Buy Bharti Airtel Ltd For Target Rs. 1070 - Motilal Oswal Financial Services
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Growth moderates; low capex aids FCF
* Bharti reported a moderate growth in 2QFY24, with India Mobile EBITDA up 3% QoQ on a 1.5% ARPU increase. Consol. EBITDA was flat QoQ, mainly due to the Naira devaluation. Capex declined in 2Q after increasing consistently (India capex at INR57b vs. INR105b in 1Q). As a result, FCF rose to INR54b vs. INR35b in 1Q, enabling a deleveraging of INR14b.
* In the near term, Bharti could see soft earnings growth and subdued FCF growth due to a limited potential for a tariff hike, market share gains and 4G-led mix benefits, along with high capex, including upcoming spectrum renewal. However, over the next 2-3 years, Bharti is well poised to gain from sector consolidation and tariff hikes. Retain BUY on the stock
India Mobile and Africa EBITDA (CC) growth at 3%/6% QoQ
* Currency devaluation impact: Consol. revenue/EBITDA were hit by a 16% currency devaluation in Africa, resulting in a 1% drop in revenue to INR370b. Conversely, India/Africa CC revenue grew 2%/6% QoQ and EBITDA was up by 2%/7% QoQ (in line).
* India growth moderates but matches RJio: India Mobile’s revenue/ EBITDA growth softened to 3% each (vs. 6% QoQ EBITDA growth in 1Q), led by a 1.5% ARPU increase (4G and postpaid-led mix benefits and higher no. of days) and 1% subscriber growth, partly offset by higher network opex with aggressive site adds.
* Home business was the silver lining, with 4% QoQ EBITDA growth (led by subscriber additions). The business has continued to grow steadily for the last 12 quarters. It has expanded to 1,234 cities vs. merely 100 cities in FY20, with 2.5x growth in subscribers in the last three years.
* Moderation in capex improves FCF and deleveraging: Capex declined INR105b QoQ (partly seasonal), which led to FCF generation of INR54b (post-interest). Subsequently, it repaid deferred spectrum liability. Net debt (excl. lease liability) reduced by INR13.6b to INR1,475b. If capex has peaked out, it could drive FCF further. Debt could be further reduced by 10% through INR160b in rights issue call money.
* Superior network capability: Bharti’s data traffic and subscribers are each still >50% below RJio’s. Yet, it continues to add strong broadband/overall sites (23k/11k), along with accelerated fiberization.
* Soft revenue growth ahead: Given the limited potential of tariff hikes, market share gains and 4G-led mix benefits, growth should moderate going ahead. However, long-term consolidation in the market holds Bharti in good stead.
Key highlights from the management commentary
* The monetization levers remain intact, aided by 1) a shift from feature phone to smartphone and from prepaid to postpaid, 2) data monetization and 3) price hikes. Bharti has achieved its ARPU goal of INR200 and now targets a long-term goal of INR300.
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