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  • CMP : 1,905.4 Chg : 21.90 (1.16%)
  • Target : 860.0 (22.16%)
  • Target Period : 12-18 Month
Result Update

09 Aug 2022

About The Stock

Bharti Airtel (Airtel) is India’s second largest telecom operator with a ~32.7 crore wireless customers in India and ~13.2 crore subscribers across 14 African countries. It enjoys industry leading ARPU in the wireless business

Q1FY23 Results

Airtel saw residual benefits of tariff hikes during the quarter.

  • Consolidated topline came in at ₹ 32,805 crore, up 4.1% QoQ, 22.2% YoY with India wireless revenues up 3.4% QoQ (up 27.4% YoY) at ₹ 18220 crore, led by residual pass through of tariff hike driving ARPU, which came in at
    ₹ 183, up 2.8% QoQ
  • Overall margins were at 50.4%, down 53 bps QoQ mainly owing to lower Africa margins, which were at 48.8%, down 110 bps QoQ. India wireless margins were at 51.2% (up 55 bps QoQ). Overall India margin was up 13 bps QoQ at 51%. PAT came in lower at ₹ 1606.9 crore, owing to higher derivatives/forex fluctuation loss of ₹ 511.9 crore and lower profit from associates of ₹ 162.8 crore (vs. ₹ 600 crore expected)
  • Reported net debt (excluding lease liability) was at ~₹ 1.195 lakh crore (down by ~₹ 4035 crore QoQ) given the strong free cash flows
What should Investors do?

Airtel’s share price has been up ~89% over the past five years.

  •                 Favourable industry structure of three players (two being strong), government relief, tariff hike and fund raise puts Airtel in a sweet spot to maintain its relative strength among peers with a formidable digital ecosystem offering.  We maintain our BUY rating
Target Price and Valuation

We value Airtel at unchanged target price of ₹ 860

Key Triggers for future price performance
  • Any further tariff hike as its pass through would bolster margins
  • Relative market share gain from VIL, given its stressed balance sheet and long term potential driven by growth opportunity from 5G
Alternate Stock Idea

Besides Airtel, we like Tata Comm in our telecom coverage.

  • A play on enterprise communication and improving balance sheet
  • BUY with target price of ₹ 1260

Particulars

Particulars (₹ crore) Amount
Market Capitalization 1,161,225.6
Total Debt (FY22) 169,678.0
Cash (FY22) 9,221.0
EV 554,189.0
52 week H/L (₹) 2,174.5/1,740.5
Equity Capital 2,900.1
Face Value (₹) 5.0

Price Chart

Key Risks

(i) Any subscriber churn;

(ii) Increased competitive intensity

Research Analyst

Bhupendra Tiwary
bhupendra.tiwary@icicisecurities.com

Result Update
ICICI Securities – Retail Equity Research

Key Financial Summary

(Year-end March) FY19 FY20 FY21 FY22 5 yr CAGR (FY17-22) FY23E FY24E 2 yr CAGR (FY22-24E)
Net Sales (| crore) 80,780.2 87,539.0 100,616.0 116,830.3 4.1 137,912.3 156,585.5 15.8
EBITDA (| crore) 25,629.5 36,482.0 45,372.0 57,817.3 10.4 71,272.7 84,929.3 21.2
Net Profit (| crore) 409.5 -32,183.0 -15,084.0 4,538.3 3.6 11,632.9 20,968.1 114.9
Adjusted PAT (| crore) -2,519.3 -4,075.0 -1,300.0 2,839.7 - 11,632.9 20,968.1 -
EPS (|) 1.0 -59.0 -27.6 8.1 - 19.2 34.6 -
P/E (x) 687.6
Price / Book (x) 3.9 5.0 6.5 5.9 - 5.1 4.1 -
EV/EBITDA (x) 19.8 14.0 11.9 9.5 - 7.9 6.2 -
RoCE (%) 2.1 4.1 6.4 9.1 - 12.1 16.0 -
RoE (%) -3.5 -5.3 -2.2 4.3 - 13.9 20.1 -
Source: Company, ICICI Direct Research

Key performance highlight and outlook

India wireless business –decent performance

The residual flow through of tariff hike drove the ARPU higher to | 183, up 2.8% QoQ (albeit tad lower than RJio’s ~4.8% growth). Overall sub base saw an addition of 1.3 mn QoQ at 327.3 mn (our expectation was addition of 2 million). It witnessed 4G net adds of ~4.5 mn during the quarter, with 4G data sub base at 205.3 mn (overall data customers base of 213.3 mn). The post-paid subscriber base was up by ~249,000 at 18.1 mn. Data usage per sub was up 3.6% QoQ to 19.5 GB. Voice usage per customer was up 2% QoQ to 1104 minutes. Key highlight was expansion in India wireless margins (only telco to witness sequential margin expansion). The company reiterated its ARPU target of | 200 in the near term and ARPU of | 300 over the medium-to-longer term. We highlight that the management does expect further round of tariff increase for pre-paid customers while it refrained from stating a timeline. We, expect monthly ARPU to reach | 213 in FY24 vs. current level of | 183, driven by another round of tariff hike & higher wallet share of premium subscribers.

Non-wireless remains robust

In the broadband business, Airtel witnessed strong growth driven by healthy net customer additions of 310,000 subs during the quarter to 4.8 mn. The collaboration with local digital cable operator on a partnership model has enabled the company to be present in 983 cities (added 136 cities during Q1FY23) with 1.7 mn home passes added on accelerated rollout. We note that the company had also reiterated robust opportunity on the Enterprise side (total market size of ~| 35,000 crore) and adjacent areas like CPaaS, data centre, cloud communication, cyber security, IoT with similar market size. During the quarter, the company saw superior growth compared to peers and added to market share gains in the enterprise segment.

Business Highlights (India)

  • Overall revenues & EBITDA: Overall India revenues were at | 23319 crore, up 3.6% QoQ, largely driven by healthy traction in India wireless business. Overall Indian margin was up 13 bps QoQ at 51% aided by wireless business margins expansion
    • Wireless revenues & EBITDA: India wireless revenues were up 3.4% QoQ (up 27.4% YoY) at | 18220 crore, led by residual pass through of tariff hike driving ARPU, which came in at | 183, up 2.8% QoQ (tad lower than RJio’s ~4.8% growth). India wireless margins was at 51.2% (up 55 bps QoQ), aided by tariff hike benefits
  • Subscriber base and 4G addition: Overall sub base saw an addition of 1.3 mn QoQ at 327.3 mn (our expectation was addition of 2 million). It witnessed 4G net adds of ~4.5 mn during the quarter, with 4G data sub base at 205.3 mn (overall data customers base of 213.3 mn). The post-paid subscriber base was up by ~249,000 at 18.1 mn
  • Minutes and data usage: Data usage per sub was up 3.6% QoQ to 19.5 GB. Voice usage per customer was up 2% QoQ to 1104 minutes. Total minutes on network was up 2.6% QoQ to 1079 billion (bn) minutes
    • Non-wireless: On the India non-wireless front, homes services (broadband) revenues were up 5.7% QoQ at | 926 crore, driven by healthy net adds of 310k customers during the quarter to 4.8 mn. Airtel business (enterprise) revenues were up 4.4% QoQ at | 4366 crore and DTH reported revenues witnessed a decline of 0.9% QoQ at | 748 crore
  • Network capacity and capex: The company maintained its continued access expansion in the form of sites/tower additions (~8049 sites) and capacity through mobile broadband BTS additions (14537 additions in Q1). We note that BTS addition has tapered in the last few quarters as the company has largely completed its 4G expansion. India mobile capex was at | 3695 crore (vs. | 2618 crore in Q4) with overall India capex of | 5288 crore (vs. | 4277 crore in Q4)

Business highlights (Africa)

  • Africa revenues were up 2.9% QoQ at US$1.26 billion. EBITDA margins were at 48.8% (down 110 bps QoQ). Airtel Money reported 10.2% QoQ revenue growth at US$160 mn. In rupee terms, Africa revenues were up 5.6% QoQ at | 9702 crore, also aided by currency depreciation
  • Subscriber base was up by 3.1 mn QoQ at 131.5 mn with ARPU at US$2.9 up 0.6% QoQ. Data subs base was down by 162,000 QoQ at 46.5 mn while total data usage was up 14.2% QoQ at 581.8 bn MB. Data usage per subscriber was at 4 GB per month, up 10.3% QoQ
  • Africa net debt (including lease obligations) was at US$3.06 bn (up by US$115 million). Capex was ~US$141 mn. Operating free cash flow for Q1FY23 was at US$487 million

Other highlights

  • 5G: The company indicated that it would deploy 5G under Non-Standalone (NSA) mode given the lower total cost of ownership and lack of devices for standalone (SA) mode. It reiterated that 700 MHz is no different from 800/900 MHz in terms of propagation while its coverage Is better in the deep inside and far flung area. It expects the coverage fall-back to be provided by 800/900 MHz, if needed, for Airtel. The company also informed that 700 MHz would require extra antenna, three extra radios, power and rental. Thus, it would have a cost per GB disadvantage by ~50%. Therefore, company does not expect any major spectrum outlay in the next couple of years for 700 Mhz. The company expects to launch 5G soon and reach 5000 towns by March, 2024. The 5G launch will entail advancement of capex by 18 months, with three years’ capex likely to be at similar levels of ~| 75000 crore as a chunk of 4G capex will be displaced. It also said that pricing difference between 4G and 5G has not been decided but stressed that ARPUs would need to increase from current levels
  • Residual rights issue calls: The company will evaluate the calls for residual ~| 15000+ crore of rights issue in the next few month post evaluation of the business cash flow profile amid some acceleration of capex
  • On fixed wireless access (FWA): Over the period, the cost per fibre broadband home pass has been brought down substantially to ~$30-35 and much lower in LCO aided setup with blended cost at ~US$50 per connected home while cost of wireless router is ~US$200. Thus, unless the router costs crashes, fibre rollout is more cost effective
  • Consolidated debt and capex: Total capex spend for the quarter was at | 6398 crore vs. | 5997 crore in Q4. Reported net debt (excluding lease liability) was at ~| 1.195 lakh crore (down by ~| 4035 crore QoQ) aided by strong cash flows
  • 5G: As expected, the focus of Airtel was on the core spectrum for 5G, 3300 MHz (mid band) and 26 GHz (millimetre wave band), which attracted maximum bids. It bought 100 MHz pan India of 3300 MHz spectrum and 800 MHz Pan India of millimetre wave band. Airtel also selectively bolstered its mid-band spectrum by adding on to 1800/2100 bands. The outlay was | 43084 crore and assuming, the operator opts for 20 year payout, annual equated instalment will be | 3853 crore

Bharti Airtel continues to report resilient numbers, especially on the Indian wireless business front. The continued margin expansion remains a key positive. The non-wireless business momentum along with Africa performance, continues to be robust.             Favourable industry structure of three players (two being strong), government relief, tariff hike and fund raise puts Airtel in a sweet spot to maintain its relative strength among peers with a formidable digital ecosystem offering. We remain constructive on Airtel and maintain our BUY rating on the stock with an unchanged SOTP based target price of | 860/share

Disclaimer

ANALYST CERTIFICATION

I/We, Bhupendra Tiwary, CFA, MBA Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.

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pankaj.pandey@icicisecurities.com

 

 

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