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ARPUs improve QoQ on price revision; BUY

Our view

The 2QFY22 consolidated operating profits at Rs 138bn (+25% YoY; +6.4%QoQ) stood broadly in‐line with our and street estimates, as QoQ higher ARPU and sequential subscriber addition drove profitability. Driven by addition of 8mn 4G subscriber, the overall India subscriber base improved by 3.6mn QoQ. Selective price intervention in entry level pre‐paid and few post‐paid plans, helped improve ARPU to 153 (from 146). BHARTI maintains that current ARPUs are not adequate to generate meaningfully return on capital and expects plan prices/ARPU to improve eventually. We accordingly model for higher mobile ARPUs of Rs 169 and Rs 183 moving into FY23e and FY24e and recommend a BUY rating with a target price of Rs 820/sh.

Result Highlights

* Revenue: Bharti’s consol. revenue at Rs 283.3 bn (+13% YoY; +5.5% QoQ), stood in‐line with estimates. The YoY growth was largely driven by 10% growth in India mobile customer base to 323mn and 7% increase in ARPU to Rs 153. On sequential basis as well, subscriber base improved by 2.2mn subscribers, despite increase in price for entry level pre‐paid plan to Rs 79 (from Rs 49).   

* Operating Profits: EBITDA at Rs 138.1bn, stood higher by 25% YoY and 6.4% QoQ. A sequential as well as YoY improvement in ARPU, coupled with addition of 8mn 4G subscribers, aided profits. The EBITDA margins stood at a strong 49%.  

* Profit/(Loss) After Tax: On after tax basis, Bharti Reported an adjusted Profit of   Rs 12.7 bn vs. 153mn in 2QFY21 and Rs 9.1bn in previous quarter

* Exceptional Item: The company reported an exceptional gain of Rs 7.2mn during the quarter on sale/transfer of spectrum. Adjusted for taxes, the gain stood at Rs 5.4bn

* Customer Base: The total customer base on consolidated basis stood at 480mn a net addition of 40mn customers on YoY basis and 6mn on QoQ basis. Of the above the India mobile subscriber was 323mn, with an addition of 30mn subs on a YoY basis and 2.24mn on QoQ basis.

* Debt: The Consolidated net debt (excluding lease obligations) stood at Rs 1,313.4bn as on Sep 30, 2021 compared to Rs 1265.1 bn as on June 30, 2021. Consolidated net debt for the company including leases stood at Rs 1,662.4bn (Rs 1,596.2 bn end of 1QFY22). The Net Debt‐EBITDA ratio (annualized) for the quarter stood shade better at 2.96x (1QFY22: 3.03x ). 

Valuation

We value BHARTI on SOTP basis at Rs 820/sh, implying a target EV/EBITDA multiple of 7.3x FY24e, vs 6.3x as implied by CMP. Consolidation of telecom market in India, and stabilization of 3+1 structure would eventually lead to imrpovement in ARPUs, in our opinion. In addition BHARTI is rapidly expanding and growing its asscociated business segemnts, which should incrementally aid earnings traction and debt reduction. We accordingly estimate an operating earnings CAGR of 19%, backed by continual subscriber gain and ARPU improvement. 

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