Bharti Airtel Rating ‘Buy’; strong showing in operational terms

Bharti Airtel’s 14m subscriber additions and 200bps q-o-q margin expansion in India mobile and growth in Africa operations surprised positively. FCF generation was healthy and leverage at 2.9x was comfortable despite addition of AGR liability. We remain constructive despite uncertainty around timing of next tariff hike, as, in its absence, market share gains are playing out. We raise our FY21-23 forecasts by 4-6% and maintain Buy with revised PT of Rs 610/share.

Operationally strong Q2: Q2FY21 results were encouraging, with consolidated revenues, up 22% y-o-y, consolidated Ebitda, up 32% y-o-y, ahead of estimates, driven by 160bps q-o-q expansion in margins to 45.4%. PBT at Rs 5 bn was in line with estimates due to higher finance costs, lower other income & lower share of associates. Reported consol loss of `7.6 bn was slightly below expectations.

Subscriber additions surprise positively: A strong pick-up in subscriber additions to 14m was the key highlight of Q2. Subscribers additions were strong in both 4G segments (+14m) as well as postpaid segment (+0.8m: 20 quarter high) and churn was at multi-quarter lows. This along with 3% q-o-q rise in Arpus to Rs 162, the highest in 15 quarters, drove 7% q-o-q jump in India mobile revenues. Bharti’s 14m 4G subscriber additions and pick-up in offline retail volumes possibly led to the Arpu increase in Q2. Average data usage was stable at 16GB/month, the highest in the industry. India mobile margins expanded by 200bps, mainly due to operating leverage.

Strong showing in Africa: Africa revenues (up 12.5% q-o-q cc) were ahead of estimates led by strong subscriber additions and higher than expected ARPU on the back of stronger Airtel Money revenues. Ebitda (up 16% q-o-q) also was ahead of estimates driven by revenue growth. While Indian non-mobile businesses had a soft quarter in terms of revenue growth, each of these segments reported strong margin expansion, largely due to lower SG&A expenses.

Stable FCF generation; comfortable leverage: During Q2FY21, Bharti Airtel’s FCF was stable q-o-q at `45 bn despite a 14% q-o-q fall in CFO due to no cash interest payouts. Cash capex was stable q-o-q. Consolidated net debt grew by 18% q-o-q as it includes `234 bn of AGR liabilities, yet leverage was comfortable at 2.9x Ebitda.

Outlook on India mobile growth healthy: Bharti’s subscriber additions across segments indicates strong market share gains in Q2. This validates the thesis that if tariff hikes don’t happen, Bharti will likely witness an acceleration in subscriber growth due to market share gains. We currently build in a 5-10% tariff hike with 15m subscriber additions over FY22-23.

Maintain Buy: We raise our consolidated revenue and Ebitda estimates by 4-6% to factor in the beat and expect Bharti to deliver 17% Ebitda CAGR over FY21-23 led by turnaround in India-mobile. However, Vodafone Idea’s potential capital raise could drive up competition in the interim and potentially delay tariff hikes. We lower our India-mobile target multiple to 10x EV/Ebitda to factor this in and revise our PT to `610/share and maintain Buy.