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A steady quarter of growth and cashflow

* Bharti reported a steady quarter with healthy 3% QoQ consol. EBITDA growth that translated into a strong FCF generation and deleveraging. These were missing in the last few quarters. The healthy growth was aided by India Mobile/Africa EBITDA growth of 5% each on the back of sound ARPU improvement (in line with RJio).

* Bharti’s EBITDA rose by >30% over FY19-22. We expect an 18% EBITDA CAGR during FY22-24 fueled by: a) 4G mix improvement, b) market share gains, and c) steady inroads into the non-wireless business (tariff hikes not factored in). All these factors are likely to translate into a strong >INR300b estimated FCF (post-interest) and deleveraging. Intensification of 5G-led capex in the near term would still keep its FCF strong. Maintain BUY.

India Mobile EBITDA up 5% QoQ (in line) on healthy 3% ARPU growth

* India Mobile revenue, at INR182.2b, grew 3.4% QoQ (in line) backed by healthy 3% ARPU growth. This was in line with Rjio’s 3.7% QoQ revenue growth, and above VIL’s 1.7% QoQ topline growth.

* EBITDA was up 4.6% QoQ to INR93.3b (in line). EBITDA margin improved 60bp to 51.2% with healthy 67% incremental margin. Surprisingly, despite diesel price rise, network cost wasflat for the last two quarters. Rjio saw 4% QoQ EBITDA growth, while VIL saw 7% QoQ growth (based on Pre IND-AS 116).

* ARPU at INR183 was up 3% QoQ in 1QFY23.

* Subscriber additions were modest at 1.3m v/s RJio’s 10m additions but healthier than VIL’s 3.4m decline. This was unlike the last quarter when Bharti was the only telco to add subscribers while RJio and VIL lost.

* Bharti’s 4G subscriber additions were moderate at 4.5m reaching 205m subscribers (2% QoQ growth), i.e., 63% of total subscribers. RJio/VIL added 7m/0.9m 4G subscribers, respectively.

Key highlights from the management call

* High proportion of mid-band spectrum should aid in accelerated 5G rollout on non-standalone network, covering 5,000 towns by Mar'24. The threeyear capex should be at the same rate but may see some increment in the next 18 months.

* Management reiterated its expectation of ARPU improvement to INR200 and further to INR300 from the current ARPU of INR183.

* Lesser launch of low-priced smartphones in the recent past has reduced industry 4G subscriber additions. This should reverse in the near term.

Valuation and view

* The stock is trading at 8x consolidated FY23E EV/EBITDA with India business trading at slightly below 10x. In the past, being an annuity business, Bharti has garnered low valuation multiple.

* Concern of intensified 5G-led capex has put pressure on the stock in the last few months. However, the potential FCF of >INR300b may still remain strong if the capex grows in the near term.

* We expect better valuation multiple for the stock given: a) a consistent 20% growth opportunity, b) low concern on 5G, and c) the company turning profitable with high 50% plus growth due to operating leverage.

* The INR160b uncalled Rights issue and INR52b investment by Google should offset Bharti’s investment in 5G over the next two years.

* We see potential upsides for both India and Africa businesses aided by steady earnings growth. We value Bharti on FY24E, assigning 11x EV/EBITDA to the India Mobile business and 5x to the Africa business, and arriving at our SoTPbased TP of INR910. The ensuing earnings growth, 5% FCF yield, and ~25% deleveraging augur well for the stock. Maintain BUY.

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