Q3FY24 Review: Bharti Airtel: The juggernaut rolls on

7 Feb 2024 , 01:30 PM

Bharti reported a strong quarter marked by healthy ARPU growth and tight cost control. FCF generation was robust in Q3 and 9MFY24 despite elevated capex. The company reiterated that FY24 is the peak year of capex (analysts of IIFL Capital Services model ₹320bn India capex). Bharti intends to bridge the coverage gap with the market leader in five key circles, where it trails in RMS by ~18ppt. It expects monetisation of investments to be driven by outright tariff hikes rather than having differential pricing on 5G services. While analysts of IIFL Capital Services maintain India Ebitda, consol Ebitda sees 3% cut for FY25 and FY26 considering the recent devaluation of the Nigerian Naira (NGN). Analysts of IIFL Capital Services estimate 12.5% consol Ebitda Cagr over FY23-26 and steady deleveraging led by RMS gains and tariff hikes (assumed in H2FY25). Their new March-25 TP of ₹1,215 implies 7% upside. In FY26, analysts of IIFL Capital Services expect consol ROCE to expand by ~500bps to 16.5% and estimate ₹417bn FCF. 

Key takeaways from the earnings call: 

1) Bharti does not believe in differential pricing for 5G; monetisation will be rather through tariff hikes; 2) Bharti would look to plug the coverage gap vs. the market leader in five key circles where it has 25k fewer 4G sites; 3) FY25 will see some moderation in capex from FY24; and 4) Bharti’s bundling efforts have been a success as seen in 47% of home BB net adds being on Airtel Black. 

Bharti’s calibrated 5G rollout strategy in sync with gradual 5G uptake:

While Bharti’s 5G rollout has been more gradual than JIO’s in terms of 5G location count, number of spectrum bands and architecture (NSA vs. SA), analysts of IIFL Capital Services have not yet seen a significant revenue divergence between the two. In analysts of IIFL Capital Services view, this is because: 1) there are no use cases for the retail customer, where 5G makes a real difference; and 2) both telcos currently have low 5G CU. This may change as 5G network fill-factor rises. Bharti may augment capacity on a need-driven basis when this happens, inline with its ethos of a calibrated rollout strategy. 

Cut FY25/26 consol Ebitda by 3% each due to Naira devaluation: 

USDNGN moved from 760 to 950 in late December. On Feb 1st, Nigeria undertook a second round of currency devaluation within 8 months; subsequently, USDNGN rapidly moved to 1250. This leads to 3%/13%/13% Ebitda cut (in USD terms) for Airtel Africa in FY24/25/26. Analysts of IIFL Capital Services also estimate Rs40bn exceptional loss in Q4FY24 due to USDNGN. Consequently, they trim FY24 PAT by 50%, while FY25/26 PAT estimates are largely unchanged.