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MOSL: BHARTI AIRTEL (Buy)-Signs of earnings bottoming out, building capacities for future

Bharti Airtel: Signs of earnings bottoming out, building capacities for future

(BHARTI IN, Mkt Cap USD17.5b, CMP INR311, TP INR380, 22% Upside, Buy)

 

• In-line performance: Bucking the downtrend of the last four quarters, consol. EBITDA came in flat QoQ in 3QFY19. The quarter was characterized by deceleration in the sequential decline in India wireless EBITDA (9% v/s 22% in the previous quarter) and continued robust growth in Africa EBITDA (+5% QoQ). Notably, the strategy of minimum recharge plans appears to be working well, with an 18% QoQ increase in India wireless ARPUs v/s a 15% drop in wireless subscribers; management indicated that Dec-18 exit revenues were even better. Africa business, too, is on a strong footing, with healthy 4% QoQ revenue growth in USD (CC) and multiple levers of growth at play. Adj. net loss stood at INR10.4b (v/s INR9.7b in 2Q). For 9MFY19, revenue/EBITDA declined 5%/17% YoY.
• Concall highlights: (1) The benefit of minimum recharge plans is likely to spill over to the coming quarters, with the higher exit monthly revenue run-rate to be partly offset by downtrading in the postpaid category and IUC-related impact. (3) TTSL acquisition received NCLT approval and now awaiting DoT approval. (4) FY20 capex will be lower than the current (FY19) elevated levels.
• Earnings bottoming out: India wireless business is likely to witness tailwinds from the implementation of minimum APRUs, the recent tweaking on certain price plans, uptrading through ‘Airtel thanks’ offers, and the shift from 2G to 4G. ARPU improvement is unlikely over the near term; however, we see signs of India wireless EBITDA bottoming out over the next 1-2 quarters (although reducing IUC gains may partly offset the benefit). We now expect EBITDA to grow 3%/16% in FY20/21 (a cut of 2-3% in our estimate).