Buy Bharti Airtel Ltd For Target Rs.1,990 by Motilal Oswal Financial Services Ltd
Strong 3Q; continues to outperform peers
* Bharti Airtel (BHARTI) reported another strong quarter, with a further ~6%/9% QoQ increase in India Wireless revenue and EBITDA, driven by a residual flow-through of recent tariff hikes and ~90% incremental margin.
* BHARTI remains the biggest beneficiary of the tariff hikes, with an INR35 increase in wireless ARPU over the last two quarters (vs. ~INR20 for RJio).
* On our estimates, BHARTI narrowed the wireless revenue market share gap with RJio by 300bp over the last two quarters. Further, BHARTI’s India Wireless reported EBITDA (post IND-AS) is now similar to RJio’s reported EBITDA, which also includes the contribution from Home Broadband business.
* FCF generation (after interest and leases but before spectrum prepayments) improved further to INR126b as operational cash flows rose, led by the tariff hike flow-through and the consolidation of Indus Towers.
* BHARTI’s consolidated net debt (excl. leases) moderated further by ~INR110b (on like-for-like basis) to INR1.3t, with the leverage ratio declining sharply to 1.3x (vs. 1.9x YoY).
* We raise our FY26E/FY27E consol. EBITDA by ~2% each on higher margins in India Wireless. We build in FY24-27 CAGR of ~15%/19% in consolidated revenue/EBITDA, driven by more frequent tariff hikes in India wireless business (~12.5% ARPU CAGR), acceleration in Homes Broadband services, and robust double-digit growth in Africa.
* 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 (INR1t over FY25-26E), which should lead to significant deleveraging and improvement in shareholder returns.
* We reiterate BUY on BHARTI with our SoTP-based revised TP of INR1,990. We value India Wireless and Homes Business on DCF (implies ~13x FY27E EV/EBITDA), DTH/Enterprise at 6x/10x Mar’27E EBITDA and BHARTI’s stake in Indus Towers and Airtel Africa at a 25% discount to our TP/CMP.
Robust tariff hike flow-through and 90% incremental margins drive outperformance
* India revenue (excluding Indus) at INR331b (+5% QoQ, 19% YoY) was ~1% above our estimate, driven by the continued benefits of tariff hikes in India Wireless (ARPU/revenue up 5%/6% QoQ).
* India EBITDA (excluding Indus) at INR186b (+8% QoQ, +24% YoY) was ~2% above our estimate, primarily led by robust ~90% incremental margins in the India Wireless business (vs. 49% for RJio).
* BHARTI remains the biggest beneficiary of tariff hikes in India Wireless business and once again outperformed RJio on most metrics in 3QFY25.
* India EBITDA margins (excluding Indus) expanded further ~140bp QoQ to 56.2% (~80bp beat).
* India capex (excl. Indus) was up ~10% QoQ at INR69b (still ~12% below YoY), with 9M capex at INR199 (down 20% YoY).
Net debt moderates further; FCF generation improves to ~INR126b
* Reported consol. PBT (before the share of JVs) at INR77b (+35% QoQ, 2.17x YoY) was in line with our estimate, as higher D&A (~1% ahead) was offset by lower net finance cost (~1% lower).
* Reported attributable PAT at INR148b was significantly above our estimate on account of exceptional gains on Indus consolidation.
* Adjusted for many exceptional items, PAT at INR55b (+41% QoQ, +2.2x YoY) was 11% higher than our estimate of ~INR49.5b.
* BHARTI’s consolidated 9M FCF (after interest and leases but before spectrum prepayments) improved to INR292b (vs. INR213b in FY24).
* Consol. net debt moderated further by ~INR110b QoQ, on a like-for-like basis, driven by Indus consolidation and robust FCF generation.
Key highlights from the management commentary
* Captive tower sales to Indus: BHARTI plans to transfer 16,100 towers (12,700 from Bharti Airtel and 3,400 from Bharti Hexacom) to Indus Towers at a consideration not exceeding INR33.1b (implies ~INR2.05m/tower). This will free up BHARTI management’s bandwidth and also create greater efficiency, scale and add long-term value for Indus.
* Capex: BHARTI management has reiterated its guidance for FY25 India capex (INR199b in 9M) to be lower than FY24 (INR330b). Management expects capex to further unwind in FY26. Going ahead, the priorities for capex would be on investments in the transport layer, Home Broadband, data center and B2B. Management expects capex as a percentage of revenue to trend lower and soon be at par with global telcos.
* Capital allocation: The main priorities for BHARTI would be to 1) further deleverage the balance sheet, 2) step up dividend payments, and 3) selective and prudent investments to bolster capabilities in B2B adjacencies through bolton acquisitions.
* Deleveraging: The company prepaid INR36b of spectrum dues pertaining to 2016 during 3Q (~INR355b high-cost debt prepayments in the past few years). BHARTI has now prepaid all the spectrum dues prior to 2021 spectrum auctions. As a result, India net debt-to-EBITDAaL moderated to 1.3x (vs. 2.1x YoY).
Valuation and view
* We raise our FY26E/FY27E consol. EBITDA by ~2% each on higher margins in India Wireless. We build in FY24-27 CAGR of ~15%/19% in consolidated revenue/EBITDA, driven by more frequent tariff hikes in India Wireless business (~12.5% ARPU CAGR), acceleration in Homes Broadband services, and robust double-digit growth in Africa.
* 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 (~INR1t over FY25/FY26), which should lead to significant deleveraging and improvement in shareholder returns.
* We reiterate BUY on Bharti with our SoTP-based TP of INR1,990. We value India Wireless and Homes business on DCF (implies ~13x FY27E EV/EBITDA), DTH/Enterprise at 6x/10x Mar’27E EBITDA and BHARTI’s stake in Indus Towers and Airtel Africa at a 25% discount to our TP/CMP.
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