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Why a tariff hike delay may structurally benefit Bharti

The recent weakness in Bharti’s share price seems to be primarily driven by concerns around potential delay in a tariff hike in the India wireless business (due to competition from Jio and government inflation concerns as we head into a critical election phase over the next 18 months) amidst a high capex phase as telcos aggressively roll-out 5G pan-India. There is no doubt that the industry needs significant tariff hikes in the medium to long term. Though a tariff hike delay for the next 12-18 months can’t be ruled out, we believe such as delay could be structurally positive for Bharti (and Jio) as this will: a) expedite the transition to a duopoly market by further deterring Vodafone Idea’s (VIL) fund-raise plans (VIL needs ARPU to jump sharply to INR 164 in FY24 and further to INR 377 in FY27 vs. INR 131 in 2QFY23 to meet its payment obligations) and significantly boost subscriber (subs) market share for Bharti (and Jio), and b) strengthen pricing power for Bharti (and Jio) to enable them take frequent tariff hike to get to its longterm ARPU target of INR 300 (enabling telcos to earn a respectable RoCE of ~15%). Our analysis suggests a potential upside of ~INR 70/share to our base case TP of Bharti (of INR 940) assuming 50% probability of a duopoly market and Bharti garnering ~110mn subs from VIL (i.e., ~48% of VIL’s total subs) without any ARPU dilution. However, a tariff hike delay in FY24 could mean a 2-3% cut in our FY24 EBITDA while impact on our DCF-based TP will be limited to only ~INR 10/share (or 1%).

At CMP, Bharti’s India wireless business is trading at implied ~7.5x FY24 EV/EBITDA vs. ~10x implied as per our base case DCF valuation (vs. global peers trading at 6-8x); we believe Bharti’s India wireless business should trade at a significant premium to global peers given the structural ARPU growth story with industry consolidation largely behind us. As highlighted in our Nov’22 note, we expect a structural uptrend in industry ARPU driven by the future investment needs – the industry requires an ARPU of INR 256-285 in the next 3-5 years for a pre-tax RoCE of 12-15% to justify capex; this is likely to come via a mix of: a) tariff hikes, and b) continued MBB upgrades and rise in data usage. We maintain BUY (unchanged TP of INR 940) as we expect Bharti’s India wireless ARPU to grow at a CAGR of ~10% over FY22-28 to INR 280 in FY28 (vs. INR 190 in 2QFY23) driving ~15% CAGR in consolidated EBITDA. The key risk is the potential entry of Adani into the consumer mobility business, which could disrupt the structural ARPU growth story and pose a threat to subs market share.

* What could lead to a potential delay in tariff hike and what could be its negative impact on Bharti? The recent weakness in Bharti’s share price seems to be primarily driven by concerns around potential delay in a tariff hike in the India wireless business amidst high capex as telcos aggressively roll-out 5G pan-India. The rationale for such as delay could be: a) rise in competitive intensity from Jio in its effort to get to its 500mn subs target (vs. 428mn at end-2QFY23), and b) inflation continuing to be a key concern for the government (telecom tariff weightage in CPI basket being 1.84%) as we enter a critical election phase over the next 18 months (Exhibit 1). In our base case, we have assumed Bharti’s India wireless ARPU to grow by ~8.5% in FY24 (at INR 206) and by 7% in FY25 (at INR 221) assuming: a) MBB upgrades driving ~4% growth in ARPU; and b) tariff hike driving the balance 4-5% growth in ARPU. Hence, a delay in the tariff hike in FY24 will result in our FY24 ARPU estimate declining to INR 197 (down 4-5%), which means a 2-3% cut in our FY24 EBITDA estimate while the impact on our DCF-based TP (of INR 940/share) will be limited to ~INR 10/share (or 1%) — Exhibit 2.

* What could be the positive impact of a potential delay in tariff hike by 1-2 years? We believe a delayed tariff hike could be structurally positive for Bharti (and Jio) as this would: a) expedite the transition to a duopoly market (by further deterring VIL’s fund-raise plan) and could, hence, significantly boost subs market share for Bharti (and Jio), and b) strengthen pricing power for Bharti

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