Outperformance to continue
Bharti Airtel (Bharti) is one of the leading global telecommunications company with operation in 18 countries across Asia and Africa. In India, the company's product offerings include 2G, 3G and 4G wireless services, mobile commerce, fixed line services, high-speed home broadband, DTH, enterprise services including national & international long distance services to carriers. In the rest of the geographies, it offers 2G, 3G, 4G wireless services and mobile commerce. Currently, the company has nearly 423 million customers across 18 countries.
Minimal impact of COVID – 19
The management mentioned that its home broad band business has witnessed huge surge in demand. Further, the B2B business services have also seen an uptick. On the mobile services front, 4G subscribers continue to remain resilient; however feature phone subscribers are facing significant pressure. Nonetheless, the company has launched several alternate platforms for recharge but many were not able to recharge. We believe that the negative impact of feature phone subscribers would be more than offset by the recent tariff increase and resilient 4G subscribers. Overall for the company, we expect the growth momentum to continue led by benefits of increase in ARPU and gradual pickup in other businesses.
Resilient performance in Q4FY20
Bharti reported strong set of numbers in Q4FY20 led by robust performance from India’s mobile services business. Its consolidated revenue grew by 8.1% QoQ to Rs. 23,723 cr driven by 16.0% growth in mobile services business in India. The growth was led by price hikes taken by the company in Dec-19 and healthy addition of 4G subscribers (+12.5mn QoQ). The ARPU increased 14.1% QoQ to Rs. 154 as against Rs. 135 in the previous quarter. Other businesses including Home Services, Enterprise and Tower Infrastructure business registered subdued growth in Q4FY20. The Africa business registered a decent growth of 3.5% QoQ. Bharti’s consolidated EBITDA grew by 10.1% QoQ as margins expanded by 78bps to 43% largely due to improvement in mobile services and Enterprise business margins. The company reported a net loss of Rs. 5,237 cr due to higher interest expense (+11% QoQ) and an exceptional loss of Rs. 7,004 cr (out of which Rs. 5,642 cr on account of reassessment of regulatory cost based on a recent judgment on one time spectrum charge related matter).
Better times ahead for Bharti
The Indian telecom industry has witnessed challenging times ever since the launch of Jio due to increase in competitive intensity. However, despite increase in competitive pressure Bharti has managed to gradually increase its customer base. Further, with respect to the payment of recent AGR dues to the government, the company has successfully raised Rs. 21,500 cr through a combination of fresh equity issuance and convertible bonds. This has definitely allayed concerns over the sustainability of its business and the recent much-required tariff increase has been a big positive for the industry, leading to better ARPUs for the company as evident in Q4FY20 ARPU growth of 14.1% QoQ. On the valuation front, it is trading at 8.9x 1-year forward EV/ EBITDA which is largely in-line with its historical average. However, we believe that it can re-rate further on the back of anticipated improvement in financial performance due to higher ARPU benefit, strong customer base, continued addition of 4G subscribers and improved traction in other businesses. Further, modest capex in FY21E and strong cash generation would aid deleveraging of balance sheet for the company. Therefore, we recommend a Buy on the stock with a target price of Rs. 709.
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