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Market share gain across businesses

Bharti Airtel’s (Bharti) Q3FY21 performance was exemplary with strong execution and market share win across mobile, FTTH, enterprise and DTH. We are impressed by its 4G and postpaid sub additions and improvement in customer engagement metrics vs peers. Also, higher 4G sub-base will enable Bharti to better translate tariff hike into ARPU whenever the hike happens (we believe it is matter of ‘when’ and not ‘if’). It gives us strong confidence in higher than assumed terminal revenue market share for Bharti. We reckon 100bps higher market share adds Rs25-30/sh to Bharti’s fair value. We have not incorporated merger of Indus Towers and we have maintained our estimates. We raise our target price for the stock to Rs723 (from Rs655) on rollover of valuation to FY23E; and value India at 10.5x EV/EBITDA (vs 11x earlier)

* India mobile performance impresses: 1) Bharti’s subs rose by 14.2mn and it has mostly come on 4G; 2) its postpaid sub-base grew by a strong 0.7mn (5% QoQ); 3) 4G subs net add at 12.9mn implies continuation of Bharti’s higher incremental market share in 4G smartphone sales (this conversion is helping organic ARPU growth); 4) customer engagement was strong – data usage and minutes grew 10.7% and 7.4% QoQ respectively; and 5) incremental India mobile EBITDA margin was at 60%.

* Market share gain across segments: 1) India mobile revenues grew by a hefty 6.8% QoQ / 32.4% YoY to Rs148bn driven by sub growth of 4.4% to 308mn, while ARPU rose 2.4% to Rs166. Incremental revenues were Rs9.5bn (close to the market leader); thus Bharti gained market share. 2) Bharti added highest subs (0.2mn) in FTTH and 1.5mn home-pass. Number of cities covered has expanded to 219 (added 120 cities). It plans to reach 1,000 cities through the partnership route, and is also converting its copper fibre network to OFC. 3) Airtel business has grown 9.2% YoY, which is ahead of peers. 4) Revenue growth in Africa too was at 19.5% YoY in USD terms (likely ahead of industry).

* India EBITDA grew 7.3% QoQ / 44% YoY at Rs86bn driven by India mobile EBITDA growth of 9.6% QoQ / 61% YoY to Rs64bn, with incremental EBITDA margin at 60%. Non-mobile EBITDA rose 1.4% QoQ to Rs22bn. Africa EBITDA rose 18.4% QoQ / 27.4% YoY to US$502mn (vs our estimate of US$427mn).

* FCF (post-interest) was Rs12bn. Bharti’s operating cashflow post-interest was Rs84bn (vs Rs82bn in Q2FY21). Working capital change was positive at Rs4bn and cash capex was Rs76bn (including spectrum payments); hence FCFE was at Rs12bn. Net debt increased by Rs76bn to Rs1,1150bn (ex-lease liability) on deconsolidation of Indus, purchase of additional stake in Indus (Rs30bn) and reclassification of provisions (Rs14bn). Company sees spectrum portfolio gap in sub-GHz for a few circles, and may buy renewal 1800MHz or 2300MHz spectrum based on capacity requirement. It expects 5G capex to be more linear and correspondingly reduce 4G capex keeping the total capex flattish. Bharti considers its network prepared for 5G launch on radio, transport and core; and new radio deployment would be done only in spectrum band (3500MHz).

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