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Enterprise business - under-appreciated; unleashing digital opportunity

In continuation to our deep diving into enterprise business (link), we are evaluating Bharti Airtel’s (Bharti) enterprise business housed under Airtel Business. Airtel Business is under-appreciated considering it is the most profitable business for Bharti with ROIC of 35-40% in the past three years and EBITDA CAGR of 13% over FY17-21, which underpins our optimism for the business. Airtel Business will benefit from the shift to new sales model for tapping SME opportunity which is adopting digital solutions like never before. Considering SME buy-bundled services unlike customised solutions by large enterprises, Airtel benefits from existing relationships and launch of new digital platforms. Nxtra (data centre and cloud offerings) has grown >3x over FY18-20, and is likely to grow over >3x in next 3-4 years. Digital platforms like Airtel IQ, Airtel Secure and Airtel IoT open doors in new-age digital solutions which are growing fast >30-50%. We see a significant upside risk to our growth estimate of 6.5% CAGR for enterprise revenue (FY21-23E). Reiterate BUY on Bharti.

* Airtel Business is the most profitable business for Bharti.

Airtel Business contributed 14% to consolidated revenue and 12% to EBITDA in FY21. Airtel Business revenue has grown at CAGR of 7.1% over FY17-21 to Rs144bn and EBITDA has grown at 12.9% CAGR to Rs55bn. It has generated FCF (EBITDA minus capex) of Rs132bn in past five years; in past three years ROIC has been 35-40%. Airtel Business offers products and services including voice, data, collaboration, cloud, data centre, security, IoT, network integration, managed services, and digital services. Airtel Business has sub-sea cable network of 365k-Rkms, covering 50 countries. In the past two years, Airtel Business’ market share has grown by 800bps to 31%, which establishes its prowess.

Company changing business model to capture huge SME opportunity.

Airtel Business gets 80% revenue from 20% customers and it sees huge opportunities in farming and hunting. It has made changes in business model – 1) in-source SME sales force (earlier outsourced) which should improve SME sales channel; 2) building omnichannel digital capabilities for customer acquisition and servicing; 3) entered new areas including data centres, Airtel Secure, Airtel IQ, Airtel Cloud and Airtel IoT; and 4) revamped teams’ incentive structure with targets for hunting and farming.

Strong presence in fast growing India market.

Airtel Business’ revenue grew at CAGR of 6.5% compared to 0.6% CAGR revenue growth for TCom. Airtel Business India non-voice enterprise revenue can continue to grow faster on higher contribution from new segments of security, cloud and cloud communications. It is also a beneficiary of IoT adoption and rollout of private network by industries for automation. We see Airtel’s India non-voice enterprise revenue growing in mid-teens at least over the next few years.

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