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Bharti Airtel BSE SENSEX S&P CNX 28,441 8,281 CMP: INR 429 TP: INR 620(+44% ) Buy

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Bharti Airtel BSE SENSEX S&P CNX 28,441 8,281 CMP: INR 429 TP: INR 620(+44% ) Buy 30 March 2020 Company Update | Sector: Telecom Bharti Airtel BSE SENSEX S&P CNX 28,441 8,281 CMP: INR 429 TP: INR 620(+44% ) Buy Still a lot of juice left! Incremental ARPU growth opportunity not captured Currently, the Bharti Airtel (BHARTI) stock is down ~20% from its peak due to the Coronavirus (COVID-19) outbreak and the consequent complete lockdown Bloomberg BHARTI IN in India. Equity Shares (m) 5,455 Additionally, both BHARTI and Vodafone-Idea (VIL) are facing the ire of the M.Cap.(INRb)/(USDb) 2351.6 / 32.5 Supreme Court (SC), which recently dismissed their plea toward self- 52-Week Range (INR) 569 / 305 assessment of AGR liabilities. 1, 6, 12 Rel. Per (%) 8/43/67 We see limited impact of COVID-19, currency and crude price swings on the 12M Avg Val (INR M) 5456 Free float (%) 41.0 BHARTI stock and believe that it is the best hedged to face regulatory woes. Through this report, we look at how BHARTI is placed in the current tough Financials & Valuations (INR b) environment and the key catalysts at hand for it to deliver. Y/E March FY20E FY21E FY22E Sales 871.9 1,018.2 1,111.8 COVID-19 to have limited impact on earnings EBITDA 365.8 457.5 508.4 Given the complete lockdown in India due to COVID-19, net subscriber adds Adj. PAT 3.6 21.2 27.2 EBIT Margin (%) 42.0 44.9 45.7 (average 2-3 months) have stalled thus impacted by 1-2%. With physical Adj. EPS (INR) 0.7 3.9 5.0 recharges being unavailable, there has been a shift to digital recharges (from EPS Gr. (%) -107.7 479.7 28.5 15% in the last 1-2 years to 35-40% currently). In the current environment, BV/Sh. (INR) 161.0 164.9 169.9 Ratios more tech-savvy data subscribers with higher ARPUs and longer-term Net D:E 1.2 1.0 0.8 recharges of 90 days may see lower impact. However, the rest of feature RoE (%) 0.5 2.4 3.0 phone subscribers doing monthly recharges (one-third the ARPU of data RoCE (%) 3.1 4.3 5.1 Payout (%) 0.0 0.0 0.0 subscribers), could see some marginal impact as to protect these low income th Valuations subscribers (80m), BHARTI has extended free incoming calls until 17 Apr’20 EV/EBITDA (x) 9.6 7.3 6.2 with additional INR10 talk-time. This could impact 1QFY21 revenue/EBITDA P/E (x) 641.1 110.6 86.1 by INR2.2b/INR1.8b i.e. equivalent to meager 1-2%. Against this, increased P/BV (x) 2.7 2.6 2.5 Div. Yield (%) 0.0 0.0 0.0 data consumption should see upgrades in recharge values, thus, mitigating FCF Yield (%) -9.1 9.3 9.6 the impact. In 4QFY20/1QFY21, we currently estimate 13%/19% revenue growth on QoQ basis. Shareholding pattern (%) As On Dec-19 Sep-19 Dec-18 Currency and crude fluctuation impact much lower Promoter 62.7 62.7 67.1 The recent sharp INR depreciation should increase BHARTI’s USD capex/debt DII 14.1 13.2 13.9 and put some of its African business under stress due to its high crude FII 16.5 22.4 17.2 Others 6.7 1.7 1.8 exports. However, we do not expect a meaningful impact. The USD FII Includes depository receipts denominated India capex is ~30%, thus, 10% INR depreciation could have ~3% increase. Similarly, ~28% of BHARTI’s debt is USD denominated while India Stock Performance (1-year) debt is 15%. The sharp reduction in crude prices could result in revenue softness in the short term, particularly in Nigeria, Congo and Chad. However, BHARTI’s FCF positive position and lower leverage should have limited impact. Expect strong ARPU increase or market share gains We believe that BHARTI remains in a win-win situation, irrespective of the SC’s outcome on VIL’s fortunes. The government has been pitching for a healthy telecom market (3 private and 1 PSU player), which accentuates the need for VIL to stay afloat. However, VIL’s survival will require a sharp ARPU increase (potentially >30%) along with moratorium of payments to service its regulatory and debt obligations, which could also benefit BHARTI. Further, Research Analyst: Aliasgar Shakir([email protected]); +91 22 6129 1565 Suhel Shaikh ([email protected]); +91 22 5036 2611; Anshul Aggarwal ([email protected]); +91 22 5036 2511 Investors are advised to refer through important disclosures made at the last page of the Research Report. 3 September 2019 1 Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital. Bharti Airtel even in the worst-case scenario of no government support on AGR dues, BHARTI’s financial position is strong enough to withstand the storm, and in fact, could lead to significant market share gains for the company at the cost of VIL. In either case, our workings indicate that BHARTI could deliver a marked rise in earnings; we see potential increase of ~39% in our FY22 EBITDA estimate to INR621b (refer exhibit 1 & 2). ARPU – Potential to reach INR200? The recent price hike will likely take BHARTI’s ARPU to INR160 (1QFY21) despite the COVID-19 impact as an upgrade in recharges should offset any impact due to physical store recharge. Further, a 10% ARPU increase should pan out annually due to mix benefit as 30-40m subscribers (>10%) shift to higher-ARPU mobile broadband plans every year. Subsequently, BHARTI’s FY22 exit ARPU should reach over INR180. This is still below its FY15 ARPU of ~INR200 when data subscribers (offering 2x ARPUs) were only 20% of total subscribers v/s 50% today. We see a strong likelihood of an industry-wide price action over the next 2-3 quarters as VIL attempts to stay afloat by generating sufficient cash flow to service its regulatory/financial burden. This could be through (a) postpaid ARPU increase, (b) increasing data bundle plans, and (c) minimum recharge plans. Also, the TRAI consultation paper on floor price, telcos’ curbing data plans and increased share of value-added services like entertainment and banking could further drive ARPUs. Revenue growth through market share gains With VIL facing the risk of survival, we expect BHARTI to garner 60% subscriber share and 50% revenue share from VIL. BHARTI’s technology-agnostic device ecosystem is well placed to gain market share from over two-thirds of feature phone subscribers. Even if VIL weathers the current financial woes, its weak 7-8 circles could continue seeing sharp subscriber churn, benefiting BHARTI significantly over the coming 2-3 quarters. Further, VIL’s ongoing network integration along with customer worries of business continuation, could pose a strong opportunity for peers to chase market share. Will BHARTI lose its sheen due to collateral damage? The incremental market share from a weakening third player in the telecom market will certainly benefit BHARTI. However, it could also face repercussions on three fronts: (i) erosion of Bharti Infratel’s value in SOTP, which is INR43/share i.e. 7% of our TP, (ii) network cost increase of 2-3% i.e. 2k/3k per site due to the cut in VIL’s tenancies and (iii) incremental capex of ~INR50b for 25-30k fresh site additions to accommodate the traffic load on the network. Against this, overall incremental EBITDA of over INR100b should still be significantly higher to manage the incremental impact. FCF generation overlooked Over the last decade, BHARTI has been saddled with high capex, spectrum acquisition cost and depressed EBITDA, which has suppressed its FCF. However, we expect the potential restoration of the past era (2G) when telcos had the opportunity to monetize investments for a prolonged period. With a large part of the heavy lifting toward 4G network in place, incremental capex should be in check, while EBITDA should see a marked improvement. This should provide an opportunity to deleverage the balance sheet. Subsequently, we expect FCF (post interest) to increase to over INR300b in FY22 (if EBITDA grows to INR621b) from INR25b in FY20 and negative in FY19. 30 March 2020 2 Bharti Airtel RoCE becoming relevant Over the last 10 years, BHARTI’s RoCE was barely in mid-single-digit due to the hyper competitive landscape and continued capex toward technology advancements, spectrum renewals and investments in Africa. Now with benign competition and limited possibility of a new player’s entry, ARPUs could be determined to at least cover the WACC. In our view, at EBITDA of INR621b, BHARTI could garner pre-tax RoCE of ~19%. Risk of capex intensity We do not see any material investments in 5G to happen over the next 3-4 years as (a) new use cases for 5G are few and far, and (b) incremental consumer benefit is limited, as data speed could easily be dealt by 4G investments. Further, unlike in the past when 4G investment was inevitable due to the entry of a new player, we don’t see any pressure on technology or spectrum investments. Valuation and view Our estimates do not capture the potential upside for BHARTI from incremental ARPU growth or market share gains, but factor in the AGR liability impact of INR343b (according to BHARTI) as against Department of Telecommunications’ (DoT) figure of INR445b. In either case, there would be EBITDA growth opportunity. EBITDA of INR621b (based on our ARPU workings) could generate FCF yield (post interest) of 11%.
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