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India ARPU takes a mild breather; underlying fundamentals intact

* Bharti reported in-line EBITDA, but ARPU of Rs145 missed our estimate by ~1.8% (adjusted for IUC and lesser number of days in Q4). This indicates a deceleration in the mix improvement-led ARPU uptick that has been seen over the last two quarters.

* Data subscriber addition momentum sustained with 13.9mn additions, boosting data subs base to 58.7% (52.4% in FY20). Healthy performance of enterprise and home broadband segments continued, with the latter seeing the highest customer additions, yet again.

* Market share gains across the business segments reflect the strength of the underlying customer winning strategy. FY22 capex is expected to be similar to that of FY21, while the composition of it will change with spends on transport capex (ahead of 5G launch).

* We keep our estimates largely unchanged. We expect a tariff hike in H2FY22. This is crucial for fast-paced balance sheet deleveraging, in turn, driving next leg of re-rating for the stock. We maintain Buy with a SoTP-based TP of Rs686.

Subscriber additions surprise positively; one-offs aid PAT again:

Consolidated revenues dipped 2.9% qoq and missed our estimates by 3% due to higher-than-expected impact stemming from the absence of IUC revenues which contribute ~9% of India wireless revenues. However, EBITDA was in line due to lower access charges. Margins expanded 244bps sequentially. Net exceptional gain of Rs4.4bn, along with related tax benefit and deferred tax assets, restricted the decline in PAT at 11% qoq.

In the non-wireless business, the enterprise segment performed well and topped our estimates, with EBITDA margin expanding by 145bps qoq. Although home broadband EBITDA grew 6%, growth was curtailed due to ARPU decline, attributable to the residual impact of lower-priced plans. Data volumes rose 9% sequentially.

Outlook:

The company has outlined its strategy for enterprise business to gain customer wallet share and new client additions in non-connectivity segment, which has an addressable market size of Rs500bn. Moreover, it is targeting 25mn home passes in home broadband business over the next 2-3 years, driven by ongoing LCO partnership expansion and entry into new markets. Going ahead, tariff hike in India mobile is key for fast paced deleveraging leading to next leg of re-rating. Considering the pandemic situation, the likelihood of a hike in H1 is slim; hence, we are expecting it in H2FY22.

In the event of a postponement or a lack of a tariff increase, the FCF generation will get restricted. That said, a lack of tariff hike could also potentially pose a huge risk to VIL’s financial viability and impending fund raise, resulting in favorable market structure for Bharti and Jio. Key risks: 1) adverse regulatory regime; 2) delays in tariff hike; 3) currency depreciation in the African market; 4) market share loss in mobile business and 5) sooner-than-anticipated 5G capex.

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