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Bharti Airtel Ltd>
  • CMP : 671.2 Chg : 11.0 (1.67%)
  • Target : 860.0
  • Target Period : 12-18 Month

21 Mar 2022

Stable performance…

About The Stock

Bharti Airtel (Airtel) is India’s second largest telecom operator with a revenue market share of ~37%. The company has ~32.3 crore wireless customers in India and ~12.6 crore subscribers across operations in 14 African countries. It enjoys industry leading ARPU in the wireless business

Q3FY22 Results

Airtel saw partial benefits of tariff hikes during the quarter.

  • Consolidated topline came in at ₹ 29,867 crore, up 5.4% QoQ with Africa revenues up 6% QoQ at ₹ 9105 crore and Indian wireless revenues were up 5.9% QoQ at ₹ 16,092 crore, led by partial pass through of tariff hike driven higher ARPU, which came in at ₹ 163, up 5.9% QoQ.
  • Overall margins at 49.2%, up 47 bps driven by Africa margins at 49.6%, up 100 bps QoQ. India wireless margins was at 49.4% (up 20 bps QoQ). Reported Net debt (excluding lease liability) was at ~₹ 1.24 lakh crore (down by ~₹7434 crore QoQ) aided by healthy FCF
What should Investors do?

Airtel share price has been up ~123% over the past five years.

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

We value Airtel SOTP target price of ₹ 860 

Key Triggers for future price performance
  • Tariff hike flow through to boost Airtel’s India ARPU/India EBITDA by 20%/30% from pre-hike levels.
  • Relative market share gain from VIL, given its stressed balance sheet and long term potential driven by growth opportunity from 5G
New Stock Ideas

Besides Airtel, we like Tata Communications in our telecom coverage

  • A play on Play on enterprise communication and improving balance sheet
  • BUY with target price of ₹ 1775

Key Financial Summary

Particulars FY19 FY20 FY21E 5 Year CAGR(FY16-FY21) FY22E FY23E FY24E 3 Year CAGR (FY21-FY24E)
Net Sales (| crore) 80,780.2 87,539.0 100,616.0 0.8 117,548.4 135,141.6 146,906.0 13.4
EBITDA (| crore) 25,629.5 36,482.0 45,372.0 5.9 58,371.0 69,640.5 76,530.9 19.0
Net Profit (| crore) 409.5 -32,183.0 -15,084.0
Adjusted PAT (| crore) -2,519.3 -4,075.0 -1,300.0 - 4,352.0 15,312.0 20,340.0 -
EPS (|) 1.0 -59.0 -27.6 - 8.6 25.7 34.2 -
P/E (x) 702.2
Price / Book (x) 4.0 5.1 6.7 - 5.0 4.1 3.4 -
EV/EBITDA (x) 21.1 15.0 12.6 - 9.3 7.3 6.2 -
RoCE (%) 2.1 4.1 6.4 - 9.0 12.8 15.0 -
RoE (%) -3.5 -5.3 -2.2 - 5.1 14.5 16.1 -
Source: Company, ICICI Direct Research

Segmental Breakup

Key performance highlight and outlook

India wireless business –Better subscriber stickiness seen

The partial pass through of tariff hike was seen driving the ARPU higher to | 163, up 5.9% QoQ (tad better than ~5.5% growth seen for peers). Key highlight was relative stickiness of customer base for Airtel vs. its peers. Overall sub base saw a decline of ~0.56 mn QoQ at 322.9 mn, due to impact of SIM consolidation amid tariff hike (~20-25% in Nov end) seen across all operators. However, we highlight that subscriber decline is much lower in contrast to its peers Jio/VIL which lost 8.5/8.2 mn subs, respectively, in Q3FY22. It witnessed a modest 4G Net adds of ~3 mn during the quarter, with 4G data sub base at 195.5 mn. Over the last two quarters, all telcos including Airtel have undertaken measure to boost APRU by taking 20-25% tariff hike across packs and increase in post-paid tariff especially moving the minimum corporate pack up to | 299/month to | 199/month in Q2. We highlight that management indicated that tariff remain abysmally low and another hike is likely in 2022 when current wave of SIM consolidation eases. It, therefore, expects ARPU to reach | 200 in CY22 itself. We, however, conservatively expect monthly ARPU to reach | 200 in FY24 vs. current levels of | 163, driven by tariff hike pass through, 4G addition and higher wallet share of premium subscribers. We do not build any further step up tariff hikes in our estimates.

Home Wireless and Enterprise remains area of focus

Broadband segment witnessed strong net adds of 341k subs during the quarter. Notably, company’s accelerated LCO partnerships in non-wired cities continues to drive growth. It has taken up the LCO partnership model live in 586 cities (~436 cities in Q2) and it has added ~1.1 million home passes in the quarter. The company would continue to step up investments to take the network to 2,000 towns across India with 35 million home passes in the next three years. We note that company had also earlier outlined robust opportunity in Enterprise side (total market size of ~| 40k crore) and adjacent areas like Cloud communication, cyber security, IOT with market size of ~| 50k crore. It indicated that in the Cyber security and IOT segment, it is currently the leader. SD-WAN is another area of growth and its acquisition of 25% stake in Lavelle Networks, a Bengaluru-based company will aid it. In its data centre business – Nextra, it has added 28 MW capacity across 4 locations in Q3.

Business Highlights (India)

  • Overall revenues & EBITDA: Overall India revenues at | 20,913 crore, were up 5.1% QoQ, largely driven by strong traction in India wireless business. Overall Indian margin was up 20 bps QoQ at 49.8% aided by wireless business margins expansion.
  • Wireless revenues & EBITDA: India wireless revenues were up 5.9% QoQ at | 16,092 crore, led by partial pass through of tariff hike driven higher ARPU, which came in at | 163, up 5.9% QoQ with net subscriber decline of 0.56 million. India wireless margins at 49.2%, were up 165 bps QoQ, aided by tariff hike benefits.
  • Subscriber base and 4G addition: Overall sub base saw a decline of ~0.56 mn QoQ at 322.9 mn, due to impact of SIM consolidation amid tariff hike seen across all operators. However, we highlight that subscriber decline is much lower in contrast to its peers Jio/VIL which lost 8.5/8.2 mn subs, respectively, in Q3FY22. It witnessed a modest 4G Net adds of ~3 mn during the quarter, with 4G data sub base at 195.5 mn (overall data customers base of 203 mn). The post-paid subscriber base was up by ~321k at 17.6 mn.
  • Minutes and data usage: Data usage per sub was down 1.8% QoQ to 18.3 GB. Voice Usage per customer was up 0.7% QoQ to 1061 minutes. Total minutes on network was up 0.9% QoQ to 1029.8 billion (bn) minutes.
  • Non-wireless: On the India non-wireless front, Homes Services (broadband) revenues were up 11.8% QoQ at | 797 crore, driven by healthy net adds of 341k customers during the quarter to 4.16 mn.  Airtel business (enterprise) revenues were up 2.8% QoQ at | 4106 crore and DTH reported revenues witnessed a decline of 0.8% QoQ at | 791 crore
  • Network capacity and capex: The company has maintained continued access expansion in the form of sites/tower additions (~7750 sites) and capacity through mobile broadband BTS additions (30801 additions in Q3). The company continues to deploy sites and reduce coverage gaps. India mobile capex was at | 2973 crore (vs. | 4629 crore in Q2) with overall India capex of | 4654 crore (vs. | 5799 crore in Q3).

Business highlights (Africa)

  • Africa revenues were up 5.1% QoQ to US$1.22 billion, driven by healthy ARPU and subscriber growth. EBITDA margins of 49.6% (up 100 bps QoQ). Airtel Money reported 8.3% QoQ revenue growth at US$140 mn.  In rupee terms, Africa revenues which were up 6% QoQ at | 9105 crore
  • Subscriber base was up by 3.1 mn QoQ at 125.8 mn with ARPU at US$3.3 up 4.2% QoQ. Data subs base was up by 1.19 mn QoQ at 45.1 mn while total data usage was up 6.7% QoQ at 478.8 bn MB. Data usage per subscriber was at 3.5 GB per month, up 3.8% QoQ
  • Africa net debt (including lease obligations) was at US$3.5 bn. Capex was ~US$188mn. Operating free cash flow for Q3FY22 was at US$298 million

Other highlights

  • During Q3, Airtel paid | 15,519 crore to the DOT towards prepayment of the entire deferred liabilities pertaining to spectrum acquired in 2014 auction. The effective cost savings in interest is likely at ~| 1000 crore, annually. Further, it also intends to repay/refinance ~|20000 crore of deferred liabilities with ~10% interest cost, going ahead aided by FCF generation.
  • Network cost was higher due to aggressive roll out of network, loading charges and energy costs. Sales and marketing costs were higher due to higher sales incentives and channel commission
  • Consolidated Debt and Capex:      Total capex spend for the quarter was at | 6101 crore vs. | 6972 crore in Q2. Reported Net debt (excluding lease liability) was at ~| 1.24 lakh crore (down by ~|7434 crore QoQ) aided by healthy FCF.
  • 5G: The company awaits TRAI response on spectrum pricing (likely in March) with its key demand being lowering of reserve price and more considerate payment term. 5G device shipments, currently is in teens as percentage of overall smartphones, while installed 5G devices are 3-4 %and likely to reach 10-12% by March, 23. Similarly, on B2B front, not  many applications are required on 5G. Thus, its expects rapid growth in 5G networks only over medium term of 5-7 years

 Quarterly Performance  Variance Table

  Q3FY22 Q3FY22E Q3FY21 Q2FY22 YoY (%) QoQ (%)   Comments
Revenue 29,866.6 29,608.2 26,517.8 28,326.4 12.6 5.4    
Employee Expenses 1,133.6 1,138.0 1,026.0 1,101.0 10.5 3.0    
Marketing Expenses 3,078.6 2,904.0 2,532.5 2,885.9 21.6 6.7    
Access Charges 1,723.2 1,712.6 3,063.2 1,670.8 -43.7 3.1    
Network Operating 6,498.6 6,176.3 5,547.9 6,178.8 17.1 5.2    
License Fee 2,729.8 2,891.4 2,295.2 2,679.4 18.9 1.9    
EBITDA 14,702.8 14,706.0 12,053.0 13,810.5 22.0 6.5    
EBITDA Margin (%) 49.2 49.7 45.5 48.8 378 bps 47 bps    
Depreciation 8,547.2 8,347.2 7,503.1 8,247.2 13.9 3.6    
Interest 4,367.1 3,971.4 3,971.9 3,964.1 9.9 10.2    
Exceptional Items -39.8 0.0 -5,250.2 -722.1 -99.2 -94.5    
Total Tax 990.8 1,003.0 4,306.7 1,030.8 -77.0 -3.9    
PAT 829.6 1,240.4 853.6 1,134.0 -2.8 -26.8    
Subscribers (Mn) 322.9 323.8 307.9 323.5 4.9 -0.2    
ARPU 163 163 166 153 -2.2 5.9    

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