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Growth steady; gaining market share; await a pickup in deleveraging

* Bharti posted a strong 2QFY22, with consolidated EBITDA up 6% QoQ (above our estimate) on India Mobile/Africa EBITDA growth of 6%/5%, led by a 5% increase in India Mobile ARPU. This has continued to drive FCF, post interest, despite higher capex. The only dampener was the steady rise in net debt, which should fall with rising FCF and proceeds from the rights issue.

* The management is making the right noise in terms of steady market share gains, premiumization, cross selling through digital initiatives, and healthy inroads in non-Mobile revenue streams like payments bank, Home, and Enterprise segments. It expects 20% consolidated EBITDA CAGR over FY21- 23E, along with tariff/consolidation to drive FCF/deleveraging. We maintain our Buy rating.

All segments fire – Mobile India EBITDA up 6% QoQ

* Consolidated revenue grew 5.5% QoQ to INR283.2b on strong performance across segments, particularly the India business. 

* Consolidated EBITDA grew 6.4% QoQ (in-line) to INR138.1b on healthy allaround revenue growth and 330bp margin improvement, led by the nonWireless India business.

* Reported net profit stood at INR11.3b. Excluding exceptional costs, net profit after minority interest stood at INR5.9b (est. INR6.8b). This is a welcome change after the high exceptional costs in FY21.

* Mobile India revenue grew 6.2% QoQ to INR151.9b. It is continuing to gain market share, with a strong 5% ARPU growth. Average monthly subscriber additions have slowed to sub-1m (v/s 3-4m in FY21) due to the high churn on account of the tariff increase in its low price plans.

* Mobile EBITDA rose 6.2% QoQ to INR74.7b, with margin flat at 49.2% on higher network/employee cost, led by an increase in diesel cost and steady site addition. RJio saw revenue/EBITDA growth of 4% each QoQ.

* ARPU rose 5% QoQ to INR153. Subscriber additions stood lower at 2.2m v/s 12-13m in FY21 due to: a) tariff hikes, which has increased the churn to 3% from 2.8% QoQ, and b) SIM card consolidation in the market, which is driving ARPU more than subscriber additions.

* Home revenue/EBITDA saw a 9%/17% QoQ growth to INR7.1b/INR3.8b (strong beat), with a strong 360bp margin improvement. Subscriber additions have jumped 64% to 468k, taking its overall subscribers to 3.8m (14% QoQ growth), as it increased the number of cities covered significantly to 523, nearly 4x in the last four quarters, led by LCO tie-ups.

* Africa revenue/EBITDA growth in reported currency was strong (5%/6% QoQ) at INR85.9b/INR41.7b. In CC terms, the same grew 4%/6% QoQ to USD1,147m/USD556m.

* Subscribers/ARPU saw a 2%/nil QoQ growth, with a strong growth in Data and Airtel Money. Detail report of Africa results.

* Capex remained high at INR65.9b (INR241b in FY21). FCF, post interest, declined to INR17.1b v/s INR22.7b QoQ due to higher taxes.

* Despite the healthy FCF, net debt (excluding lease liability) continued to increase by INR48.3b to INR1,313b due to reclassification of accrued interest capitalization. Including lease liability of INR349b, net debt stood at INR1,662b, with net debt-to-EBITDA ratio of 2.9x on a 2QFY22 basis, down from 3x QoQ.

Key highlights from the management commentary

* Business moats: There are four key moats in the company that help it tap wider growth avenues: a) Airtel Payments bank is leveraging its reach and scale, b.) Enterprise business is seeing new areas of double digit growth, c) Premiumization opportunity across the customer value chain, and d) leveraging Data capabilities to provide targeted offerings.

* ARPU upgrades: The management will continue to look for ARPU growth through customer upgrades, 4G subscriber additions, and tariff hikes.

* Prudent leverage: It will be prudent on leverage, despite high capex and debt moratorium, by utilizing its rising FCF to pare down its high cost debt. 

* 5G sometime away: 5G rollout, unlike previous technology rollouts, will have a fallback option on its existing 4G network, so the rollout may be phased out. For this, additional spectrum needs to be made available at moderate pricing, which will take some time.

Valuation and view

* Bharti’s superior execution quality is reflected in its strong performance in the last 8-10 quarters; 25% YoY growth in consolidated EBITDA, despite no tariff hikes; and consistent subscriber and revenue market share gains.

* The key worry is high capex intensity suppressing FCF. Given the: 1) continued growth in EBITDA, 2) peak capex is behind it for the next four quarters, and 3) rights issue, there could be potential deleveraging of INR200-300b over the next four quarters.

* We expect 20% CAGR in consolidated EBITDA over FY21-23E on the back of 23% CAGR in Mobile India EBITDA. While the street has been concerned about the timelines of a potential tariff hike, we believe strong earnings growth can be achieved even without a tariff hike.

* The continued steady performance (19% EBITDA CAGR over FY19-21) in Airtel Africa has started to reflect in its share price (~35% rally) in the last three months, thus unlocking value. It is trading at a FY23E EV/EBITDA of a mere 3.1x. Adjusting for Airtel Africa’s recent stake sale of ~11% in the Mobile Money business to MasterCard and the TPG Group at 11x EV/EBITDA, the rest of the Airtel Africa business (including one-third from Data revenue, which is growing more than 20%) is valued at 3x EV/EBITDA on a FY23E basis.

* We see potential for a re-rating in both the India and Africa businesses on the back of steady earnings growth. We value Bharti on a Sep’22E basis, assigning an EV/EBITDA of 11x/5x to the India Mobile/Africa business, arriving at an SoTPbased TP of INR860. Our estimates do not factor in any upside from a tariff hike or steep market share gains from VIL’s financial stress. We maintain our Buy rating.

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