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Insulated from COVID woes

Expect steady growth irrespective of price hike

BHARTI has been an underperformer despite elevated expectations around business potential/growth. In this note, we highlight our key arguments as to why we believe it offers a good risk-reward equation

 Despite the COVID woes, Bharti has delivered estimated EBITDA growth of 28% and the trend should continue in FY22E with estimated consol. EBITDA growth of 21%.

 This should be on the back of steady market share gains; we think, irrespective of a tariff hike, earnings growth should continue to be strong.

 FCF generation and deleveraging have been a concern for the past 4–6 quarters. However, we are now seeing a more focused approach to drive healthy INR233b FCF (in FY23E) and corresponding deleveraging benefits.

 The stock looks attractively valued at EV/EBITDA of 6x – as it does not capture the potential tariff hikes and garners 8% FCF yield on an FY23 basis. Maintain Buy, with TP of INR720.

Limited COVID impact

In the past year, even as most businesses were severely impacted by the COVID-led lockdown, Bharti’s consolidated revenue/EBITDA is estimated to have grown 17%/28% in FY21, with the India Wireless business revenue/EBITDA up ~21%/44%. Wireless EBITDA grew 3% QoQ even during the strict lockdown in 1QFY21, when telcos were offering free validity to low-ARPU subscribers – this underscores the inherent strength of the company.

Thus, the company does not face any imminent risks from the ongoing second wave of COVID. The lack of physical recharges / new SIM card availability in the ongoing lockdown may have a minimal impact on the company as an increase in the number of online recharges (50% currently estimated) and data subscribers should offset the impact (as seen in the previous lockdown).

Steady market share gains; price hikes irrelevant

Although the Telecom industry awaits a price hike, since the previous one taken about five quarters ago, Bharti has delivered steady revenue/EBITDA growth (of 10%/35% YoY in 4QFY21E) in the Wireless business – on the back of healthy market share gains. Subscriber/revenue market share gains of 180bp/550bp (33.7%/35.3%) over 9MFY21 are commendable, with gross/active subscribers adds of 3%/4%. Wins in the 4G market have been a key factor in improving ARPU – it added 30.1m 4G subscribers of the total 56.8m industry adds, implying incremental market share of 53%.

One of the key factors is its superior data experience, reflected in its data usage, which is just one-third that of RJio’s despite the similar network capability. Thus, irrespective of a price hike, Bharti has the ability to deliver 2–3% ARPU growth on average and 1–2% subscriber adds quarterly, which should drive annual revenue growth of 12–13%. Assuming 65% incremental market share, EBITDA should grow at a 21% CAGR over FY21–23E.

FCF generation to improve In the last six quarters, despite healthy

EBITDA growth, Bharti has been unable to garner high FCF generation – which could be utilized to deleverage the balance sheet. The exponential data growth during the lockdown required intensification of the network, which kept FY21E capex high (similar to FY20 levels), contrary to the management guidance for a capex reduction. Additionally, Bharti spent a) INR28.8b for 4.94% additional stake in Indus, b) INR31b for the buyback of Warburg Pincus’ 20% stake in the DTH business, and c) INR187b (INR70b in 4QFY21 as an upfront payment) on the spectrum auction.

Furthermore, continued one-offs/extraordinary provisions of INR164b resulted in a net loss position in FY21. This has been a key dampener as the high EBITDA growth has not reflected in the form of FCF improvement or the return of net profit. However, going forward, capex should reduce as more spectrum acquisitions would reduce site additions. Moreover, with the management’s focus on FCF and deleveraging, it should refrain from utilizing OCF in other avenues. Subsequently, we expect FCF (post-interest) at ~INR233b in FY23 (at EBITDA of INR639b).

RoCE turning relevant

Over the last 10 years, BHARTI’s RoCE was barely in the mid-single digits due to a hyper-competitive landscape and its continued capex for technological advancements, spectrum renewals, and investments in Africa. Now with benign competition and the limited possibility of a new player’s entry, ARPU could be determined to at least cover WACC. In our view, at EBITDA of INR639b in FY23E, BHARTI could garner pre-tax RoCE of ~12%.

Risk of capex intensity

We do not see any material investments in 5G to happen over the next 2–3 years as a) new use cases for 5G are few and far between and b) the incremental consumer benefit is limited – as data speed could be easily dealt with through 4G investments. Furthermore, unlike in the past – when 4G investments were inevitable due to the entry of a new player – we do not see any pressure on technology or spectrum investments.

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