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Analyst meet: Not just wireless, growth opportunities galore in other areas

We attended Bharti’s Analyst day (link for the presentation) where the management focused on highlighting the huge growth potential beyond the wireless business — i.e., in Home Broadband business, Enterprise business and various Digital opportunities (Payment bank, Data centre and other Digital assets). On the wireless business, the management reiterated its medium-term ARPU target of INR 300; it expects ~40mn feature phones to upgrade to smartphone p.a., which will continue to drive APRU growth. The management expects the 5G spectrum auction by May-Jun’22 but reiterated that it doesn’t expect a significant jump in capex in the next 2-3 years due to the 5G roll-out

The company expects subscriber growth in the Home Broadband business at +15% CAGR facilitated by rapid expansion via the LCO model. Further, in the Enterprise business, it expects industry’s revenue to grow at 15% CAGR led by new emerging products (like Data Centre, NaaS, IOT, Security, CPaaS, Cloud); it also sees significant scope for market share gains. The management discussed various Digital assets in detail and highlighted that the Street is not factoring in their revenue growth potential. It plans to list Payment bank and Data centre business in the next few years; however, it has no plan to list Enterprise and FTTH business as it is part of the core integrated Telecom business. We maintain BUY on Bharti (TP of INR 900) as we expect tariff hikes to be more frequent, going forward, with Jio more willing to participate in tariff hikes given that it also needs to start focussing on profitability

Reiterates medium-term ARPU target of INR 300; MBB upgrades to continue to drive APRU growth: The management reiterated its medium-term ARPU target of INR 300 to ensure that the industry earns a reasonable 15% RoCE (vs. 6-8% currently). It shared limited details on the near-term tariff hike but reiterated that Bharti was willing to lead the tariff hike in future as well while ensuring that its tariff remains competitive to prevent any major subscriber loss. The management expects ~40mn feature phones to upgrade to smartphone p.a. – so 200mn feature phone users (out of the existing 350mn feature phones) are expected to upgrade to smartphones by FY26. However, the recent rise in smartphone cost has increased the replacement cycle by 6-7 months (from 30 months to 36-37 months); this could probably lead to moderation in upgrades to smart phone to ~40mn in CY22 (vs. ~50mn in CY21). The company reiterated that its strategy continues to be to focus on: a) quality customers; and b) provide brilliant experience. Further, it highlighted ~20% reduction in delivered cost/GB in the last 2 years by using leaner towers (which use AI to switch off the towers at times of low usage).

5G spectrum auctions likely by May-Jun’22; don’t expect significant jump in capex in next 2-3 years: The management opined that the 5G spectrum auction is likely by May-Jun’22 given that TRAI is likely to submit its recommendations by end-Mar’22 though it reiterated that a significant cut in the 5G spectrum price is critical. Further, it reiterated that Bharti’s capex run-rate in the next 2-3 years is likely to be similar to that seen in the last couple of years as its core network is 5G ready; further rise in 5G capex will be offset by a gradual decline in 4G capex. However, the management highlighted the possibility that a major part of 5G capex could be front-loaded in the first year of 5G launch if competition (Jio) goes aggressive on the 5G roll-out (in which case Bharti may also do the same; otherwise, Bharti will prefer a gradual 5G roll-out over 2-3 years as it expects 5G devices to constitute 20-25% of total devices only by Mar’24 vs. 3-4% currently

Strong growth potential in Home Broadband and Enterprise business: The Homes broadband business (FTTH) is likely to see the subscriber base grow at a healthy 15% CAGR to 40mn+ by 2025 (vs. 27mn in 2022) facilitated by rapid expansion via the LCO model. The management plans to expand the FTTH business to 2,000 cities with 30mn home passes in the next 3 years (vs. 672 cities and +4mn home pass achieved in 3QFY22). Further, in the Enterprise business, the management expects industry revenue to grow at +15% CAGR led by new emerging products (like Data Centre, NaaS, IOT, Security, CPaaS, Cloud); it also expects significant scope for gain in market share. Further, there is huge growth opportunity in the Data centre business – though it is capex intensive in nature it has significant monetisation opportunities.

Huge opportunity in various Digital businesses; plans to list Payment bank and Data centre business in next few years: The management discussed various Digital assets in detail and highlighted that the Street is not factoring in their revenue growth potential. It highlighted that it has 184mn MAU (monthly active users) across various digital assets with: a) 120mn MAUs for Airtel Thanks, and b) 71mn MAUs for Wynk. Further, Airtel Payment bank has got +122mn customers and was profitable in FY22 (achieved breakeven in July’21); GMV grew 9x in 5 years (to +INR 370bn GMV per quarter) while revenue grew at 58% CAGR (and 29% CAGR on users) – annualised 3QFY22 revenue was at +Rs10bn. The management plans to list Payment bank and Data centre business in the next few years; however, it has no plans to list Enterprise and FTTH business as it is part of the core integrated Telecom business.

Intent continues to be to monetise stake in Indus at right time; recent stake purchase to stabilise shareholding of Indus: The management highlighted that Bharti continues with its strategy to monetise its stake in Indus Tower (Indus) at the right time. However, its recent decision to purchase stake in Indus is aimed at stabilising the shareholding of Indus given its strategic importance to Bharti. But the management didn’t comment on what’s the right stake to own in Indus (whether it’s 51% or lower) before it decides to monetise the same. Later, Bharti announced that its 4.7% stake purchase in Indus from Vodafone Plc. will be executed at INR 189/share as per the agreed formula, amounting to total outflow of INR 23.9bn, upon fulfilment of all conditions precedent as per the agreement. Bharti currently holds 41.73% stake in Indus; hence, its stake will rise to 46.4% after this transaction.

Reiterate BUY with TP of INR 900 as we expect tariff hikes to be more frequent: We reiterate BUY on Bharti (TP of INR 900/share) as we believe tariff hikes are likely to be more frequent, going forward, with Jio more willing to participate in tariff hikes given that it also needs to start focussing on profitability (and not just on subscriber additions) as it prepares for its potential IPO in the next 1-2 years. In this scenario, we believe the sector could see significant re-rating, and Bharti could gain significantly from that given the sticky nature and premium quality of its subscribers, ensuring that tariff hikes flow through to ARPUs.

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