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4G upgrades recovering as sim consolidation abates; maintain BUY

Bharti Airtel’s 4QFY22 consolidated EBITDA was INR 160.6bn (+ 7.8% QoQ), ~2% higher than JMFe (in line with consensus) due to better 4G upgrades/ higher post-paid subs addition and lower network/other opex. India mobile services EBITDA improved to 50.6% (from 49.4% in 3QFY22) due to the Nov’21 tariff hike. ARPU at INR 178 was up 9.2% QoQ (vs. INR 163 in 3QFY22) due to the Nov’21 tariff hike and partly due to improved mix on account of recovery in 4G upgrades. Traction in other businesses also remains strong with: a) FTTH business seeing quarterly addition of ~323k subscribers; and b) Enterprise business revenue going up by ~1.8% QoQ. We maintain BUY on Bharti (revised TP of INR 940) 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.

* 4G upgrades recovering, suggesting abating of sim consolidation post Nov’21 tariff hikes: In the core India wireless business net subscribers rose by 3.1mn (vs. JMFe of 2.3mn net additions) in 4QFY22 with reported churn still high at 2.8% (vs. 2.9% in 3QFY22); this seems to be primarily due to outsized churn in the lower ARPU segments. However, 4G upgrades was robust at 5.2mn in 4QFY22; higher than 3.0mn 4G subscriber additions in 3QFY22, suggesting abating of the sim consolidation trend witnessed post the Nov’21 tariff hikes. Post-paid subscriber addition was also higher at 495k (vs. 150-350k addition witnessed in the last few quarters). However, ARPU at INR 178 was a tad below JMFe of INR 180; however, this was up 9.2% QoQ (vs. INR 163 in 3QFY22) due to the Nov’21 tariff hike and partly due to improved mix on account of recovery in 4G upgrades. The usage metrics strengthened further to 18.8GB/user/month (vs. 18.3GB in 3QFY22) despite tariff hikes.

* Other businesses’ traction continues to be strong: The Homes business (FTTH) continued to perform robustly, with additions of 323k subscribers during the quarter with it being now live in 761 cities (vs. 672 cities at the end of 3QFY22), the fast expansion being facilitated by the LCO model. Further, Enterprise business revenue rose 1.8% QoQ to INR 41.8bn, indicating traction in new products and partnerships. Digital services offerings continue to be robust with a customer base of +189 mn MAUs across its digital assets.

* Reiterate BUY with TP of INR 940 as we expect tariff hikes to be more frequent: We marginally tweaked our FY23/24E EBITDA estimate to account for the FY22 results; our TP is revised to INR 940/share (vs. INR 930/share). 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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