Journey towards strong FCF progressing well, Bharti Airtel

Bharti Airtel’s (Bharti) Q4FY23 was a no-tariff-hike quarter, yet mobile revenue grew 11% YoY and ARPU was up 8.4% YoY driven by higher 4G and postpaid subs addition. Digital revenue for the company stood at Rs11bn. Incremental EBITDA margin moderated due to higher churn rate and channel commission. Bharti has initiated measures to combat inefficiency at certain channels, which should improve margins going forward. Non-mobile revenue continues to grow fast with rise in FTTH adoption and digital adoption in the enterprise segment. We believe 5G use-cases for enterprise will grow exponentially in the future, and higher market share in the B2B business will be key to monetise 5G investment. Bharti has been disciplined in capital allocation, which resulted in strong FCF generation and steady drop in leverage, which we believe will help create strong shareholder value in next few years (refer our note). We have tweaked our EBITDA estimates for FY24E/FY25E marginally. Our SoTP-based target price remains unchanged at Rs960 with EV/EBTDA multiple at 9.5x for the India business. Maintain BUY. Risks: 1) Market share loss in India mobile business, and 2) rise in competitive and regulatory intensity.

• All segments firing – except DTH: 1) Home services: The number of home broadband customers grew 34.9% YoY to 6mn. Revenue grew 25.2% YoY to Rs11bn and EBITDA rose 15.8% YoY to Rs5.5bn. 2) Enterprise: Revenue and EBITDA grew 14.5% and 19.6% YoY to Rs48bn and Rs20bn respectively. 3) Payments bank: Active users were up 49% YoY to 54.7mn and revenue grew 41.3% YoY (18.8% QoQ) to Rs3.8bn; EBITDA was at Rs333mn, up 51.7% YoY. 4) Africa: Revenue and EBITDA (in USD terms) increased by 9.7% and 13.7% YoY to US$1.3bn and US$655mn respectively.
• Mobile revenue jumped 11% YoY / 1% QoQ to Rs195bn: This was in comparison to RJio’s 1.7% QoQ / 11.9% YoY growth under the same parameter, which also includes FTTH and enterprise. RJio added 6.4mn subs while Bharti added 3.2mn subs and 7.4mn 4G subs. RJio ARPU grew 6.7%YoY vs Bharti’s 8.4% YoY. Bharti benefited from 2G to 4G transition and bigger postpaid sub-base (up 10.4% YoY). Bharti is consistently winning more market share and narrowing its gap vs RJio. In Q4FY23, Bharti’s mobile ARPU dipped 0.1% QoQ to Rs193 due to two less days, and sub-base grew 1.0% QoQ to 335mn. Bharti’s 4G net add was at 7.4mn taking the total to 224mn, and post-paid subs add was 0.7mn to 19.7mn.
• India EBITDA grew 1.8% QoQ / 17.2% YoY to Rs134bn driven by India mobile EBITDA growth of 1.1% QoQ / 17.9% YoY to Rs105bn. Incremental EBITDA margin was at 56%, which was hurt from lower revenues. In FY23, SG&A expenses rose sharply due to higher churn and rise in commissions for subs addition. Bharti is initiating measures to curtail leakage at certain channels. India depreciation rose 6.2% YoY while interest cost dipped 7.5% YoY to Rs33bn. Net profit increased to Rs22bn due to gain of Rs6bn in JVs (vs loss of Rs3.7bn in Q3FY23) and EPS was Rs5.5/sh. India CapEx was Rs90bn (34% of revenue) in Q4FY23 and Rs281bn for FY23.
• FCF generation was Rs46bn despite higher CapEx. Net debt dipped by Rs22bn to Rs1,527bn. Bharti’s operating cashflow, after lease payment and interest cost, was Rs146bn, up 10.4% YoY. Company had negative working capital of Rs28bn vs positive in Q3FY23, and its FCF after interest cost was at Rs46bn. The lower debt reduction can be explained by: increase in debt from interest accrued but not paid (which does not pass through the cashflow statement).
• Other highlights. 1) 5G smartphone penetration for Bharti – at 32mn out of 335mn subs base – is less than 10%; however, penetration in postpaid subs base is 33%. This is helping Bharti to grab more postpaid subs with Rs599 family plan. 2) 5G users who have not opted for unlimited plan have shown some early signs of upgradation. However, data consumption on unlimited is very high, which is understandable, and IPL should have also added to volumes. 3) Bharti believes NSA-5G network has worked in its favour as user experience has been better, and it is also capital efficient. 4) Company has rolled out 5G in 3,000 cities and is adding 30-45 cities each day. It should complete urban rollout by end-CY23. Rural rollout is based on handset penetration, which has slowed down. 5G handset penetration has not picked pace as was anticipated. 5) In the enterprise segment, connectivity has seen rise in market share to 34%, up 220bps. IOT and cloud services revenue has been growing at >50%. 6) Company is adding 1.6mn home passes in FTTH per quarter. 7) War-on-waste: Bharti is re-engineering its towers wherein it plans to relocate 66.5k towers from high-cost locations. Bharti has reduced commissions selectively in past 45 days. 8) CapEx: FY24 CapEx in India will be largely similar to FY23 (Rs280bn). Bharti has stopped adding any 4G capacity BTS, and 5G CapEx beyond urban locations will depend on handset penetration. It will continue to invest in transport network and enterprise business. It expects CapEx from FY25 onwards to moderate from highs of FY23/ FY24.

CT Bureau