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Strong 2Q on tariff hike flow-through

* Bharti Airtel (BHARTI) reported a strong 2QFY25, driven by flow-through of tariff hikes in the India wireless business (ARPU: +11% QoQ, vs. 7% QoQ for RJio) and robust incremental margins (~71% vs. 60% for RJio).

* FCF generation (before spectrum prepayments) improved to INR98b as operational cash flows rose and capex moderated further.

* Our FY25-26 earnings estimates are broadly unchanged. We build in FY24- 27 CAGR of ~13%/16% in consolidated revenue/EBITDA, driven by more frequent tariff hikes in India wireless business, ramp-up of FWA services and steady growth in B2B and Airtel Africa.

* We continue to like BHARTI’s superior execution on the premiumization agenda. Further, with moderation in capex intensity, BHARTI is likely to generate significant FCF (INR330b/INR430b in FY25/FY26), which should lead to significant deleveraging and improvement in shareholder returns.

* We reiterate BUY on Bharti with our SoTP-based TP of INR1,900. We value India wireless and homes business on DCF (implies ~13x FY27 EV/EBITDA), DTH/Enterprise at 6x/10x Dec’26 EBITDA and BHARTI’s stake in Indus Towers and Airtel Africa at a 25% discount to our TP/CMP.

Strong 2Q, market share gains continue in India wireless

* 2QFY25 consolidated revenue at INR415b (+8% QoQ, +12% YoY) was 1% above our estimate, aided by slightly better India wireless (revenue up 11% QoQ), B2B and Africa performance (2% ahead).

* India revenue at INR316b (+9% QoQ, 17% YoY) was ~1% above our estimate on better flow-through of tariff hikes in India wireless (ARPU up 11% QoQ) and better show in B2B.

* Consolidated EBITDA at INR218b (11% QoQ, 12% YoY) was 1% above our estimate, largely supported by better margins in Airtel Africa and slightly better India wireless (~150bp QoQ margin expansion).

* India EBITDA at INR173b (+11% QoQ, +19% YoY) was largely in line with our estimate as slightly better India wireless was offset by weaker B2B.

* Reported consolidated EBITDA margin expanded by ~150bp QoQ to 52.7% (flat YoY), in line with our estimate.

* Consol. capex moderated further by ~4% QoQ to INR77b (-17% YoY, 13% below our est.) on lower capex in India wireless (-18% QoQ, -30% YoY).

* Consol. free cash flow (after leases and interest payments, but excluding INR85b spectrum prepayments) improved further to INR98b (vs. INR68b QoQ), aided by improvement in operational cash flows (INR21b) and favorable working capital changes (INR11b).

Key highlights from the management commentary

* Tariff hike flow-through: The flow-through of recent tariff hikes has been in line with the management’s expectations. Further, the SIM consolidation and customer down-trading was lower than initial expectations.

* Tariff repair: The management highlighted that even after the recent tariff hikes, the industry’s RoCE is sub 7% (BHARTI’s ~11%), while the data outgo and ARPU remain at one of the lowest levels globally. In this context, BHARTI has reiterated its stance on the need for further tariff hikes and a change in tariff construct to usage-based plans.

* Subscriber trends: BHARTI’s 2.9m wireless subs decline in 2QFY25, was milder than the management’s expectations. The subscriber trends are normalizing, with positive net adds in Oct’24. Further, the quality of subscriber mix continues to improve with consistent ~0.8m postpaid net adds and rising proportion of data subs in mix.

* Capex: The management indicated that capex was lower in 1H due to seasonality and would be higher in 2H. However, it reiterated that FY25 India capex should be lower than FY24 capex (INR334b), driven by a reduction in radio capex. BHARTI will continue to invest in transport network, core, B2B especially in Cloud, Datacenters and Home broadband for FWA ramp-up.

* Succession plan: BHARTI has well laid out its succession plan. COO Mr. Shashwat Sharma is set to succeed Mr. Gopal Vittal as Chairman and MD of BHARTI from Jan’26. Mr. Vittal would take up a wider role as Executive Vice Chairman and would drive synergies across the group’s footprint, along with ramping up its presence in digital and financial services.

Valuation and view

* Our FY25/FY26 earnings estimates are broadly unchanged. We continue to build the next tariff hike in Dec’25 (~15% or INR50/month on base pack) and ~6% ARPU CAGR over FY27-34, in our base case.

* We build in a CAGR of 13%/16% in consolidated revenue/EBITDA over FY24- FY27, driven mainly by a ~13% ARPU CAGR in India wireless business, ramp-up in fixed wireless access in Homes, steady growth in B2B and Africa businesses.

* We continue to like BHARTI’s superior execution on the premiumization agenda. Further, with a moderation in capex intensity, BHARTI is likely to generate significant FCF (INR330b/INR430b in FY25/FY26), which should lead to significant deleveraging and improvement in shareholder returns. We reiterate BUY on BHARTI with our SoTP-based TP of INR1,900. We value India wireless and homes business on DCF (implies ~13x FY27 EV/EBITDA), DTH/Enterprise at 6x/10x Dec’26 EBITDA and BHARTI’s stake in Indus Towers and Airtel Africa at a 25% discount to our TP/CMP

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