Bharti Airtel Rating: Buy; the outlook for earnings remains strong

The swift ~20% recovery in the stock after the recent fall has triggered deliberations on its earnings outlook, the possibility of a tariff hike, and capex intensity. Based on our recent channel checks, we note that: BHARTI’s earnings outlook remains strong, given the steady 4G subscriber additions, which are likely to see 2-3% q-o-q ARPU growth, and strong Ebitda growth.

A price hike, which looked uncertain in the last 6-9 months, has now started to look imminent with the weakening of industry subscriber growth. Our recent interactions with industry experts indicate a potential price hike of 15-20% in the next two months. Competitive pricing in postpaid and FTTH segment by peers have had a limited impact on earnings.

Capex could reduce by ~15% in FY21e. Spectrum auction, which could entail investments of Rs 130 bn, looks unlikely to happen by Q4FY21e. We continue to remain bullish on BHARTI (with a TP of Rs 650), given its strong earnings outlook, potential tariff hikes soon, well-capitalised balance sheet, potential FCF generation, and strong competitive position.

See India wireless revenue/Ebitda q-o-q growth steady at 2-3%/4-5%

4G subscriber additions to remain healthy: Our channel checks indicate that BHARTI continues to gain competitive ground, adding strong 4G subscribers in the festive season, after the recent healthy additions in Q2FY21. The company should be able to maintain its 35-40% incremental 4G subscriber market share. This would turn out to be 3-4 m monthly 4G subscriber additions in Q3FY21e.

ARPU to grow through mix benefit: In line with the last two quarters, we expect an improvement in the subscriber mix to generate ~2% ARPU growth. Our channel checks indicate that BHARTI saw a limited impact from the recently launched competitive postpaid tariffs by its peers, given the sticky nature of its customer profile and follow-up price cuts in FTTH. IDEA’s recent Rs 50 tariff rise could support industry tariff hikes.

Valuation and view

We continue to remain bullish on BHARTI given its strong earnings outlook (even without a price hike) and improving RoCE and FCF generation potential. We expect it to generate post-interest FCF of Rs 64 bn in FY22E after factoring in the spectrum renewal cost of Rs 130 bn. We value BHARTI on a SoTP basis to arrive at our target price of Rs 650/share –we assign an FY22e EV-to-Ebitda of 11x to the Indian business and 6x to the African business. Our higher target multiple for the India Wireless business captures expected gains from any potential ARPU increase or higher market share gains – both of which are not fully captured in our model.