Q4FY23 Review: Bharti Airtel: Sailing with ease on choppy seas

18 May 2023 , 11:53 AM

After generating Rs250bn est. consol. FCF pre-spectrum payout in FY23 (Rs122bn post spectrum payout), Bharti management stated that FY24 India capex will be similar to FY23 level (Rs280bn) before tapering in FY25. While rural 4G coverage expansion will continue in the near future, Bharti will also double down on the top 150 cities, which account for 70-90% of the post-paid, converged homes and enterprise market. It also highlighted multiple initiatives to keep costs under check. The company stated that pricing has to go up, but did not offer any timeline. Analysts of IIFL Capital Services believe that 4G prepaid tariff hikes are likely only in FY25 and maintain estimates.

Healthy outlook across businesses: 

Key takeaways from the earnings call: 1) Bharti has achieved a life-time high mobile RMS at 38.7% on a comparable basis. 2) After the initial burst, 5G capex should moderate; considering a significant proportion of 4G sites have adequate capacity headroom. 3) Focus on FTTH to continue for tapping Homes market, as opposed to 5G FWA (JIO has been more upbeat on FWA rollouts). 4) The industry has seen some discipline on channel payouts and there has been a reduction in churn in the past 45 days.

Key notables: 

Although Bharti states that higher CPE cost of FWA vs FTTH is a dampener, we believe JIO’s focus on ramping up FWA during FY24 ma result in a sharp fall in FWA CPE due to economies of scale. Consequently, Bharti would also benefit from this. Key things to watch out for: 1) Possible announcement of a 5G handset in RIL’s 2023 AGM. 2) Progress on the next spectrum auction, possibly in H1FY2023.

Maintain estimates; new TP Rs919: 

Bharti managing to keep churn in check despite sharp entry-level tariff hikes suggests that the key impediment to broad-based tariff hikes is competitive intensity, rather than weak consumption environment. With Vi’s lack of 5G providing a fertile ground for RMS gains for the top 2, and parliamentary elections lined up in H12024, analysts of IIFL Capital Services continue to build in tariff hikes only in Q2FY25. FY24 is likely to be a steady (11% Ebitda growth) rather than a spectacular year (24%+ Ebitda growth in each of the last 3 years) for Bharti.

Analysts of IIFL Capital Services build in 11%/20% Ebitda growth in FY24/25 led by solid execution, market share gains and efficiency improvements. Healthy FCF generation should result in net debt-to-Ebitda falling from the current 3.1x to 2.1x in FY25. Their TP, after rolling forward to June’24, rises from Rs892 to Rs919 (16% upside). Maintain BUY.