Bharti Airtel rating – Buy: Quarter results an all-round beat on estimates

We expect network costs to return to growth in subsequent quarters.

Bharti’s Q1 revenues (up 21% y-o-y), Ebitda (up 31% y-o-y) and profit of Rs 2.8 bn, all beat our estimates led by strong revenue growth in India non-mobile and Africa. Mobile Arpu, up 1% q-o-q, was supported by healthy 4G and postpaid adds. We raise our consolidated estimates by 2-3% to factor in the beat and expect 20% Ebitda CAGR over FY21-24. At 7.4x FY23E EV/Ebitda risk-reward looks favourable. We maintain Buy with rolled-over PT of Rs 685/sh.

Q1 results an all round beat: Bharti Airtel’s Q1FY22 consolidated revenues, up 15% y-o-y (21% y-o-y on like to like basis), consolidated Ebitda, up 31% y-o-y, and profits at Rs 2.8 bn, all beat our estimates. Higher than expected revenues led by strong growth in India-non-mobile business and Africa drove the beat.

India mobile–revenue miss but margins surprise positively: Bharti’s India mobile revenues were up 11% y-o-y (22% on like-to-like basis), missed estimates. ARPUs at Rs 146, were up 1% q-o-q, largely in line with estimates; however flat subscriber base due to higher than expected churn among prepaid voice subscribers disappointed. Bharti’s subscriber additions in 4G (+5m) and postpaid (+0.3m) was encouraging. Bharti’s data traffic growth remained healthy at 49% y-o-y. To support this growth, Bharti added 55k broadband base stations in Q1, its highest in over 5 years. Despite such investments, network costs were lower and helped drive 170bps q-o-q expansion in margins to 49%, ahead of estimates. We expect network costs to return to growth in subsequent quarters.

Strong performance in non-mobile and Africa: Indian non-mobile businesses had a strong quarter with all three segments growing 8-13% y-o-y, beating estimates. Homes segment delivered subscriber additions of 0.28m, its highest in a quarter led by scale-up of LCO tie-ups; however its margins fell 620bps q-o-q due to regulatory change. Africa revenues (up 7.7% q-o-qcc) were ahead of estimates led by strong subscriber additions and higher than expected ARPU. Africa Ebitda (up 8.6% q-o-qcc) was also ahead of estimates.

FCF falls q-o-q; comfortable leverage: During Q1FY22, Bharti Airtel FCF rose to Rs 29 bn vs negative Rs 19 bn FCF in Q4FY21, as FCF in Q4 was impacted by Rs 63 bn of upfront spectrum payment. Adjusted for that, FCF fell 36% q-o-q, due to higher cash interest payments and no dividend from Indus Towers. Consolidated net debt grew by 6% q-o-q due to Rs 106 bn addition to spectrum liabilities, yet leverage was comfortable at 3.0x Ebitda.

Maintain BUY: We raise our consolidated revenue and Ebitda estimates by 2-3% as we raise estimates for India non-mobile and Africa segments. Over FY21-24, we now expect Bharti Airtel to deliver 14% CAGR in revenues and 20% CAGR in Ebitda assuming 7% tariff hikes in Q4FY22 and Q4FY23. We maintain Buy.