Analyst Corner— Bharti Airtel: Reiterate ‘buy’ and raise target price by 14% to Rs 650

By HSBC Global Research

Arpu to improve as company gains high-value subs, migrates subs from 2G to 4G and potential tariff hikes in FY22e. Spectrum supply is abundant in the upcoming auction; we expect Bharti to invest Rs98 billion and industry to skip 700MHz. Reiterate ‘buy’ and raise target price by 14% to Rs650 (from Rs570). Key catalyst would be rise in mobile Arpu.

Arpu is set to rise at 14% CAGR over three years: India mobile Arpu is well-poised to rise driven by acquisition of high-value subscribers; subs migration from 2G to 4G; potential tariff hikes during FY22e. Bharti subs addition at 3.7 million remained robust in October 2020. Its post-paid subs addition was robust at 695k in 2QFY21 and 4G subs penetration improved to 52% as of 2QFY21. We expect 4G subs penetration to surge to c80% by FY23e, which would support arpu increases. Thus, we expect Bharti Airtel’s consolidated revenue and ebitda to expand at 12% and 15% CAGRs, respectively, over FY20-23e.

Abundant spectrum supply during March 2021 auction is a positive; industry likely to skip 700MHz: On January6, 2020, the Department of Telecommunications (DoT) announced it would conduct spectrum auction across bands on March 1, 2021. We believe industry is unlikely to purchase 700MHz as the reserve price is pegged at Rs329 billion ($4.5billion) per 5MHz block, implying $0.66 per MHz per capita — we compare this to spectrum prices seen across the region. More importantly, the 700MHz reserve price is high in India.

Industry likely to invest Rs256 billion in spectrum: We estimate spectrum investment of Rs98 billion by Bharti Airtel, Rs125 billion by Reliance Jio and Rs33 billion by Vodafone Idea in the upcoming auction. We don’t expect operators to purchase the entire spectrum coming up for renewal as operators have enhanced their spectrum holdings over the last few years. In our base case, we forecast investment for spectrum coming up for renewal. Bharti Airtel and Reliance Jio could buy incremental growth spectrum in sub-GHz and 1800/2300MHz — which would then reduce network capex forecasts.

Reiterate ‘buy’ with revised SOTP-based TP of Rs650 (from Rs570): We raise ebitda estimates by 1%-3.5% over FY21-23e and net profit by 30% for FY22e, driven by higher India arpu estimates. We raise our TP as we incorporate higher arpu estimates and roll forward valuation to Dec-2021e. At our TP, the implied valuation for Bharti’s India and South Asia business would be 11.7x FY22e ev/ebitda and 10.4x FY23e ev/ebitda, respectively. Key downside risks include higher-than-expected customer churn; arpu recovery stalls owning to higher competition; and higher spectrum investments.