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Continued strong performance on market share wins

* Bharti Airtel (BHARTI) displayed a good performance in 3QFY21 for the second quarter in a row, with a consol. EBITDA jump of 9% QoQ (5% beat). This was attributable to strong market share gains and ARPU improvement, aided by operating leverage in Mobile India. The Africa business also continued its good run.

* We marginally raise our FY22E consol. EBITDA, factoring in steady 20% EBITDA growth in FY22 over a stellar 28% growth in FY21. We roll over the valuation to FY23, revising TP to INR720 (INR650 earlier). Maintain Buy

India Wireless EBITDA up 10% QoQ despite no tariff hike

* BHARTI’s consol. revenue was up 6% QoQ to INR265.2b (in-line on LTL). Consol. EBITDA was up 9% QoQ to INR120.5b (5% beat on LTL) on healthy operating leverage in the India Mobile and Africa businesses. The EBITDA margin was up 130bp QoQ to 45.5% (240bp above estimate).

* Subsequently, reported net profit stood at INR13.5b. Continued exceptional cost of INR45.6b was a key dampener. Excluding this and INR99b profit from the Indus Towers de-merger adjustment, adjusted net loss after minority stood at INR2.98b v/s INR7.4b loss QoQ (est. net profit of INR5.3b).

* India Wireless: Revenue was up 6.8% QoQ to INR147.8b (2% above est.), with strong market share gains led by 2%/5% growth in ARPU/subs. This was on an already high base of the sequential quarter, which made it more resounding.

* India Wireless EBITDA was up 10% QoQ to INR64.6b. (3% above est.), with incremental EBITDA margins at 60% (below 70%+ in previous quarters), as the management intensified marketing to gain market share.

* ARPU continued to see a steady uptick – it came in 2% higher QoQ (23% YoY) at INR166 (v/s est. INR164). Strong 4G subscriber adds of 14m further aided growth. ARPU has improved 8% since 4QFY20, without any tariff hike. Subscribers jumped strongly for the second quarter in a row by 14.2m (RJio added 1.7m); this highlights that BHARTI may have potentially continued to gain the lion’s share out of VIL’s subscriber loss.

* It reported high capex of INR68.6b (INR173b in 9MFY21) to cope with the strong data growth / subscriber adds. Moreover, an increase in interest cost softened FCF post interest to INR13.3b.

* Net debt increased by INR45b to INR1,145b, potentially due to a) an INR20b impact from Bharti Infratel’s deconsolidation with the Indus merger, b) an INR30b investment in the Indus merger, and c) an increase in deferred spectrum liability, accounting for additional AGR liability. Including lease liabilities net debt increased to INR1,474b, raising net debt to EBITDA to over 3x on an FY21 basis.

Highlights from management commentary

* Mobile India to continue stellar growth: This segment presents huge opportunity, with a) 300m feature phone subscribers available for upgrades, b) strong traction in postpaid subscribers, and c) the revamping of digital distribution by targeting micro markets. 4 February 2021 3QFY21 Results Update | Sector: Telecom Bharti Airtel 5 February 2021 7

* Enterprise and Home businesses seeing strong opportunity: The company has superior capabilities and offerings in these segments. An increased focus on network penetration in new cities and LCO partnership models should drive growth.

* 5G capex poses no threat: The company has displayed market-readiness with the test launch in Hyderabad; it would be prudent about making incremental investments until the ecosystem/spectrum is available; the investments would be offset against a reduction in 4G capex.

Valuation and view

* BHARTI’s superior execution quality is reflected in its strong performance over the past three quarters, with 8% ARPU growth without a tariff hike, leading to resounding EBITDA growth of 27% in Mobile India. It has certainly surprised with market share gains and quality customer acquisitions – 29m 4G subscriber additions (in 9MFY21) – which have supported ARPU growth.

* We believe that regardless of a price hike, it could deliver resounding growth as a delayed tariff hike may be compensated by market share gains – given its improving competitive position in the market. We partly capture this in our 20% consol. EBITDA growth estimate (5% ARPU growth in FY22) over an already sharp 28% increase in FY21. This certainly has an upward bias if the ongoing pace of market share gains continues.

* a) Efforts toward digital super app Airtel Thanks by widening capabilities through the partnership model and

b) enhancing offerings to mine the growing base of 4G and Airtel Thanks customers are welcome and should further improve subscriber stickiness and ARPU. Also, the Enterprise and Home businesses certainly present good opportunity in the coming quarters.

* The derailment of FCF generation and deleveraging despite a good operational performance are the key dampeners.

* With the expectation of healthy FCF generation, BHARTI’s position is hedged – do not see any urgent need for a price hike. We roll over the valuation to FY23E, assigning EV/EBITDA of 10x to the India Mobile business and 6x to the Africa business, arriving at an SOTP-based TP of INR720. Our higher target multiple for the India Mobile business captures expected gains from any potential increase in ARPU or market share, both of which may not be fully captured in our model. Maintain Buy.

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