Bharti Airtel rating – Buy: Good performance by firm in Q3FY22

Bharti Airtel (Bharti) reported consolidated revenue of Rs 299 bn (+5% q-q), 2% ahead of both our/Bloomberg consensus estimates, driven by better performance by India wireless, India Homes and Africa (all 2% above our estimates). Consolidated Ebitda at Rs 147 bn (+6% q-q) was in line with our estimate and 1% ahead of consensus as margin expanded to 49.2% (+40bp q-q, +370 bp y-y). Reported PAT at Rs 8.3 bn was in line with our forecast (Rs 8.3 bn), but slightly below consensus estimate (Rs 10.5 bn).

India wireless: Higher ARPU drives further market share gains
Bharti’s India wireless segment revenue at Rs 161 bn (+5.9% q-q, vs 3.3% q-q for R-Jio and Vi ) was driven by 2% higher ARPU offsetting lower paying subs base. Reported ARPU of Rs 163 (vs Rs 153.4 q-q, vs Rs 151 for R-Jio and `115 for Vi) was 2% ahead of our estimate, driven by the partial impact of Jul’21 and Nov’21 tariff hikes. Bharti’s paying subscriber base declined by 0.6 mn q-q (vs higher q-q subscriber declines reported by peers) as against our expectations of 2mn net adds. Among the three private telcos, Bharti’s revenue and subscriber market share inched up by 65bp and 45bp q-q, respectively, on our estimates.

Segment Ebitda at Rs 79.4 bn was +6% q-q as higher revenue was part offset by higher network opex. Segment Ebitda margin was up 20bp q-q to 49.4% (+570bp y-y) on higher incremental Ebitda margin of 53% (vs 49% q-q). With sharply 36% q-q lower capex at Rs 30 bn (-29% y-y) and higher Ebitda, operating free cashflow (OFCF) was up 75% q-q to Rs 49.7 bn (+120% y-y).

Subscriber mix continues to improve, despite muted reported subscriber additions in the quarter
Bharti’s subscriber mix continues to improve. We note that, despite a 0.6mn decline in reported wireless subs, Bharti added 0.3mn net post-paid subs (+10% y-y) and 3mn net 4G data subs (though lower than 8.1mn net adds in Q2). ~61% of subs are now using 4G data vs ~54% y-y). Bharti added 7.8k Mobile Broadband (MBB) towers in Q3 (vs 3.7k q-q) and increased MBB sites count by ~31k (+4.3% q-q). However, there was a slight q-q moderation in data usage per customer at 18.3GB/month (vs 18.6 in Q2, 18.4GB for R-Jio [inc. FTTH]) .

India Homes: Ahead of our estimates
Subscriber net adds remain robust at ~341k (+9% q-q) to reach 4.16mn subs (+49% y-y), driven by acceleration in local cable operator (LCO) tie-ups to 586 cities (vs 436 q-q, 120 y-y). Revenue was +12% q-q to `8 bn (+40% y-y) as subscriber additions offset 1% q-q ARPU decline to Rs 657 (-7% y-y).

Airtel Business: Revenue growth remains robust; significant growth potential
Airtel Business (B2B) revenue grew 3% q-q to Rs 41 bn (+13% y-y) as Bharti likely benefited from improved traction for the new product launches. On our estimates, Bharti’s B2B subscriber base (including corporate fixed line, machine to machine [M2M] subs and other Enterprise products and services) further increased sharply by 1.5mn q-q to 10.7mn subs (+41% y-y). However, Ebitda was -1% q-q to Rs 15.8 bn (+13% y-y), as margin normalised to 38.5% (vs 39.9% q-q, 38.7% y-y). Several new product launches and recent rollout of 5G for Business could provide high growth potential for the segment, in our view.

Bharti is well hedged for growth; reaffirm our Buy rating and TP of Rs 855
In a recent report, we highlighted that Bharti is in a well hedged position to gain from either market consolidation (duopoly) or market repair (sharper tariff hikes, further relief measures). In our view, Bharti’s rights issue (Rs 210 bn), recent strategic tie-up with Google, cashflow relief from the moratorium on government dues, along with Rs 200 bn+ in annual free cashflow generation over FY21-25F, not only alleviate debt concerns, but also ensure that Bharti would be well-placed to compete with R-Jio. We reiterate our Buy with a TP of Rs 855 (implying 21% upside). The stock currently trades at ~7.5x FY23F EV/Ebitda (Ebitda of ~Rs 702 bn).