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Tariff hike-led temporary moderation in 4G subs; maintain BUY

Bharti Airtel’s 3QFY22 consolidated revenue was INR 301bn (+5.7% QoQ), ~2% higher than JMFe/consensus as ARPU was ~3% ahead of JMFe though overall subscribers declined by 0.6mn (vs. JMFe of 4.6mn additions). Further, EBITDA came in at INR 149bn (+7.0% QoQ); this is also 3-5% higher than JMFe/consensus aided by slightly lower regulatory cost and other opex. India wireless business ARPU was INR 163 (up 6.2% QoQ), ~3% ahead of JMFe; however, Bharti’s 4G subscriber addition moderated to ~3mn due to industry wide sim consolidation following the tariff hikes in Nov’21. The management expects 4G subscriber additions to gather momentum soon as the tariff hike-led consolidation normalises in the next 1-2 months. Traction in other businesses also remains strong with: a) FTTH business seeing quarterly addition of ~341k subscribers; b) Enterprise business revenue going up by ~2.8% QoQ; and c) Africa EBTDA rising 8.3% QoQ. We maintain BUY on Bharti (revised TP of INR 900) as we expect tariff hikes to be more frequent, going forward, with Jio more willing to participate in tariff hikes given that it also needs to start focussing on profitability.

India wireless business ARPU beats estimate though subscriber addition moderates:

In the core India wireless business total subscribers declined by 0.6mn (vs. JMFe of 4.6mn additions) in 3QFY22 with reported churn remaining high at 2.9% (vs. 3.0% in 2QFY22); this seems to be primarily due to outsized churn in the lower ARPU segments given the entry level prepaid tariff hike in Jul’21, followed by another sharp hike in Nov’21. Despite the decline in overall subscribers, 4G upgrades was at 3.0mn; however, this is lower than 8.1mn 4G subscribers added in 2QFY22. Post-paid subscriber addition also moderated to 164k (lower than 300k-350k addition witnessed in the last couple of quarters). But ARPU, at INR 163, was 3% higher than JMFe of INR 158 (and INR 153 in 2QFY22) – partly due to the Nov’21 tariff hike and partly due to improved mix because of the likely exit of low APRU subscribers. The usage metrics moderated a tad to 18.3GB/user/month (vs. 18.6GB in 2QFY22) due to the recent tariff hike

Other businesses’ traction continues to be strong:

The Homes business (FTTH) continued to perform robustly, with additions of 341k subscribers during the quarter with it being now live in 672 cities (vs. 523 cities at the end of 2QFY22), the fast expansion being facilitated by the LCO model. ARPUs dropped marginally to INR 657/month, vs. INR 661/month in 2QFY22, possibly due to more incremental additions taking place at lower tariff levels. Further, Enterprise business revenue rose 2.8% QoQ to INR 41bn, indicating traction in new products and partnerships. This, coupled with the continued strength in the Africa business (8.3% QoQ growth in EBTDA), gives us confidence on the company’s medium- to long-term prospects.

Google deal to boost Bharti’s Digital agenda; concerns around Hexacom deal overstated in our view:

We believe the recent tie-up with Google is likely to help Bharti expedite the scale-up of its Digital business with particular focus on: i) enabling affordable access to smartphones; ii) continuing to potentially co-create India-specific network domain use cases for 5G and other standards; and iii) helping accelerate the cloud ecosystem for businesses across India. Separately, we believe the concerns around Hexacom deal are overstated as our calculation (Exhibit 10) suggests that the potential value of the government’s 30% stake in Bharti Hexacom is unlikely to be significantly above ~INR 31bn (vs. INR 70bn indicated as per press reports). Hence, we don’t perceive this as a major concern for Bharti; further, buying the government’s 30% stake in Hexacom is likely to give Bharti additional flexibility to operate and grow the circle with improved efficiencies.

Reiterate BUY with TP of INR 900 as we expect tariff hikes to be more frequent:

The management reiterated that medium-term 5G capex would be contained by the fact that the core network is 5G ready, and the gradual decline in 4G capex by the time 5G rolls out. Further, net debt for the quarter, including lease liabilities, declined by INR 71bn QoQ to INR 1,591bn with net debt-EBITDA declining to 2.67x at end-3QFY22 (vs. 2.96x at the end of 2QFY22). We raise our FY22/23E EBITDA estimate by 6-8% to account for the Nov’21 tariff hike, and roll-forward to a new TP of INR 900/share (vs. INR 725/share earlier). We maintain BUY on Bharti as we believe tariff hikes are likely to be more frequent, going forward, with Jio more willing to participate in tariff hikes given that it also needs to start focussing on profitability (and not just on subscriber additions) as it prepares for its potential IPO in the next 1-2 years. In this scenario, we believe the sector could see significant re-rating, and Bharti could gain significantly from that given the sticky nature and premium quality of its subscribers, ensuring that tariff hikes flow through to ARPUs

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