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MOSL: BHARTI AIRTEL (Buy)-Steady growth in a weak market-pricing actions key going forward

BHARTI AIRTEL: Steady growth in a weak market; pricing actions key going forward

(BHARTI IN, Mkt Cap USD25.3b, CMP INR343, TP INR420, 22% Upside, Buy)

 

• Consistency in growth - a welcome sign: BHARTI reported a steady 2% QoQ growth in consol. EBITDA to INR67.8b (in-line) on a pre-Ind-AS 116 basis. India wireless revenue increased for the second straight quarter (+2% QoQ), but EBITDA declined 2% QoQ off a high base (+31% QoQ in 4QFY19 led by some one-offs). BHARTI is fighting the 4G battle well with 8.4m subscriber adds (30-35% of estimated incremental share), higher than VIL's addition of ~5m. ARPUs have been improving steadily - up 4% QoQ to INR129, now ahead of VIL/RJio's INR108/INR122.
• Concall highlights: (a) BHARTI completed re-farming of 900Mhz spectrum to 4G in 10 circles and should complete 2,100Mhz by Mar'20, increasing capacity exponentially. However, capex will be relatively low in FY20. (b) ARPU uptrading is likely due to the transition of customers from 2G to 4G, and Airtel Thanks revamp with multiple new services. (c) Company is prepared to operate with no price increase over the near term.
• Turning self-sufficient, irrespective of price increase: Recent fund raising (right issue: INR250b, Africa IPO: ~INR47b) and lower capex intensity are likely to allow BHARTI to reach close to FCF breakeven (including interest) and reduce net debt-to-EBITDA (on pre-Ind-AS 116) to ~3.2x from ~5x just three quarters back. Thus, irrespective of a price increase, the company should now be able to sustain with limited increase in debt. Further, ARPU accretion from broadband subscribers (2x ARPU v/s voice only subs) is likely to contribute to growth. We factor in flattish ARPU in FY20 and price action with a 10% ARPU increase in FY21. We largely maintain our revenue/EBITDA estimates on a pre-Ind-AS 116 basis.
• Valuation view: We maintain our TP at INR420, ascribing 11x EV/EBITDA to the India business and 5x to the Africa business, given the low trading multiples. While the steady EBITDA performance, deleveraging and the improving FCF position have protected the stock even in the current weak market, incremental upside would hinge on pricing actions, in our view. Maintain Buy.