Q2FY24 Review: Bharti Airtel: Steady execution continues

2 Nov 2023 , 03:07 PM

Bharti had an inline Q2 with flat QoQ Ebitda while FCF generation before spectrum payouts was healthy at Rs129bn in H1 despite an acceleration in capex. Bharti’s QoQ mobile revenue growth at 2.7% matched JIO’s in Q2 (after having outperformed JIO in 6 out of 9 preceding quarters). On the earnings call, management stated that the ARPU uptick from 2G-to-4G upgrade has come down subsequent to entry-level pack price hikes. Bharti has been faring well on post-paid, 4G and FTTH adds. Analysts of IIFL Capital Services largely maintain estimates (barring FY24 PAT which sees 16% downgrade considering exceptional hit in Q2). Their TP rises from Rs967 to Rs1,003 on rolling forward to Dec-24. Analysts of IIFL Capital Services expect Bharti to nearly double its FCF between FY23 and FY26 to Rs405bn. Any relief on AGR liabilities could add up to ~Rs60/share. Maintain BUY. 

Focus on strong execution continues: 

Key takeaways from the earnings call: 1) Some slowdown in ARPU increase can be attributed to the lower ARPU uptick from 2G-to-4G conversion after the increase in entry-level pack prices (the gap between 2G and 4G is just Rs60); 2) Bharti would deploy SA 5G network only at the right time and there is no need for more low-frequency spectrum; 3) There has been a 500bps YoY increase in penetration of Airtel Black plans and 100bps market share gain in high-end phones in the past year; 4) Bharti sees 60mn households as the addressable market for home broadband (including FWA); 5) FY24 will be the peak year of capex; and 6) there is some near-term weakness in the overseas portion (~50%) of the enterprise segment. 

Key monitorables: 

On the earnings call, Bharti also stated that it would not shy away from moving first on tariff hikes at the appropriate time while keeping an eye on competitive implications. Analysts of IIFL Capital Services continue to build in tariff hikes in FY25. While JIO matched Bharti on QoQ mobile revenue growth in Q2, it is still too early to call out a reversal of the trend of Bharti’s recent outperformance. With 295k unique 4G locations, Bharti is just ~10% shy of JIO’s est. 330k locations. This should also aid rural sub adds. 

Maintaining consol Ebitda; new TP Rs1,003: 

Analysts of IIFL Capital Services largely maintain their revenue and Ebitda est. While FY24 EPS sees 16% cut, FY25/26 EPS is largely maintained. Analysts of IIFL Capital Services forecast 14% Ebitda Cagr over FY23-26 and 450bps ROCE improvement to 16%. The stock trades at a reasonable 8.7x 1YF EV/Ebitda.