IGI Logo

Premiumisation at play; tariff hike & capex moderation to boost FCF

Bharti’s 4QFY24 consolidated EBITDA at INR 197bn (down 2.8% QoQ but up 3.7% YoY) was 4% lower than JMFe/consensus, primarily due to impact of Nigerian Naira currency devaluation on the Africa business. However, India wireless EBITDA was largely in-line with JMFe at INR 122bn (+2% QoQ and +15.6% YoY) as higher net subscriber (subs) adds (at 6.7mn) and 4G/5G subs adds (at 7.8mn) were offset by lower APRU at INR 209. EBITDA margin remained stable QoQ at 55.1%. Traction in FTTH business remained strong; however, enterprise business growth continues to be subdued due to slowdown in the global business. Consolidated capex was INR 12bn higher QoQ at INR 105bn with India capex INR 7bn higher QoQ at INR85bn; management re-iterated FY24 was peak capex and will moderate from FY25. Further, board approved final dividend of INR 8/share (or 61% payout), though will frame dividend policy once some deleveraging is done. We maintain BUY on Bharti (revised TP of INR 1,450) as we believe India wireless business tariff hikes are likely to be more frequent, going forward, given the consolidated industry structure and higher ARPU requirement for Jio also to justify significant 5G capex. ARPU growth aided by likely moderation in capex will drive Bharti’s FCF from FY25, enabling it to get to net cash by FY29; this will also aid in accretion in equity value.

* Consolidated EBITDA lower than JMFe/consensus due to impact of currency devaluation on Airtel Africa: Bharti’s 4QFY24 consolidated revenue at INR 379bn (down 1.1% QoQ but up 4.5% YoY), was 1.9% lower than JMFe/consensus of INR 386bn, primarily due to impact of Nigerian Naira currency devaluation on the Africa business. Hence, consolidated EBITDA at INR 197bn (down 2.8% QoQ but up 3.7% YoY) was 4% lower than JMFe/consensus of INR 205bn. Network cost (at INR 76bn, +0.1% QoQ and +2.7% YoY) was slightly lower than JMFe while Licence fee/SUC cost (at INR 31.1bn, +3% QoQ and +10% YoY) was in-line. Further, SG&A cost was also slightly lower at INR 20.7bn vs. JMFe of INR 20.9bn though other costs were higher at INR 54.6bn (+0.6% QoQ, +7.1% YoY) vs. JMFe of INR 53.0bn.

* India wireless EBITDA in-line with JMFe as higher net subs adds (at 6.7mn) and 4G/5G subs adds (at 7.8mn) offset by lower APRU at INR 209: India wireless revenue was 0.5% lower than JMFe at INR 221bn (+2% QoQ and +12.9% YoY). India wireless EBITDA was largely in-line with JMFe at INR 122bn (+2% QoQ and +15.6% YoY). India wireless EBITDA margin remained stable QoQ at 55.1% in 4QFY24. India wireless business net subscribers rose sharply by 6.7mn to 352mn (vs. JMFe of ~3.5mn net additions) with reported churn lower QoQ at 2.4% in 4QFY24 (vs. 2.9% in 3QFY24) - management attributed the decline in churn to its focus on improving customer experience. Further, 4G/5G net additions were also slightly stronger than expected at 7.8mn in 4QFY24 v JMFe of ~7.2mn addition (vs. 7.4mn addition in 3QFY24); 4G/5G subscribers constitute 72% of total subscribers. Post-paid subscriber net addition (excluding IoT) continued to be strong at 0.8mn in 4QFY24 (vs. 0.9mn in 3QFY24). Further, usage metrics was up 2.7% QoQ at 22.6GB/user/month in 4QFY24. However, India wireless ARPU increased only by INR 1 QoQ to INR 209 (vs. INR 208 in 3QFY24); lower than JMFe of INR 211. This compares to Jio’s ARPU (including FTTH) being flat QoQ at INR 181.7 in 4QFY24 and Bharti Hexacom’s ARPU rising by INR 4 QoQ to INR 204 in 4QFY24 (aided by low base). Bharti's management reiterated that even at current ARPU, RoCE continues to be low at 9.5% and, hence, tariff hike is extremely critical to repair industries health.

* FTTH business growth robust; enterprise business growth continues to be subdued due to slowdown in the global business: FTTH business EBITDA increased to INR 6.6bn in 4QFY24 (+2.9% QoQ and +18.8% YoY) with addition of 330k subscribers during the quarter, with the service being now live in 1,290 cities (vs. 1,267 cities at the end of 3QFY24); however, ARPU was down 1.0% QoQ at INR 577. Enterprise business revenue rose by 5.1% QoQ and up 14.1% YoY to INR 54.6bn and EBITDA was up 1% QoQ and up 5.8% YoY to INR 20.8bn due to consolidation of Beetel Teletech Limited (acquired during 4QFY24). However, without such acquisition, enterprise business revenue would have grown only by 0.6%/9.2% QoQ/YoY to INR 52bn and EBITDA by only 0.8%/5.6% QoQ/YoY to INR 20.8bn due to slowdown in global business on account of decline in demand for bandwidth, CPaas and related services, especially from global OTT players.

* Consolidated capex up INR 12bn QoQ at INR 105bn in 4QFY24 with India capex up INR 7bn QoQ at INR85bn; net debt declined by INR 14bn: Consolidated capex rose INR12bn QoQ to INR 105bn in 4QFY24 (of which India business capex rose to INR 85bn), higher than 3QFY24 capex of INR 93bn (of which India business capex was INR 78bn). FY24 consolidated capex was INR 395bn (of which India business capex was INR 334bn), higher than FY23 capex of INR 342bn (of which INR 282bn was for India business) and FY22 capex of INR 257bn (of which INR 204bn was for India business). Management re-iterated FY24 was peak capex and will moderate from FY25. Net debt, excluding lease liabilities, declined INR 14bn QoQ to INR 1,410bn at end 4QFY24. Net debt-EBITDA, excluding lease liabilities, was 1.79x at end 4QFY24.

* High conviction on our BUY rating on Bharti with 1-year TP of INR 1,450 and 3-year TP of INR 1,970 (implying 14% IRR): We have marginally tweaked FY25-26 consolidated EBITDA factoring in FY24 financials, with currency devaluation impact on Airtel Africa financials offsetting higher subscriber additions. However, our 1 year DCF TP has been raised to INR 1,480 (from INR 1,350) due to roll forward of our valuations to Sep’25 (implying 10.6x Sep’26 EV/EBITDA for India wireless business). Further, given the attractive long growth runway, we see Bharti delivering a 3-year IRR of 14% based on our 3-year TP of INR 1,970 (Exhibit 9), implying 8.9x FY28 EV/EBITDA and 22.9 FY28 PE. As detailed in our Dec’23 note (Biggest beneficiary of structural ARPU growth story), we reiterate the high conviction we have on our BUY rating as we believe India wireless business tariff hikes are likely to be more frequent, going forward, given the consolidated industry structure and higher ARPU requirement for Jio also to justify significant 5G capex. Bharti is the biggest beneficiary of higher tariffs given the sticky and premium quality of its subs. ARPU growth aided by likely moderation in capex will drive Bharti’s FCF growth from FY25, enabling it to get to net cash by FY29 (vs. net debt excluding lease liability of INR 1,410bn at end-FY24); this will also aid in accretion in equity value.

Please refer disclaimer at https://www.jmfl.com/disclaimer

SEBI Registration Number is INM000010361