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Strong performance in Nigeria; growth in Data revenue remains robust across geographies

* Operating profit remains flat; lower finance/tax charges boost PAT growth:

Airtel Africa’s revenue/EBITDA fell 2% each QoQ to USD1,038m/USD492m in 4QFY21, with a 20bp decline in margin to 47.4%. On a constant currency (CC) basis, revenue/EBITDA rose 2%/4% QoQ to USD1,058m/USD506m (in line). EBITDA margin improved 90bp QoQ to 47.8%. Performance remained flattish QoQ as ARPU increased by 1% to USD3, while net subscriber base declined by 0.6% to 118.1m. Reported PAT rose 69% QoQ to USD154m due to lower (down 19%/27% QoQ) finance/tax charges, leading to PAT benefits. Monthly churn fell to 3.9%, which is the lowest in the past four years (v/s 5% in 3QFY21). Net debt/EBITDA for FY21 stood at 2x (v/s 2.1x in FY20). FCF rose 42.8% YoY to USD647m in FY21.

* Nigeria drove growth, but was offset by East/Francophone Africa:

Geography-wise, Nigeria revenue/EBITDA grew 7%/9% QoQ (in CC terms) to USD441m/USD242m. This was mainly led by a 6%/16% improvement in Voice/Data ARPU, while its subscriber base declined by 6%. East Africa’s performance remained flat QoQ, with revenue/EBITDA at USD373m/USD171m (in CC terms) due to a 5% QoQ decline in revenue from the Voice segment (as ARPU fell 4% QoQ, while its subscriber base stood flat QoQ), offset by 7% growth in Data revenue. In CC terms, Francophone Africa’s revenue/EBITDA grew 0.4%/1% QoQ to USD250m/USD105m as the 6% growth in subscriber base was offset by a 5% decline in ARPU. Voice revenue declined 2% QoQ, while Data revenue grew by 8%.

* Data revenue shows the highest growth:

Across segments, Data revenue showed the highest (9% QoQ) growth at USD322m (in CC terms) on the back of strong ARPU growth (+13% to USD2.7), while its Data subscriber base stood flat at 41m. Revenue for the Voice segment fell 2% QoQ to USD557m, driven by a 1% decline in subscriber growth to 118m, while ARPU was flat at USD1.6. Revenue for Mobile Money segment remained flat QoQ as ARPU declined 5% QoQ to USD1.7, offset by marginal growth in its subscriber base to 22m.

* Highlights from the management commentary:

a) Growth engines: Data and mobile money remain the growth engines, with annual growth in excess of 30%. The cost of traditional banking remains high in Africa, providing an opportunity for Airtel Mobile Money. b) Francophone: The region is turning a key growth contributor in Africa. Data services grew 32% in FY21 led by expansion of 4G networks (65% sties on 4G network). Mobile Money grew 48% YoY, with strong growth in the DRC region. c) Capex and deleveraging: Capex target stands at USD650-700m annually and will be utilized mostly towards modernization of its network, growth of cell sites and fiber footprint for towers, and increase in 4G coverage. FCF has been strong at USD647m. Leverage reduced to 2x in FY21 from 9x in FY17. d) Growth opportunities: Voice ARPU can grow further as customer voice service utilization still remains low (v/s global average).

Valuation and view:

Airtel Africa has a market capitalization of USD3.5b and EV (including lease obligation) of USD7b, with an implied EV/EBITDA multiple of 3.2x/2.7x (including lease obligation) on FY22E/FY23E EBITDA. The company’s capability to generate strong FCF (USD647m during FY21) will aid in further deleveraging. Our SoTP-based TP for BHARTI stands at INR720/share, including INR125/share for Airtel Africa.

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