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We expect Bharti’s consolidated FCF to rise to ~INR 480bn/ INR 545bn in FY25/FY26 (from ~INR 330bn in FY24E) and Jio’s FCF to rise to ~INR 245bn/ INR 383bn in FY25/FY26 (from ~INR 33bn in FY24E) driven by normalisation of capex and expectation of sharp tariff hike in FY25. Bharti and Jio’s managements are guiding for peak capex in FY24 and moderation in capex from FY25 with accelerated pan-India rollout of 5G likely to be achieved by Mar’24 and Dec’23 (achieved), respectively. Further, we continue to expect Bharti/Jio ARPU to grow at 9-10% CAGR over the next 3-5 years given the consolidated industry structure, and as industry needs to achieve an ARPU of INR 275-305 in the next 3-5 years (via tariff hikes, MBB upgrades, post-paid additions and data monetisation) for a pre-tax RoCE of 12-15%. Further, any near-term delay in tariff hike is likely to only strengthen the structural ARPU growth story as it is likely to expedite the transition to a duopoly market by further deterring VIL’s fundraise and, hence, capex plans. We expect Bharti to become net cash by FY29 (vs. net debt of INR 2,021bn, including lease liability, at end-3QFY24); this will also aid in accretion in equity value. We reiterate high conviction on our BUY on Bharti with an unchanged 1 year TP of INR 1,265 (and 3-year TP of INR 1,710; implying a 3-year IRR potential of 15%).

* Bharti and Jio register ~3% QoQ EBITDA growth in 3QFY24; continued ARPU-led growth for Bharti and subs-led growth for Jio; VIL’s subs loss continues: In 3QFY24, Bharti continued to lead with ARPU of INR 208 (up INR 5 QoQ) followed by flattish QoQ ARPU of INR 182 or ~INR 172 ex-FTTH for Jio, and INR 145 (up INR 3 QoQ) for VIL. Jio (+11.2mn) and Bharti (+7.4mn) continued to see robust addition to high ARPU 4G subs in 3QFY24, while VIL’s 4G subs addition was muted at 0.9mn only (moreover, VIL’s overall subs-declining trend also continued). Hence, Bharti’s India business EBITDA was up 3% QoQ in 3QFY24, aided by improved subs mix and rise in AMDU on back of robust 4G net adds and post-paid subs net adds (of 0.9mn). Jio’s EBITDA was also up 2.8% QoQ, driven by strong subs addition. However, VIL’s EBITDA was up only 1.6% QoQ due to overall subs loss (of 4.6mn) though its ARPU grew 2.1% QoQ with improvement in subs mix and full quarter impact of entry level tariff hike taken during 2QFY24). (Exhibit 15)

* 5G subs penetration improves gradually but 5G monetisation still remains a significant challenge for Jio and Bharti in absence of killer use case: 5G penetration continued to improve for Jio and Bharti during 3QFY24 with +90mn 5G subs for Jio (vs. 70mn in 2QFY24) and 65mn 5G subs for Bharti (vs. 55mn last quarter). However, 5G subs penetration levels are still below 20% primarily due to lack of killer 5G use-cases and high price of entry level 5G smart-phones. Hence, Jio and Bharti continued with their unlimited 5G data offerings and haven’t shared any 5G monetisation plans other than limited monetisation opportunity in form of 5G FWA and private 5G network services. Jio offers its 5G FWA services (Jio AirFiber) in +4,000 cities/towns and expects pan-India coverage in 1HCY24; while Bharti plans for full-scale rollout of its 5G FWA services using standalone 5G infrastructure (from presence in only 3 cities currently).

* Bharti and Jio’s FCFF to grow from FY25 driven by capex normalisation and structural growth in ARPU: Bharti and Jio’s managements are guiding for peak capex in FY24 and moderation in capex from FY25 with accelerated pan-India rollout of 5G likely to be achieved by Mar’24 and Dec’23 (achieved), respectively. Bharti’s management has guided for India business capex for FY24 to be elevated, at the same level as the FY23 capex of ~INR 280bn, but it has guided for cumulative capex in the India business over 3 years (FY23-25) to be ~INR 750bn (at the past run-rate of ~INR 250bn p.a.). This implies Bharti’s India business capex could decline to ~INR 200bn from FY25, though we continue to conservatively build in ~INR 275bn for FY25. Jio’s management also highlighted that capex is expected to moderate from FY25 with accelerated pan-India rollout of 5G achieved by Dec’23; we estimate Jio’s capex to moderate to ~INR 310bn in FY25 vs. INR 450-500bn run-rate ex-spectrum in the last 2 years. Separately, notwithstanding a near-term delay in a tariff hike, we continue to believe ARPU is on a structural uptrend given the consolidated industry structure and future investment needs.