Equity Research INDIA July 12, 2021 BSE Sensex: 52373 Bharti Airtel BUY ICICI Securities Limited is the author and Maintained distributor of this report Enterprise business - under-appreciated; unleashing digital opportunity Company update Rs530 In continuation to our deep diving into enterprise business (link), we are evaluating Telecom Bharti Airtel’s (Bharti) enterprise business housed under Airtel Business. Airtel Business is under-appreciated considering it is the most profitable business for Target price: Rs675 Bharti with ROIC of 35-40% in the past three years and EBITDA CAGR of 13% over FY17-21, which underpins our optimism for the business. Airtel Business will benefit from the shift to new sales model for tapping SME opportunity which is adopting Shareholding pattern digital solutions like never before. Considering SME buy-bundled services unlike Sep Dec Mar customised solutions by large enterprises, Airtel benefits from existing relationships ’20 ’20 ’21 Promoters 56.2 56.2 55.9 and launch of new digital platforms. Nxtra (data centre and cloud offerings) has grown Institutional >3x over FY18-20, and is likely to grow over >3x in next 3-4 years. Digital platforms investors 39.3 39.6 38.9 MFs and others 14.4 14.0 12.8 like Airtel IQ, Airtel Secure and Airtel IoT open doors in new-age digital solutions Insurance Cos. 5.6 5.8 5.9 which are growing fast >30-50%. We see a significant upside risk to our growth FIIs 19.3 19.8 20.2
Others 4.5 4.2 5.2 estimate of 6.5% CAGR for enterprise revenue (FY21-23E). Reiterate BUY on Bharti. Source: NSE Airtel Business is the most profitable business for Bharti. Airtel Business Price chart contributed 14% to consolidated revenue and 12% to EBITDA in FY21. Airtel Business revenue has grown at CAGR of 7.1% over FY17-21 to Rs144bn and EBITDA has grown 700 at 12.9% CAGR to Rs55bn. It has generated FCF (EBITDA minus capex) of Rs132bn in 600 past five years; in past three years ROIC has been 35-40%. Airtel Business offers 500 products and services including voice, data, collaboration, cloud, data centre, security,
(Rs) IoT, network integration, managed services, and digital services. Airtel Business has 400 sub-sea cable network of 365k-Rkms, covering 50 countries. In the past two years, Airtel 300 Business’ market share has grown by 800bps to 31%, which establishes its prowess. 200 Company changing business model to capture huge SME opportunity. Airtel Business gets 80% revenue from 20% customers and it sees huge opportunities in Jul-18 Jul-19 Jul-20 Jul-21 Jan-19 Jan-20 Dec-20 farming and hunting. It has made changes in business model – 1) in-source SME sales
force (earlier outsourced) which should improve SME sales channel; 2) building omni- channel digital capabilities for customer acquisition and servicing; 3) entered new areas including data centres, Airtel Secure, Airtel IQ, Airtel Cloud and Airtel IoT; and 4) revamped teams’ incentive structure with targets for hunting and farming. Strong presence in fast growing India market. Airtel Business’ revenue grew at CAGR of 6.5% compared to 0.6% CAGR revenue growth for TCom. Airtel Business India non-voice enterprise revenue can continue to grow faster on higher contribution from new segments of security, cloud and cloud communications. It is also a beneficiary of IoT adoption and rollout of private network by industries for automation. We see Airtel’s India non-voice enterprise revenue growing in mid-teens at least over the next few years.
Market Cap Rs2909bn/US$39.1bn Year to Mar FY20 FY21 FY22E FY23E Reuters/Bloomberg BRTI.BO / BHARTI IN Revenue (Rs bn) 875 1,020 1,131 1,285 Shares Outstanding (mn) 5,492.0 Net Income (Rs bn) (56) (90) 74 123 52-week Range (Rs) 609/398 EPS (Rs) (10.3) (16.5) 13.6 22.6
Research Analyst: Free Float (%) 44.1 % Chg YoY 529.6 59.5 (182.3) 66.5 FII (%) 20.2 P/E (x) (9.1) (19.4) 39.6 23.8 Sanjesh Jain Daily Volume (US$/'000) 1,26,759 CEPS (Rs) 31.7 27.0 59.0 71.5 [email protected] +91 22 6637 7153 Absolute Return 3m (%) 1.4 EV/E (x) 10.3 11.1 9.1 7.8 Absolute Return 12m (%) (7.5) Dividend Yield (%) 0.4 0.4 1.0 2.1 Sensex Return 3m (%) 9.9 RoCE (%) 3.4 (19.2) 8.9 11.3
Sensex Return 12m (%) 44.6 RoE (%) (43.3) (21.8) 11.7 18.0
Please refer to important disclosures at the end of this report
Bharti Airtel, July 12, 2021 ICICI Securities
Cloud – betting big on data centres. Nxtra Data offers 1,98,000 sqft of data centre space in 10 data centres. Nxtra Data revenue has grown by 3.2x over FY18- 20 to Rs11bn; EBITDA has grown by 3x to Rs2.8bn. India data centre market is expected to grow 3x in next four years to 1,100-1,200MW. We expect Nxtra revenue to grow faster with the launch of more data centres and strong relationship with hyperscalers who are looking to expand presence in India. Further, Nxtra also offers public cloud, private cloud and hybrid cloud services and helps enterprises migrate to cloud architecture. Digital services – rising up in value chain which is likely to boost TAM. Airtel Business has also developed multiple platforms and services, which are adjacent to connectivity solutions and help the company grab a higher share of ICT spending by enterprises. The services launched by Airtel Business include: 1) Airtel IQ - a cloud communication platform for customer engagement through customers’ preferred channels - calls or SMS and mobile or web app using APIs and software tools. It is designed for easy adoption (plug and play) into any application using easy API. Airtel Business has gained good traction for the product with on-boarding of 50 customers including Swiggy, HDFC Bank etc. The opportunity for Airtel IQ is quite high with underlying market opportunity in India at US$1.6bn and growing fast. Airtel IQ total addressable market will increase once it is launched in other geographies; 2) Airtel Secure is multi-layered, full service cybersecurity offerings designed to safeguard enterprises against threats. It has partnerships with ~8 cybersecurity product companies which enables it to offer the entire suit of security services. India security market is estimated at US$700mn. Airtel Business has ~100 customers on Airtel Secure and the list is growing fast; and 3) Airtel IoT is an integrated platform offering end-to-end solutions powered by a variety of connectivity technologies. Airtel IoT has >7,000 active customers with >6mn IoT device deployments already. It is adding, on an average, >12k IoT devices per day, which is a testimony for demand for IoT services. India IoT market stands at US$1bn and is growing fast. Rising contribution from new-age solutions likely to drive higher valuations for enterprise business. We remain excited on enterprise business within telecom due to 1) rising investment by enterprises into new-age solutions driving higher total addressable market; 2) telcos have done reasonable investments in digital solutions for enterprise business (unlike B2C, which are captured largely by startups or technology companies); and 3) 5G may drive higher growth for connected devices which should augur well for telcos. Further, we like Bharti’s strategy to enter new services such as cloud communications, security and cloud which should help the company grow faster in next decade. We see these services commanding sales multiple compared to 11x EBITDA multiple assigned by us. The company also plans to house digital business in parent in new proposed structure which should help drive higher value. Data centre business in Bharti is under-appreciated, which has been growing fast and may continue to do so for the next few years. Carlyle has valued the business at US$1.2bn; we see value for this business growing fast as we see revenue from the segment rise by 3x in next few years.
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Bharti Airtel, July 12, 2021 ICICI Securities
How important are enterprise services for Bharti Airtel
Bharti brands enterprise business as Airtel Business; it contributed 14% to consolidated revenue in FY21 and 12% to consolidated EBITDA. Airtel Business revenue has grown at a CAGR of 7.1% over FY17-21 to Rs144bn; EBITDA has grown at 12.9% CAGR to Rs55bn.
Airtel Business has been relatively more resilient with consistent growth; it was not impacted as severely as mobile services from rise in competitive intensity. Customer stickiness, particularly for large corporates, has been much higher and low churn which has helped the segment grow.
Chart 1: Airtel Business (enterprise) contributed 14% to Bharti’s consolidated revenue in FY21…
FY21 revenue (Rs bn)
Home services, 23 , 2% South Asia DTH, 31 , 3% mobile, 4 , 0%
Enterprise, 144 , 14%
India mobile, 556 , 53%
Africa mobile, 291 , 28%
Source: I-Sec research, Company
Chart 2: …and 12% to consolidated EBITDA
FY21 EBITDA (Rs bn)
Home services, 13 , 3% South Asia DTH, 21 , 4% mobile, 0 , 0%
Enterprise, 55 , 12% India mobile, 243 , 52%
Africa mobile, 133 , 29%
Source: I-Sec research, Company
Airtel Business has generated FCF (defined as EBITDA minus capex) of Rs132bn in the past five years. It has remained stable despite rise in capex intensity in the past three years to average 17% from less than 10% in earlier two years. The company has been investing in building sub-sea fibre capacity and data centres. It has also added many new business segments along with traditional connectivity business.
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Bharti Airtel, July 12, 2021 ICICI Securities
Further, Airtel Business’ ROIC has been strong at 35-40% in the past three years, which is amongst the best for Bharti Airtel. Our ROIC working is based on 1) segmental EBIT for Airtel Business and 2) invested capital is derived from cumulative investment minus depreciation wherein consolidated depreciation is distributed proportionate to cumulative investment.
Chart 3: Airtel Business has generated cumulative FCF (EBITDA-capex) of Rs132bn in past five years
FCF (EBITDA - Capex) - Rsbn
40 34 35 33
30 27 26 25
20
15 12
10
5 - FY17 FY18 FY19 FY20 FY21
Source: I-Sec research, Company
Chart 4: And is amongst the most profitable business for Bharti
ROIC (%)
55.0 51.8
50.0 47.8
45.0
39.8 39.4 40.0 35.5 35.0
30.0 FY17 FY18 FY19 FY20 FY21
Source: I-Sec research, Company
We estimate revenue CAGR of just 6.5% for Airtel Business over FY21-23E and see an upside risk.
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Bharti Airtel, July 12, 2021 ICICI Securities
Chart 5: We estimate Airtel Business revenue CAGR of 6.5% over FY21-23, but see an upside risk to our estimates
Airtel Business revenue (Rs bn)
165 163
160 154 155
150 144 145
140
135
130 FY21 FY22E FY23E
Source: I-Sec research, Company
Airtel Business sub-sea cable network is spread across 365k-Rkms, covering 50 countries and 5 continents, 33 international cables and 65 global PoPs (point of presence). Further, it is interconnected with its domestic network in India and direct terrestrial cables in SAARC countries, Myanmar and China. It also leverages presence of mobile services in 16 countries across Asia and Africa.
It has ownership in i2i submarine cable system which connects Chennai to Singapore; and consortium ownership in South East Asia - Middle East - Western Europe - 4 (SWM4), Asia America Gateway (AAG), India - Middle East -Western Europe (IMEWE), Unity, Europe India Gateway (EIG) and East Africa Submarine System (EASSY). Along with these seven owned subsea cables, Airtel Business has capacity on 27 other cables.
Airtel Business offers products and services including voice, data, collaboration, work- from-home solutions, cloud, data centre, security, IoT, network integration, managed services, enterprise mobility and digital media. Airtel Business revenue comprises 1) enterprise & corporate fixed line, data and voice, and 2) global business, which includes wholesale voice and data.
Global business offers an integrated suite of global and local connectivity solutions, spanning voice and data to the carriers, telcos, OTTs, large multinationals and content owners globally. It also offers mobile solutions (ITFS, signalling hubs and messaging), along with managed services and SatCom solutions. Global business also provides advanced consumer solutions like IoT.
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Bharti Airtel, July 12, 2021 ICICI Securities
Chart 6: Airtel Business product / services portfolio
Source: Company
Mr Gopal Vittal, CEO, Bharti Airtel has mentioned Airtel Business market share (India enterprise market) has improved to 31% in Dec’20 from 23% in Dec’18, up 800bps in past two years (per Frost and Sullivan report), which is impressive.
Chart 7: Airtel Business market share has improved by 800bps in past two years (F&S)
Airtel Business market share in India enterprise market (per F&S) - %
33 31 31 29 27 25 23 23 21 19 17 15 Dec'18 Dec'20
Source: I-Sec research, Company
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Bharti Airtel, July 12, 2021 ICICI Securities
Bharti adopting new sales engine for growth
Airtel Business serves over 1,200 global customers (a significant number of them are carriers, OTTs and media companies); 2,000 large corporates such as BFSI, IT/ITES, manufacturing companies and others and 500,000 medium/small businesses across India. This is unlike Tata Communications, which only focuses on large corporates - ~1,000 globally. TCom is now planning to increase its efforts to expand its reach to 5,000 mid-market enterprises in India.
Bharti stated in earnings call that it gets 80% of revenue from 20% of enterprise customers, and it sees huge opportunity to grow revenue through farming (mining existing customers) and hunting (adding more customers). It has made four key changes in business model to adopt farming and hunting model: 1) in-sourcing entire SME sales force (from earlier outsourced model or partner acquisition model) which will significantly improve SME channel capabilities; 2) building omni-channel digital capabilities to on-broad customers and customer servicing; 3) entering adjacent and new areas including data centres, Airtel Secure, Airtel IQ, Airtel Cloud and Airtel IoT; and 4) revamping teams’ incentive structure, which are now given separate targets for both hunting and farming.
Chart 8: Bharti adopting hunting and farming business model
Source: Company
We understand the requirements for SMEs are different from larger corporates who look for customised architecture and network designs which meet their requirements and policies. SMEs are looking for basic services (a significant component of it would be connectivity) and more standard solutions. Airtel Business has configured many standard solutions, which meet the requirements of these SMEs; and omni-channel allows customers to on-board via digital platform. Bharti said more than 95% of new orders for enterprise product and services are coming through digital channels, which enables the company to expand its reach and gain share in the SME segment.
Bharti also services SOHO (small office home office) and micro businesses through its mobile and home services. The demand for these customers are limited to postpaid mobile connections, landline and fixed broadband and few value-added services. They are better served through mobile and home services segment. Recently, Reliance Jio (RJIO) launched bundled services targeting SOHO and SME segment which included services such as high speed data connectivity, IP centrex, and others. The starting
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Bharti Airtel, July 12, 2021 ICICI Securities
price for services is as low as Rs901/month to Rs10,001/month which meets the requirement of MSME customers depending upon their size.
Chart 9: RJio’s business plans for MSME segment
Source: Company
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Bharti Airtel, July 12, 2021 ICICI Securities
Strong presence in fast growing India market
‘Strategy&’, part of PWC network, estimates India enterprise connectivity market in 2019 at US$2.3bn across layer 2 and layer 3 solutions. It estimates the market size to grow to US$2.6bn in 2020 with layer 2 reaching US$1bn while layer 3 market is seen at US$1.6bn.
Layer 2 (OSI model) consists of ethernet, domestic leased circuit (DLC), international private leased circuit (PLC), etc. Layer 3 comprises MPLS, SD-WAN, and alternatives such as internet leased line.
Chart 10: India enterprise connectivity market at US$2.6bn (up 13% YoY) in 2020
Source: PWC
The top two segments for connectivity business in India are BFSI and cloud/OTT, while BFSI relies on layer 3 connectivity such as MPLS; cloud services providers use more dedicated services on layer 2 for carrying huge data across their data centres (regions and availability zones). Unlike global connectivity market, which is expected to remain flattish, India is seeing strong high single digit to early teens revenue growth. This is on back of strong growth from digital transformation adopted by organisations and rising demand for fresh connectivity from MSME segment, which is gradually shifting to digital platform. RJio estimates India has 50mn MSME customers; we believe only a fraction of them are on enterprise-grade connectivity today which provides huge opportunity particularly for Bharti and RJio who enjoy deeper connectivity reach in India.
Faster growth in SME segment probably has been one of the key reasons why Bharti has grown faster than TCom in Indian market over FY18-20. Airtel Business revenue grew at CAGR of 6.5% compared to 0.6% CAGR revenue growth for TCom. Notably, TCom revenue was negatively impacted by deconsolidation of data centre business in which it sold 74% stake to ST Telemedia.
We see Airtel Business India non-voice enterprise revenue can continue to grow faster as it is now participating in new segments of security, cloud and cloud communications. It is also amongst the largest beneficiaries of IoT adoption and rollout of private network by industries for automation. We see Bharti India non-voice enterprise revenue growing in mid-teens at least over the next few years.
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Bharti Airtel, July 12, 2021 ICICI Securities
Chart 11: Airtel Business India non-voice revenue has grown at CAGR of 13.1% over FY17-20
Airtel Business Tcom
190 167 169 169 170 163
150 132 125 130 109 113 110 90 70 Revenues Revenues bn) (Rs 50 30 FY18 FY19 FY20 FY21
Source: I-Sec research
Airtel Business is designed to provide services demanded in India and customised for India to meet demand of various customer categories. The company has also evolved with rise in demand for new services including managed services, platforms and digital (cloud based) solutions. It is also investing in next-gen connectivity solutions such as SD WAN and NaaS (network-as-a-service).
Chart 12: Airtel Business has scaled up from being a connectivity company to offering managed services, platform and expanding presence in digital solutions
Source: Company
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Bharti Airtel, July 12, 2021 ICICI Securities
Connectivity – adding next-gen solutions
Airtel Business thrives on strong terrestrial fibre in India, which is supported by sub- sea cable connecting 50 countries. It also enjoys strong connectivity with major cloud service providers. Connectivity remains the core of enterprise offering for telecom service providers; it also allows to monetise fibre assets across businesses.
Over the years, consolidation has not only benefited mobile services, we have also seen consolidation in enterprise connectivity service providers with the exit/weakening of Reliance Communications and other smaller operators. We have not seen any major impact on industry revenue due to the entry of Reliance Jio.
The core connectivity business is worth Rs200bn in India including basic enterprise- grade internet, dedicated internet, VPN MPLS services, ethernet, leased lines etc. Further, we have also seen rising demand for next-gen connectivity solutions such as SD WAN, AppWAN and Cloud connect. It appears Indian connectivity market can grow at high single digit in the near future. Airtel Business provides various services in connectivity including SLAs and security bundled. It also has offerings for next-gen connectivity solutions such as SD WAN; company has been developing a solution which will enable Airtel Business to offer network-as-a-services. It is also looking to invest in start-ups to gain access to next-gen technologies.
TCom likely had head start in next-gen connectivity services due to global presence in enterprise segment. We see Bharti also catching-up fast with launch of services offering. Further, Airtel Business also sells wholesale data connectivity globally on its sub-sea cable, but we do not see much growth in wholesale business.
The other area of advantage for Airtel Business is the adoption of satellite-based connectivity services for connecting remote and difficult terrains. OneWeb, a fellow group company, has been investing in satellite services which Airtel Business can resell in India.
Table 1: Airtel Business connectivity services offerings in India Product/services Description Remarks Internet services Business broadband connection with high-speed, Basic internet Targeted at SMEs with price point of Rs499/month reliable internet access Enterprise-grade, high-speed connectivity 1) Network speed offerings from 2Mbps to 100Gbps; 2) Dedicated internet services with consistent performance, security enterprise-grade SLAs and 3) optional security features and reliability across sites Enterprise-grade internet integrated with next- gen firewalls to ensure everything from malware IPSec and SSL VPN, network segmentation and load Secure Internet and virus protection to intrusion detection and balancing are included content filtering Automated, cloud hosted Wi-Fi solution with Managed Wi-Fi Indoor and outdoor Wi-Fi access points high-speed, unified wireless network access VPN Secure and dedicated MPLS based connectivity High-speed access to global cloud platforms like Azure, AWS, VPN with any-to-any connectivity to a single network Google, Oracle using Airtel CONNEXION for Cloud Seamless data and voice transmission across Direct VPN India - high network speed, security, and low Bandwidth options from 2Mbps to multiple Tbps latency - helping application performance Streamline traffic flow and boosts bandwidth on Combine expertise of network and SD-WAN deployments Intelligent VPN demand - dynamic load balancing, application across verticals; and SD-WAN life cycle management prioritisation and transport neutrality Source: I-Sec research, Company
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Bharti Airtel, July 12, 2021 ICICI Securities
Cloud – betting big on data centre
Bharti’s data centre business is housed in subsidiary Nxtra Data Ltd. It has recently sold 25% stake in Nxtra to Carlyle Group for US$235mn, valuing the company at US$1.2bn. Bharti continues to own the remaining 75% stake in Nxtra Data. Nxtra Data offers 1,98,000 sqft of data centre space in 10 tier-III data centres. These data centres are located in Chennai, Bengaluru, Mumbai, Pune, Bhubaneswar, Manesar and Noida.
India data centre demand has been growing at 15-20% in the past five years to US$1.2bn in FY21 (as per Crisil). With acceleration in digitisation and growing digital economy, Crisil expects data centre to grow at CAGR of 25-30% US$4.5-5bn by FY25. This is also benefiting from government’s efforts towards data localisation. Industry data centre capacity was estimated at 360MW in FY20, which is expected to jump to 1,100-1,200MW by FY25.
Chart 13: Data centre services market size is expected to grow >3x by FY25
Source: Crisil
Nxtra Data revenue has grown by 3.2x over FY18-20 to Rs11bn, and we believe growth momentum must have maintained in FY21 as well. EBITDA has also improved by 3x during the same period.
Chart 14: Nxtra revenue has grown 3.2x over FY18-20
Nxtra revenue EBITDA EBITDA (%) 28.5 12,000 10,854 29.0 28.0 10,000 8,518 27.0 25.7 8,000 26.0 25.0 6,000 23.5 24.0 4,000 3,347 23.0 2,788 1,998 22.0 2,000 953 21.0 - 20.0 FY18 FY19 FY20
Source: I-Sec research, Company
Bharti may likely work to improve its market share in India data centre, which means Bharti is also likely to expand its revenues by over 3x in next 3-4 years, in our view. This is also enabled by the fact that Bharti has been working with hyperscalers such as Google, Microsoft, AWS etc who are rapidly expanding presence in India. Bharti is
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Bharti Airtel, July 12, 2021 ICICI Securities
also building edge computing data centres, which it already has >120, and demand may accelerate with rollout of 5G services.
Table 2: Data centre services offered by Nxtra Product/services Description Remarks Enterprises hardware resources are stored in a secure data Under server co-location services, enterprise can Colocation centre for higher redundancy. It also offers high-traffic capacity choose from dedicated or shared racks in a carrier-neutral model. Outsourcing all routine, perennial tasks that are necessary to Managed hosting keep the systems up and running Provide swift provisioning of resources to host applications and a) Dedicated server help in acquiring hardware under OPEX models, and OS hosting licenses on SPLA (service provider licence agreement) model b) Managed Effective control and on-demand availability for superior BaaS can create an efficient and reliable backup storage and back up management of structured and unstructured data for critical data service a) Support all major applications and ERP suites; Assist IT practitioners in managing applications, databases, Remote infrastructure b) support numerous Linux distros and Microsoft operating systems and network and security systems, management OS versions; and c) maintenance of various proactively Databases and backups Disaster Recovery as a service makes things Disaster recovery Replication site simple, allows rapid and immediate recovery Source: I-Sec research, Company
Nxtra also offers cloud services including migration or transition to cloud for enterprises helping build optimal cloud solution. It helps design network architecture to enterprises that support scalability, performance and security. It also does multi-cloud deployment. It has four solutions including:
Table 3: Cloud services portfolio offered by Nxtra Product/services Description Remaks a) Elastic cloud deployment model Optimisation of computing, storage and with a single-tier architecture for networking resources. It offers higher scalability, on-demand elastic computing Nxtra public cloud availability, security, and compliance with service; and b) virtual private cloud multiple deployment models provides isolated private cloud network within a public cloud Ensure low latency for real-time Custom built to meet specific security, (trading, price tracking, ticketing performance and compliance needs. It provides Nxtra private cloud etc) and mission-critical a physically isolated, yet scalable enterprise- applications (ERP suites, CRM, grade cloud environment partner portals etc) Strong cloud infrastructure Combine the advantages of public cloud to expertise, a comprehensive and deliver the agility, elasticity, and cost- Nxtra hybrid cloud integrated suite of offerings to build effectiveness, with those of private cloud in terms an agile and future-ready hybrid IT of ironclad data security environment Global self-service portal for Simplify and automate monitoring and monitoring, which enables granular Back up on Cloud optimisation of backups backup and recovery of files, and databases Source: I-Sec research, Company
Public cloud is more of reselling on behalf of a larger hyperscale cloud service provider; this is lower margin business and low capex as well. This helps the company in tapping multi-cloud deployment with private cloud from own stable.
We see a huge opportunity for Nxtra private cloud with the implementation of government community cloud, BFSI community cloud and SAP HANA appliances. We see SAP HANA push ERP to cloud which should garner huge demand for private cloud deployment in India; Bharti is well placed to benefit from it.
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Bharti Airtel, July 12, 2021 ICICI Securities
Digital services – rising up in value chain; likely to boost TAM
Airtel Business has also developed multiple platforms and services which are adjacent to connectivity solutions and help the company grab higher share of ICT spending by enterprises. This has also helped the company expand the total addressable market and also accelerate revenue growth as these new digital services are growing fast. Airtel Business already has good reach with large enterprises and SMEs in India which it plans to harness and mine for new solutions. The services launched by Airtel Business are 1) Airtel IQ, 2) Airtel Secure and 3) Airtel IoT.
Airtel IQ Though Airtel IQ is core to mobile business as it involves delivering voice, video, messaging, chat and other communications, it is done through APIs on a completely valued-added basis and competes with many software companies such as Twilio, Sinch, Route Mobile, Tanla etc. In simple, Airtel IQ is cloud communication platform for customer engagement through customers preferred channels - calls or SMS and mobile or web app using APIs and software tools to embed real-time communication.
The services are used for a) click-to-call function on website or app to connect instantly; b) communicate employees and customers with notifications and reminders; c) intelligent IVR and automated recording of outbound call conversation and contextual analytics; d) reduce call waiting time for customers; e) customised dashboard for tracking KPIs and gaining insights; f) integrated communication module for omni-channel experience; g) number masking etc.
Airtel Business had been adding many features to improve the utility of platform; it is likely working on incorporating message delivery to IMs like WhatsApp and other rich communication features. Further, it is designed for easy adoption (plug and play) into any application using flexible and easy API.
Airtel Business has gained good traction for the product with on-boarding of 50 customers including Swiggy, HDFC Bank, Rapido, Urban Company, Delhivery etc. The company also has plans to take these services globally and harness mobile signalling business for Airtel IQ where it already enjoys relationship with many telcos.
The opportunity for Airtel IQ is quite high with underlying market opportunity in India at US$1.6bn and growing fast. Airtel IQ total addressable market will increase once it is launched in other geographies.
Airtel Secure Airtel Secure is multi-layered, full service cybersecurity offering designed to safeguard enterprises against threats of various kinds and origins. Security has become important as enterprises are moving more applications to cloud and increasing reliance on internet to connect branch offices to cloud-based services. Airtel Business has security operating centres (SOC) which help in managing security services for enterprises.
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Bharti Airtel, July 12, 2021 ICICI Securities
Further, Airtel Secure has partnership with ~8 cybersecurity companies globally which enables Airtel Business to offer the entire suit of security services with world class products. Airtel Business has partnership with Cisco, Paloalto, Seceon, Netskope, Sonicwall, Forcepoint, Fortinet and Radware.
Table 4: Security services offered by Airtel Business Product/services Description Remaks All-in-one capabilities with firewall, Fully managed, cost-effective solution to manage including anti-spam, anti-virus, Secure internet and gain control over internet access. It prevents intrusion prevention and content any unauthorised access to corporate network filtering Deploy a hassle-free yet secure VPN, virtual Secure access desktop and cloud access for home users Provides threat intelligence, consistent Includes endpoint protection protections, contextual visibility, predictive platform, web application firewalls, Secure devices analytics and automated threat response, secure web gateway (SWG) and ensuring secure access for all touchpoints. network security
Includes threat intelligence, spam Advanced defence capabilities that rapidly protection, block fraudulent Secure email detect, block and remediate threats in emails senders, phishing defence and data protection
Services include 1) vulnerability management; 2) penetration Secure intelligence Monitors business 24x7 for security risks using testing; 3) firewall assurance; 4) centre (SOC) intelligent security operations centre privilege identity management; 5) IAM and others
Takes information and identity protection to the Services include 1) data loss next level by fusing point solutions to eliminate all prevention; 2) data classification; 3) Secure information possibilities of data loss across endpoints, digital rights management; and 4) network, email and cloud database activity management Source: I-Sec research, Company
Security is amongst the fast growing ICT services; with rise in cyber-attacks enterprises are expected to continue investing in security services. India security market is estimated at US$700mn.
Airtel Business has ~100 customers on Airtel Secure and the list is growing fast.
Airtel IoT Airtel IoT is an integrated platform offering end-to-end solutions powered by a variety of connectivity technologies. Connectivity technologies includes 5G (future ready), 4G, NB-IOT, 2G, satellite along with eSIM solution. It offers connectivity on telco grade security for IoT data with a dedicated private network. It also offers platform with easy- to-use APIs for seamless integration with other applications.
Airtel IoT comes with Hub, which helps in device life cycle management and delivering and managing bulk on-field SIMs. It allows diagnosing SIMs remotely with advance monitoring tools and interacts with devices by sending SMS from the portal. It also offers location services and regulatory compliance.
Airtel IoT is targeted at five verticals.
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Bharti Airtel, July 12, 2021 ICICI Securities
Automobile – helps in vehicle theft prevention and recovery, comprehensive road safety, driving behaviour, vehicle monitoring, usage optimisation, digital insurance, remote maintenance and operations transformation Energy and utility - reduce waste generation, improve supply efficiency, optimise power consumption by customers and streamline operations Logistics - automate visibility of assets and vehicle distribution and real-time alerts and analytics on freight safety and security throughout journey, cost optimisation and efficiency improvement Financial services - usage-based insurance for fleet and asset tracking, cost optimisation for PoS device makers and improve reach to remotest parts and Manufacturing - efficient, cost-effective and automated information gathering capabilities and setting up of smart factories.
With the advent of 5G and expected exponential rise in connected devices, we see huge scope for Airtel IoT business. Existing market size is US$1bn and can grow exponentially over the next decade or so in our view. Airtel IoT has >7,000 active customers with >6mn IoT device deployments already. It is adding on an average >12k IoT devices per day, a testimony for demand for IoT services.
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Bharti Airtel, July 12, 2021 ICICI Securities
Private network – emerging large opportunity
We see this as an extension to Airtel IoT services wherein Airtel Business is helping factories and sites in remote location to implement private LTE network for better connectivity and low latency. In FY20, Airtel and Nokia partnered to offer private LTE based Industry 4.0 solution to enterprises. The partnership addresses the emerging requirements of enterprises across banking, financial services and insurance (BFSI), information technology enabled services (ITES), media and services, manufacturing and distribution with technologies such as cloud, IoT, artificial intelligence and machine learning and edge computing concepts. In addition, the two companies are exploring the development of 5G use-cases for enterprises.
We see more automation in work place is likely post-covid and private network is emerging globally which is helping in automation. This will give major boost, probably with the rollout of 5G services, which is oriented to offer enterprise services with much lower latency and higher device (sensor) density.
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Bharti Airtel, July 12, 2021 ICICI Securities
Table 5: Bharti Airtel: SoTP-based valuation Rs mn FY23E India business (ex Tower) EBITDA (adj IND AS 116) 4,08,125 Multiple (x) 11.0 EV 44,89,378 Less net debt 12,51,063 Equity value…(a) 32,38,315
Tower business (DCF from Indus model) EV 8,22,988 Less net debt (6,644) Equity value 8,29,632 Stake (%) 42 Attributable Equity value…(b) 3,46,206
Airtel Africa EBITDA (adj IND AS 116) 1,41,251 Multiple (x) 5.0 EV 7,06,254 Less net debt 61,844 Equity value 6,44,410 Stake (%) 53 Bharti attributable Equity value…(c) 3,42,826
Bharti Airtel Equity value 39,27,346 Outstanding shares (mn) 5,456 Equity value per share (Rs) 720 Less: AGR dues 45 Equity value per share (Rs) 675 Source: I-Sec research
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Bharti Airtel, July 12, 2021 ICICI Securities
Financial summary Table 6: Profit & loss statement Table 9: Cashflow statement (Rs mn, year ending March 31) (Rs mn, year ending March 31) FY20 FY21 FY22E FY23E FY20 FY21 FY22E FY23E Operating Income (Sales) 8,75,390 10,19,888 11,30,683 12,85,422 Operating Cashflow 3,47,251 3,59,536 5,34,167 6,33,830 Operating Expenses 5,09,295 5,55,540 5,74,756 6,23,362 Working Capital EBITDA 3,66,095 4,64,348 5,55,927 6,62,060 Changes (1,65,964) (5,829) (36,929) (18,812) % margins 41.8 45.5 49.2 51.5 Capital Commitments (2,23,937) (3,28,575) (3,38,725) (5,28,944) Depreciation & Amortisation 2,76,896 2,96,529 3,10,184 3,31,682 Free Cashflow (42,650) 25,132 1,58,514 86,074 Net Interest 1,39,918 1,42,866 1,38,974 1,53,547 Cashflow from Other Income 6,524 4,311 17,492 19,759 Investing Activities (80,982) 1,37,679 - - Recurring PBT (26,121) 29,264 1,24,261 1,96,590 Issue of Share Capital 3,91,322 - - - Add: Extraordinaries 7,931 61,044 4,02,344 - Buyback of shares Less: Taxes (1,21,823) 91,860 41,364 61,890 Inc (Dec) in - Current tax Borrowings (1,79,553) - 50,000 2,00,000 - Deferred tax Dividend paid (20,325) (2,13,022) (2,30,685) (2,79,614) Less: Minority Interest 15,190 27,195 8,973 11,593 Extraordinary Items - - - - Net Income (Reported) (3,21,832) (1,50,835) 73,924 1,23,107 Chg. in Cash & Bank Recurring Net Income (56,285) (89,791) 73,924 1,23,107 balance 67,812 (50,211) (22,172) 6,460 Source: Company data, I-Sec research Source: Company data, I-Sec research
Table 7: Balance sheet Table 10: Key ratios (Rs mn, year ending March 31) (Year ending March 31) FY20 FY21 FY22E FY23E FY20 FY21 FY22E FY23E Assets Per Share Data (in Rs.) Total Current Assets 7,47,488 6,17,026 6,00,095 6,26,047 Recurring EPS (10.3) (16.5) 13.6 22.6 of which cash & cash eqv. 1,58,927 1,08,716 86,544 93,005 Reported EPS (59.0) (27.6) 13.6 22.6 Total Current Liabilities & Recurring Cash EPS 31.7 27.0 59.0 71.5 Provisions 10,87,338 10,01,257 9,69,570 9,70,250 Dividend per share (DPS) 1.9 2.0 5.4 11.3 Net Current Assets (3,39,850) (3,84,232) (3,69,475) (3,44,203) Book Value per share (BV) 141.4 111.8 119.9 131.2 Investments 2,54,765 1,17,086 1,17,086 1,17,086 of which Growth Ratios (%) Strategic/Group 96,808 96,808 96,808 96,808 Operating Income 8.4 16.5 10.9 13.7 Other Marketable 1,57,957 20,278 20,278 20,278 EBITDA 41.8 26.8 19.7 19.1 Net Fixed Assets 19,89,186 20,80,477 21,71,160 24,32,935 Recurring Net Income 759.3 59.5 (182.3) 66.5 Goodwill 3,46,192 3,46,192 3,46,192 3,46,192 Diluted Recurring EPS 529.6 59.5 (182.3) 66.5 Total Assets 22,50,293 21,59,523 22,64,963 25,52,011 Diluted Recurring CEPS (38.8) (14.7) 118.3 21.2
Liabilities Valuation Ratios (% YoY) Borrowings 14,82,281 14,82,281 15,32,281 17,32,281 P/E (9.1) (19.4) 39.6 23.8 Deferred tax liability (2,53,283) (1,82,307) (1,71,222) (1,45,727) P/CEPS 16.9 19.8 9.1 7.5 Minority Interest 2,49,847 2,49,847 2,49,847 2,49,847 P/BV 3.8 4.8 4.5 4.1 Equity Share Capital 27,278 27,278 27,278 27,278 EV / EBITDA 10.3 11.1 9.1 7.8 Face Value per share(Rs) 5.0 5.0 5.0 5.0 EV / Operating Income 4.3 3.9 3.6 3.3 Reserves & Surplus 7,44,170 5,82,424 6,26,778 6,88,332 EV / Operating FCF 42.4 23.7 16.5 12.8 Net Worth 7,71,448 6,09,702 6,54,056 7,15,610 Total Liabilities 22,50,293 21,59,523 22,64,963 25,52,011 Source: Company data, I-Sec research Operating Ratios Other Income / PBT (%) (25.0) 14.7 14.1 10.1 Effective Tax Rate (%) 466.4 313.9 33.3 31.5 Table 8: Quarterly trend NWC / Total Assets (%) (15.1) (17.8) (16.3) (13.5) (Rs mn, year ending March 31) Inventory Turnover (days) - - - - Receivables (days) 19.2 18.5 17.7 17.0 Jun-20 Sep-20 Dec-20 Mar-21 Payables (days) 174.5 145.3 123.4 108.8 Net sales 2,39,387 2,57,850 2,65,178 2,57,473 Net Debt/EBITDA Ratio (x) 2.3 2.3 2.0 2.0 % growth (YoY) 15.0 21.6 20.4 8.1 Capex % of sales 25.4 32.2 30.0 41.1 EBITDA 1,04,079 1,16,420 1,20,530 1,23,319 Margin (%) 43.5 45.2 45.5 47.9 Other income (4,371) (1,673) (440) 7,177 Profitability Ratios (%) Add: Extraordinaries (1,17,457) (493) 52,502 4,404 Rec. Net Income Margins (6.4) (8.8) 6.5 9.6 Net profit (1,59,331) (7,632) 8,536 7,592 RoCE 3.4 (19.2) 8.9 11.3 Source: Company data RoIC 5.2 10.2 14.3 17.4 RoNW (43.3) (21.8) 11.7 18.0 Dividend Yield 0.4 0.4 1.0 2.1 EBITDA Margins 41.8 45.5 49.2 51.5 Source: Company data, I-Sec research
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Bharti Airtel, July 12, 2021 ICICI Securities
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New I-Sec investment ratings (all ratings based on absolute return; All ratings and target price refers to 12-month performance horizon, unless mentioned otherwise) BUY: >15% return; ADD: 5% to 15% return; HOLD: Negative 5% to Positive 5% return; REDUCE: Negative 5% to Negative 15% return; SELL: < negative 15% return
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