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Strong all-round performance; healthy deleveraging to prop up valuation

* Bharti Airtel (Bharti) reported strong all-around performance in 3QFY22 with consolidated EBITDA growth of 6.5% QoQ aided by India mobile/ Africa’s EBITDA growth of 6.4%/4.5%, respectively. This along with the first tranche rights issue of INR52.5b has finally led to healthy deleveraging of INR74.3b.

* After gaining market shares in the last eight quarters, Bharti now has strong momentum in India Mobile/Africa and other non-mobile segments. We expect its 20% consolidated EBITDA CAGR over FY22-24, driven by tariff hikes and market share gains, to translate into a strong >INR300b estimated FCF (post-interest) and deleveraging potential. We believe this is not captured in the stock’s valuation. Maintain BUY with a TP of INR910.

Mobile India/Africa EBITDA up 6%/5% QoQ, respectively

* Consolidated Revenue/EBITDA rose 5.4%/6.5% QoQ (2% above estimate each) at INR298.7b/INR147b, respectively, fueled by strong performance across segments particularly the India business.

* Excluding exceptional cost, net profit after minority stood at INR8.1b v/s INR5.9b in 2QFY22. This is a welcome change after the last few quarters’ high exceptional costs.

* Mobile India revenue/EBITDA grew 6.5%/6.4% QoQ (in line), aided by strong 6.5% ARPU growth, gaining market share. Subscribers declined 560k to 323m, while 4G additions also dropped to 3m from 12-13m in the last fiscal because of tariff hikes. We expect this to revive from 1QFY23.

* Despite the tariff hikes, data traffic remained strong and increased 6.7% QoQ to 120b GB with 19.9 GB/user.

* Among other segments, Africa revenue/EBITDA growth was strong at INR91.1b/INR41.1b (+6%/+5% QoQ) in reported currency. In constant currency (CC), revenue/EBITDA grew 5%/8%, respectively, aided by Subs/ ARPUs growth of 2%/6% QoQ. Home business improved strongly with revenue/EBITDA growing 12%/15% QoQ from healthy subscriber growth as coverage improved to 672 cities v/s 219 cities in Dec’20, led by LCO tie ups.

* Capex softened to INR61b from ~INR70b run-rate over the last 3-4 quarters (INR197/INR241b in 1HFY22/FY21).

* Healthy FCF coupled with INR52b rights issue saw net debts (excluding lease liability) reduce notably by INR74.3b to INR1,239b. With Google’s fund infusion of INR52b and strong operating cashflow from tariff hikes, Bharti should further see a healthy INR80-100b (6%) deleveraging and sustained annual deleveraging of INR200b (15-20%) going forward.

Key highlights from the management call

* Management expects the next round of hike to take place later in 2022 with ARPU expectations to reach INR200 in 2022 and later settle at INR300.

* Subscriber adds, impacted by SIM consolidation due to tariff hikes, should revive from 1QFY23.

* Leverage: Management expects to utilize its rising FCF and improved EBITDA to pare down its high-cost debt.

* Google Partnership: Bharti entered into a partnership with Google where the latter would invest USD1b, revolving around affordable device, cloud and network.

* 5G: Management expects auction to take place in May-Jun’22, with some rationalization in reserve price and considerate payment terms.

Potential re-rating upsides likely in both the India and Africa businesses

* Bharti’s superior execution quality is reflected in its strong performance in the last 8-10 quarters, where it gained market share consistently with consolidated EBITDA CAGR of 27% over FY20-22E.

* In the past, FCF generation as well as deleveraging has been a challenge despite strong earnings growth; we are now seeing this change with healthy FCF and deleveraging. With Google’s fund infusion of INR52b and strong operating cashflow from tariff hikes, Bharti should further see a healthy INR80-100b (6%) deleveraging and sustained annual deleveraging of INR200b (15-20%) going ahead.

* We expect FY22-24 consolidated EBITDA CAGR at 20% aided by Mobile India EBITDA CAGR of 25% on improving 4G mix, market share gains, and full benefits of the tariff hikes announced last quarter.

* Airtel Africa’s stock has seen a strong rally of nearly 50% in the last three months and 3x in the last six quarters. Yet, adjusting for the ~11% stake in the Mobile Money business to MasterCard and TPG Group at an 11x EV/EBITDA valuation, the remainder of the Airtel Africa business is valued at 3x EV/EBITDA. Airtel Africa has consistently delivered strong earnings growth over the last 3-4 years, with a ~30% CAGR over FY18-22E, and has an upward bias to our 15% EBITDA CAGR estimate over FY22-24. A strong balance sheet with low leverage and healthy FCF further adds to the strong capabilities

* We see potential re-rating upsides in both the India and Africa businesses aided by steady earnings growth. We value Bharti on FY24E, assigning EV/EBITDA of 10x to the India Mobile and 5x to the Africa business, thus arriving at an SOTPbased TP of INR910, implying 26% upside. The ensuing earnings growth, 5% FCF yield, and ~25% deleveraging bode well for the stock. Maintain BUY.

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