Market share gain an upside risk
Bharti Airtel’s (Bharti) incremental AGR (including NLD) and incremental EBITDA have shown healthy improvement with market shares starting to increase. Company’s incremental AGR and incremental EBITDA (YoY) gaps vs RJio’s were Rs14bn and Rs7bn in Q3FY20, respectively adjusted for net-IUC. The gaps have significantly narrowed in past seven quarters, and we expect them to further shrink going forward, We see upside risk to Bharti’s market share on acceleration of its network investment, particularly in challenger circles. Our analysis shows that for every 100bps higher market share for Bharti, its equity value rises by Rs182bn, or Rs33/sh (5% of our SoTP-based value). Maintain BUY with an unchanged target price of Rs610.
* Bharti’s incremental AGR (including NLD) and incremental EBITDA have shown remarkable improvement. Bharti incremental AGR (including NLD) YoY has shown significant improvement from a negative Rs24bn in Q4FY18 to a positive Rs15bn in Q3FY20, an improvement of Rs39bn. Adjusted for net-IUC, AGR gap has narrowed to Rs14bn for Bharti against RJio and we expect it to further shrink in coming quarters. Despite decline in AGR, Bharti has broadly maintained its market share while VIL continue to show negative incremental revenues. Bharti’s AGR (including NLD) market share was 31.6% in Q3FY20 (vs 31.8% in Q4FY18).
Incremental EBITDA has improved from a negative Rs18bn in Q4FY18 to a positive Rs7bn in Q3FY20. We expect Bharti’s EBITDA expanding much faster in the next few quarters due to the benefit of tariff hikes taken in Dec’19. Adjusted for net-IUC, the company’s incremental EBITDA gap against RJio has narrowed to Rs7bn. We see this gap fast reducing on rising incremental revenues for Bharti. Company’s EBITDA market share is still 26.3% among the top three operators, and we see huge scope for improvement in this parameter.
* Market share has upside risk. Bharti’s market share has upside risk vs consensus estimate due to: 1) the huge 4G network expansion planned by it over next 24 months, particularly in nine circles where it traditionally was a challenger, or has recently lost huge market share. Network expansion should help Bharti increase its 4G coverage, which should result in higher incremental market share; and 2) we believe Bharti will be a net gainer from SIM consolidation.
* 100bps rise in market share implies Rs182bn (Rs33/sh) rise in equity value for Bharti. Our analysis shows that every 100bps gain in market share by Bharti can potentially add Rs182bn to its equity value, or Rs33/sh (5% of our SoTP based value). However, we believe rising market share can lead to rerating in valuation multiples, and the upside could be higher than Rs33/sh.
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