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Steady earnings despite lockdown; encouraging outlook

* Bharti Airtel (BHARTI) delivered healthy EBITDA growth of 5% QoQ on a consol basis (5% above est.), led by EBITDA growth of 5.1%/5.3% in the India Mobile / Africa businesses – despite subscribers/ARPU for the India business being impacted by the lockdowns. However, it had high capex toward network investments in India and paid dues towards a deferred spectrum liability for the spectrum acquired from the recent auction. As a result, it continues to post negative FCF and higher leverage.

* a) Subscriber recovery over June–July’21, b) the management indicating growth opportunities in the Enterprise and Digital verticals, and (c) flat to declining capex in FY22 (v/s a high spend in 1QFY22), underscores a healthy earnings and FCF outlook. We estimate a 21%/17% CAGR EBITDA growth for India Mobile / the consol business over FY21–23E, in line with the trend of 30% YoY growth seen in India Mobile, despite no tariff hikes. Maintain Buy.

Mobile India EBITDA up 5% QoQ (5% above est); 170bp margin improvement

* Consol. revenue was up 4.3% QoQ to INR268.5b (3% above est), led by a strong performance from the Africa business as well as a stable India Mobile biz.

* Consol. EBITDA was up 5.3% QoQ to INR129.8b (5% above est), led by robust margin improvement in the India Mobile business as well as a healthy Africa business.

* Reported net profit stood at INR2.8b. Excluding exceptional cost, net profit after minority stood at INR2.7b (est INR4.4b). This is a welcome change after the last few quarters of high exceptional costs.

* Mobile India revenue grew 1.6% QoQ (in-line), attributable to flat subscriber adds / ARPU, against 14–15m subscriber adds in the last three quarters (due to lockdown restrictions). However, June–July recovery appears strong at 3–4m, reconciling TRAI’s April–May’21 nos.

* Mobile India EBITDA was up 5.1% QoQ to INR70.3b. (5% above est), with robust 170bp margin improvement to 49.2% on lower network cost. However, adjusted for possible one-off gains, EBITDA was up 2–2.5%.

* Overall/4G subscribers remained flat/+5m v/s steady 14–15m adds over the last few quarters (possibly due to the lockdown restrictions), but should recover in the coming quarters. (RJio’s subs additions were much better at 14m, estimated to have come largely from JioPhone).

* ARPU at INR146 was up by INR1, impacted by free validity offered to lowARPU subscribers during the lockdown.

* Africa revenue/EBITDA growth was up by a strong 7.6%/8.3% QoQ to INR81.8b/INR39.3b in CC. In reported currency, growth stood at 7% to USD1,112m/USD903m, led by subs / ARPU improvement of 2%/7% QoQ (strong growth in Data and Airtel Money).

* Capex remained high at INR65.9b (INR241b in FY21). FCF post interest declined to INR17.1b (v/s INR22.7b QoQ) due to higher taxes.

* Despite healthy FCF, net debt (ex-lease liability) increased sharply by INR110b to INR1,265b. This was due to an increase in deferred spectrum liability towards the recent spectrum acquisition. Including lease liability of INR330b, net debt stood at INR1,558.5b, with net debt to EBITDA of 3.1x on a 1QFY22 basis.

Highlights from management commentary

* Recovery in sight: June-July subscriber and ARPU traction indicate strong and healthy recovery from the lockdown impact.

* Focus on premium subs: Airtel’s customer segmentation strategy stresses its focus on the top 50m customers in the market, of which 30m are already its users. These, along with 500m ‘Aspirers’, are high-ARPU customers that contribute 85–90% to the market and form its key focus set. The remaining 400m basic users are targeted for upgrades.

* Capex and 5G investments: FY22 capex is expected to trend lower v/s FY21; the higher capex in 1QFY22 was towards an advance for the spectrum acquired at the recent auction. It is well-prepared for 5G, with tests and trials being conducted in multiple cities. The government is planning a 5G auction next year, but there is no clarity on the spectrum pricing.

* Non-Wireless business: The Non-Wireless business (Homes, Payments Bank, and Enterprise) is poised for growth. Homes added a strong 285k customers, the Payments Bank business achieved breakeven with INR10b revenue, and the Enterprise business is gaining strong market share.

* Investments in Africa business: In addition to USD100m from Mastercard and USD200m from TPG’s RISE funds, the company announced an additional investment of USD200m in its Africa business from Qatar Holding LLC.

Valuation and view

* BHARTI’s superior execution quality is reflected in its strong performance over the last four quarters (consolidated EBITDA growth of 30% YoY despite no tariff hikes) as well as consistent subscriber and revenue market share gains.

* However, the key concern is the high capex intensity, which continues to leave limited FCF for any deleveraging possibility. The management indicated that FY22 capex should trend lower v/s FY21, thus improving FCF. The higher capex in 1QFY22 was towards an advance for the spectrum acquired at the recent auction.

* We expect an FY21–23E consol EBITDA CAGR of 18% on the back of 7% EBITDA CAGR in Mobile India. While the street has expressed concerns about the timelines of a potential tariff hike, we believe strong earnings growth is achievable even without a tariff hike.

* Bharti Africa is trading at EV/EBITDA of merely 3.7x (incl lease debt) on 1QFY22 annualized EBITDA. Adjusted for Airtel Africa’s recent ~11% stake sale in the Mobile Money biz to Mastercard and TPG Group at 11x, the rest of the Airtel Africa biz (including one-third from Data rev growing >20%) is valued at 2.8x on 1QFY22 annualized EBITDA. At CMP, Bharti India looks attractively valued at just 8.5x EV/EBITDA on FY23E basis.

* We see a potential re-rating upside in both the India and Africa businesses on the back of steady earnings growth. We value BHARTI on FY23E, assigning EV/EBITDA of 11x to the India Mobile business and 5x to the Africa business, arriving at SOTP-based TP of INR720. Our estimates do not factor in any upside from tariff hikes or sharp market share gains, potentially due to VIL’s eventual outcome of financial stress. Maintain Buy.

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