Bharti hikes tariff, other telcos likely to follow suit, Motilal Oswal

A 20% hike in prepaid plans to boost EBITDA by 13% (INR72b)

• The effective tariff hike of ~20% in prepaid plans is expected to contribute incremental revenue/EBITDA of INR103b/INR72b, thereby driving 13% consolidated EBITDA growth on a 2QFY22 annualized basis.

• To improve cash flow in the industry, other large players are expected to follow suit in the immediate future.

• Bharti’s lower churn and strong network capability leaves room for a potentially healthy EBITDA increase, in line with the tariff hike in Dec’19.

• The significant reduction in the data allowance across price plans leaves limited possibility for downtrading.

The math of a tariff hike – 13% rise in consolidated EBITDA
On 22nd Nov’21, Bharti announced a 20% price hike, effective 26th Nov’21, across its prepaid plans, which contributes 85% to India Mobile revenue (15% is postpaid). The tariff hike comes nearly eight quarters from its last hike (Dec’19), even as industry participants have been calling for the same since the last 12 months. With a 20% increase in prices and expected ARPU at INR181, we expect incremental revenue/EBITDA contribution to its India Mobile business to be INR103b/INR72b, i.e. 16%/22% growth, which works out to a 13% growth in consolidated EBITDA on 2QFY22 annualized basis. On an FY24E basis, we revise higher our consolidated EBITDA estimate by 10% to INR821b.

Other telcos likely to follow suit
In line with its previous tariff hike in Dec’19 we expect the other two large telcos – RJio and VIL -to raise tariffs in the immediate future. Both telcos have been advocating the need for a tariff hike to improve the cash flow situation in the industry. Bharti’s tariff, effective 26th Nov’21, offers time to other telcos to implement a similar price hike. A similar price hike will increase VIL/RJio’s EBITDA by 100%/23%.

Previous hike resulted in a higher earnings translation for Bharti v/s its peers
After the tariff hike in Dec’19, Bharti saw ~80% increase in ARPU, which, in turn, boosted EBITDA. On an annualized basis, India Mobile business EBITDA rose INR44b, or 27%, over 2Q-4QFY20. During the same period, VIL saw a much lower increase in EBITDA by INR12b v/s our expectation of INR50-60b. RJio’s EBITDA increase was gradual over the last 4-5 quarters as it has a higher share of long validity customers (two-third of overall). Its ARPU increased by 18% as compared to price hike of 26-27%, possibly due to higher contribution of lower ARPU JioPhone. Bharti’s lower churn and strong network capability underscore the potential to see a similar healthy EBITDA increase, in line with the tariff hike in Dec’19.

Limited risk of downtrading
The price plans are designed in a way that the downtrading reduces the data allowance significantly, thus leaving limited room to do so. Downtrading from its most popular and attractive plans of INR719 for 84 days (i.e. INR257 for 30 days) to its next lower plan offers 34% lower monthly outgo at INR192 for 30 days (i.e. INR179 for 28 days), but reduces the data allowance by nearly 95% to a mere 2GB/month.

An INR200b FCF generating company, yield at 5%
Bharti’s consolidated EBITDA (2QFY22 annualized) after capturing the 20% tariff increase would be INR624b. Adjusting for capex, interest, tax, and Ind AS 116, it would be ~INR200b, thus implying a 5% FCF yield. It has the potential to grow EBITDA by more than 20% over the next two years on the back of mix led ARPU improvement and subscriber additions. It does not factor in an additional 13% EBITDA opportunity due to potential market consolidation over time, leaving additional growth levers.

Valuation has more levers
• Without capturing market share gains, the stock is trading at 7x consolidated EBITDA on a one-year forward basis, while the implied India business is trading at 8.5x. This doesn’t capture an additional 13% EBITDA opportunity from market consolidation and the re-rating potential due to an improving FCF/RoCE profile.

• We expect 24% CAGR in consolidated EBITDA over FY21-24E on the back of 31% CAGR in Mobile India EBITDA, aided by ARPU growth as a result of the tariff hike.

• We see potential for a re-rating in both the India and Africa business on the back of steady earnings growth. We value Bharti on a Sep’23E basis, assigning an EV/EBITDA of 10x/4x to the India Mobile/Africa business, arriving at a SoTP-based TP of INR920. We maintain our Buy rating.
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