Q1FY24 Review: Bharti Airtel: Who says elephants can’t dance?

7 Aug 2023 , 02:13 AM

Bharti had a robust Q1 with 6% India Mobile Ebitda growth and Rs62bn est. consol. FCF. On the earnings call, management mentioned that efforts on targeted pack upgrades and international roaming also drove ARPU, in addition to 2G-to-4G conversion. Ongoing efforts on cost reduction at high-cost sites have helped offset the network rollout costs. Analysts of IIFL Capital Services upgrade India Ebitda by 2-3%, but consol. Ebitda sees 1-3% cut, due to the sharp fall of Nigerian Naira. They continue to build in 4G prepaid tariff hikes only in FY25 based on which, they estimate 9%/17% Ebitda growth in FY24/25. Analysts of IIFL Capital Services expect Bharti to continue gaining RMS and the ensuing healthy FCF should drive steady deleveraging. The stock trades at 9x 1YF EV/Ebitda. Their new TP is Rs967 (old TP: 919). Maintain BUY. 

Healthy outlook across businesses: 

Key takeaways from the earnings call: 1) There are multiple ARPU tailwinds, but a step-jump will happen only with headline price increase. 2) Bharti maintained Rs280-300bn FY24 India capex guidance. 3) Rural 4G rollout should be concluded by Nov/Dec 2023. 4) 30% of data traffic has been offloaded to 5G networks; there are no capacity constraints in the foreseeable future. 5) NSA architecture also supports network slicing to an extent, though use cases are some time away. 6) There is room for network opex reduction on 75-100k high-cost sites. 

Key monitorables: 

While it is still early days, analysts of IIFL Capital Services would closely monitor the uptake of JIO Bharat Phone targeted at 2G users (Bharti mentioned that 2G users account for 18% of its Mobile revenue). Affordability issue of 5G handsets has been an issue, as highlighted in this note. A possible 5G phone launch by JIO around the festive season could address this. While Bharti’s low-frequency spectrum holding is significantly below JIO’s, analysts of IIFL Capital Services do not see this as a handicap for the company in the next 12-18 months. Over time, when Bharti potentially deploys SA 5G network, it may bolster its low frequency holding by acquiring 850/900MHz. Consol. 

Ebitda sees 1-3% cut; new TP Rs967: 

Higher ARPU and Ebitda margin assumptions drive India Ebitda upgrade. Analysts of IIFL Capital Services build in US$0.4bn/0.5bn Ebitda hit in FY24/25 from Naira depreciation, which leads to 1%/3% consol. Ebitda cut. While FY24 EPS sees 5% cut, FY25 EPS is largely maintained. Their TP increase is led by roll-forward to Sep’24 and 20bps lower WACC (in line with the fall in 10yr G-sec yield).