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Multiple growth levers in place; analyst meet takeaways

Bharti Airtel (Airtel) hosted an analyst meet underscoring three key things – a) multiple growth engines, b) premiumization and digital shift, moving away from a dumb pipe and c) its network capabilities and 5G preparedness – biting the bullet.

Further, there could be monetization/value unlocking opportunities in a few businesses. We certainly believe the stock has multiple levers. The key highlights of the analyst meet are furnished below:

Multiple growth opportunities beckon

Airtel’s mobility business has multiple ARPU levers supported by a favorable market construct, tariff hikes and a shift to smartphones from feature phones. However, the non-mobility revenue which has achieved 28% share currently (v/s 21% in FY15), too has strong growth levers. The Homes business is in a land acquisition state, targeting 2.5x growth in home passes over FY22-25E. The B2B-Airtel business should benefit from the 55% jump in market size to INR980b in FY25E, with new emerging segments in CPaaS, and IoT. The Airtel Payments Bank achieved sizeable scale with a network of 122+ customers and 8m+ merchants, using its own subscriber ecosystem. This addresses the concern of high customer acquisition cost and thus turning breakeven

Premiumization and digital shift, moving away from a dumb pipe

The mobility business has led to customer premiumization at the higher and mid-market ends through upgrades of Airtel Black campaign, Postpaid, fiber and converged entertainment (OTT + linear) products that would drive ARPUs and increase customer wallet share as well as improve stickiness. The digital assets are leveraging its quality subscribers to create scale – Thanks / Wynk apps with MAUs of 102m / 71m (up 2.5x-3x in ~two years), respectively, and Payments Bank MTU of 32m (4x in ~two years). These have allowed Airtel to create multiple value unlocking opportunities in: a) Ad tech, having a strong scale of 184m MAUs and 135+ brands, b) Airtel Payments, having 500m customers and c) Digital market places, viz., Wynk, Xstream, loans and credit cards, and hence, moving away from a dumb pipe

5G – biting the bullet

Our discussions with regulatory experts and equipment manufacturers indicate that 5G is round the corner with possible auction by 2Q-3QFY23E along with possibilities of reduced spectrum pricing. However, Airtel showcased its preparedness and inclination to drive the technology change through: a) 5G trials, b) backhaul fiberization and infra readiness and c) device ecosystem developments. Importantly, investments on 5G may be a function of timing, but over 3-5 years capex may remain moderate as a % of revenue, given that only 5G radio capex may see lumpiness, while other components such as core, transport, non-mobility and 4G capex may be on the wane.

Airtel Payments Bank – a profitable unicorn with a huge opportunity

The Airtel Payments Bank, an unusually profitable venture, has an advantage of using Airtel’s large 350m subscriber ecosystem through Thanks app that feeds a strong 122m users and 32m MTUs garnering GMVs of 370b+ with INR10b+ revenue. These allow it to generate revenue not just through the conventional transaction route but also through cross selling of loans, FASTags, and bundle subscriptions along with interest revenue. Leveraging the existing subscriber ecosystem has allowed the bank to save markedly on customer acquisition costs unlike the industry scenario. This has managed to turn the bank profitable. It should now be on a strong growth trajectory and may list separately in the stock market over next few years.

Material upside potential from multiple growth levers; Reiterate BUY

Airtel is valued at 10x on India Mobile and 5x on Africa Business EV/EBITDA on FY24E factoring in ~20% EBITDA CAGR over FY22-24E. We have built in 15% ARPU increase over FY22-24E primarily from mix benefit without factoring in any incremental tariff hikes. We see material upside potential on the stock from: a) incremental ARPU improvement opportunity through market share gains, tariff hikes and customer upgrades, b) growth in non-mobility businesses including value unlocking in multiple digital/enterprise segments and c) re-rating of valuation multiple backed by improving ROCE/FCF profile due to ARPU growth and higher share of non-mobility business, raising customer stickiness. While 5G-led increase in capex intensity remains a red flag, our channel checks indicate lower spectrum pricing as well as moderate capex as a % of revenue over 3-5 years coupled with the INR160b uncalled Rights issue will ensure that FCF and net debt numbers would be well managed. Maintain BUY with a TP of INR910, implying 28% potential upside.

Opportunities galore

Mobility business

Industry structure: Market reduced to four players from eight players; Airtel is competitively well placed to gain market share.

ARPU opportunity: India, at USD1.9/customer, is much below the majority of global economies. The ARPUs are very low and should reach INR200-INR300, which will need a few more rounds of tariff hikes over the next few years. In India, postpaid is merely 4% of the total subscribers, which is much lower than most economies. Airtel has added 3m customers in postpaid over the period. At present, Airtel has USD2 ARPU with 6% ROCE. At USD3.3, its ROCE will be 20%. This could generate incremental revenue of INR330b and INR280b of EBITDA.

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