FWA is under trial. 5) Bharti is planning to expand rural coverage to expand its reach from current 97% population coverage, and win more market share. 6) 5G premium tariffs have not worked well for 5G adoption in a few developed markets. Bharti believes 5G adoption and data growth in 5G, can be supported if prices are maintained at 4G levels. However, Bharti aims to increase 4G pricing itself when market conditions are appropriate.