Published on 15/12/2020 11:06:05 AM | Source: Motilal Oswal Financial Services Ltd

Update On Bharti Airtel Ltd By Motilal Oswal

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Strong EBITDA jump of 12 QoQ (9% beat)

India Wireless EBITDA up 13% QoQ (10% above est.) despite no tariff hike

* Consol. revenue was up 7.7% QoQ to INR257.9b (5% beat) on a big beat in India Wireless.

* Consol. EBITDA was up 12% QoQ to INR116.4b (11% beat) on strong revenue and operating leverage.

* The consolidated EBITDA margin improved 170bp to 45.2% (210bp above estimate).

* Subsequently, reported net loss stood at INR7.6b. Excluding exceptional cost, adjusted net loss after minority interest stood at INR7.4b (est. profit of INR2.6b) v/s net loss of INR4.4b in 1QFY21.


India Wireless EBITDA up 13% QoQ (10% above est.) despite no tariff hike

* Revenue surprised with a 7.4% QoQ increase to INR138.4b (5% beat), attributed to 3%/5% ARPU/subs growth. Of this, 2–3% revenue loss may be reversed from the previous quarter, while the rest would be attributable to mix benefit from healthy subscriber adds.

* EBITDA was up 12.8% QoQ to INR58.9b (9% beat), with the incremental EBITDA margin at a healthy 70%. Total opex (excl. access/license fee) was flattish (up 2%) as SG&A efficiency was offset by an increase in network cost due to higher capex.

* ARPU jumped 3% QoQ to INR162 (v/s est. INR157) on mix benefit from healthy 4G subs adds and revenue recovery from the COVID-19 impact.

* Subscribers saw a strong 13.9m jump, much better than 3.8m decline in the lockdown quarter (1QFY21). This is despite Bharti’s criteria for measuring inactive subscribers being more stringent (eliminates users inactive for >30 days) v/s peers RJio and VIL (inactive for >90 days).

* 4G subs adds were at 14.4m, compensating for the weak 2m adds in the last quarter (v/s an average 8m adds historically). July’20 TRAI data saw Bharti beat RJio subs adds for the first time, with 4m adds.

* Data traffic grew 5.5% QoQ to 7.6b GB (16.4 GB/user). Surprisingly, both total data traffic and usage/subs moderated after seeing a sharp jump in the last quarter due to lockdown. Bharti’s data traffic and data subscribers are less than half that of RJio. Moreover, the capacity gap is much smaller, highlighting better network experience and room for improvement.

* MOU remained stable (up 1%) at 1,005min.


Africa nos rebound higher than 1QFY21 loss; EBITDA up 14% QoQ

* Africa revenue/EBITDA jumped by a strong 13%/16% in CC. In reported currency, it increased 11%/14% to INR71.7b/INR32.5b.

* 9% ARPU recovery was seen (v/s 4% fall last quarter), with 4% subscriber growth.


Other segments present tailwinds

* Home revenue/EBITDA grew 2%/-3% QoQ to INR5.9b/INR3.4b with a rise in capex. The Home segment has seen a healthy 5% subscriber adds (129k), offset by pressure on ARPU (down 2%).

* Enterprise revenue/EBITDA grew 2%/5% QoQ to INR35.8b/INR13.4b.

* Passive revenue/EBITDA was up 8%/6% to INR17.7b/INR9.3b. This business – contributing 7%/8% of revenue/EBITDA – would not reflect in the consolidated financials as the merger with Indus would reduce Bharti’s stake to below 50%.

* Digital revenue / EBITDA, which normalized after the last quarter impact, grew 1%/6% to INR7.5b/INR5.4b.


Rise in capex slows FCF; net debt rises due to AGR

* Capex rose to INR67.9b v/s INR39.8b in 1QFY21; thus, FCF post interest stood at INR13.3b v/s INR36.1b in 1QFY21. With 1HFY21 capex at INR108b v/s the fullyear estimate of INR200b, there is a risk of upward capex revision.

* 4G base stations / towers saw strong 30k/5k adds to 537k/199k, apart from healthy ramp-up in fiber addition. Management indicated capex should moderate, which would be keenly observed .

* Net debt saw a big rise of INR234b to INR1074b related to AGR. Including lease liability of INR304b, net debt stood at INR1,378b, increasing annualized net debt to EBITDA to 2.9x on 2QFY21 EBITDA. This further increased interest cost by 22% to INR37.3b.


Key positives

* Massive EBITDA beat despite no price hike: The stock was a major underperformer in the last quarter, however earnings growth has been resounding. Consol rev/EBITDA jumped 7%/12% QoQ (9% beat); India mobile EBITDA grew 13% QoQ and 16% in the preceding two quarters, without a price hike.

* Quality 4G subs adds aid ARPU: India mobile added strong 14.4m subscribers (~5m monthly), the highest reported by the company (except the 3QFY20 disruption quarter) – historically, July’20 has been the best month at the industry level in terms of subscriber adds. This was reflected in the consistent ARPU increase of 3% to INR162. Gross subscribers too saw healthy 14m adds; recovery was higher than loss reported in the 1QFY21 lockdown quarter.

* Other segments present tailwinds: Africa saw strong 14% EBITDA growth, implying higher recovery v/s 1QFY21 loss. Home/Enterprise EBITDA, up -3%/5%, added healthy subscribers and is poised for healthy growth in the coming quarters.

* Superior network capacity: Despite robust data traffic volumes of 7.6b GB (with 16.4 GB/user), data traffic / subscribers are less than 50% of RJio levels. Moreover, the gap in network capacity is significantly smaller, thus highlighting a healthy network capacity and room for improvement. It has a healthy 537k base stations (closer to RJio), with the number of unique broadband towers also at a healthy 199k.



* High capex driving down FCF: Capex rose to INR67.9b v/s INR39.8b in 1QFY21; thus FCF post-interest slowed to INR13.3b v/s INR36.1b in 1QFY21. With 1HFY21 capex at INR108b v/s the full-year estimate of INR200b, there is a risk of upward capex revision.

* AGR liability hurts net debt: Both net debt and interest cost rose due to the inclusion of the INR234b AGR liability. Thus, net debt to EBITDA increased to 2.9x on 2QFY21 annualized EBITDA.


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