April 20, 2023
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BHARTI AIRTEL Stock Research Report by Motilal Oswal
Sector: Telecommunication – Service Provider
CMP Rs. 768, Target Rs. 950 (24% upside potential)
Target Period: 12 Months
BHARTI AIRTEL Stock Research Report: Soft landing ahead
Earnings pace cools off, capex heats up
Bharti has seen decent earnings growth for the last 12 quarters. However, we expect Bharti to witness 1) a period of soft earnings given low probability of a price hike, and 2) high capex over the next 2-3 years given increased investments in 5G and rural densification. These factors could keep the stock range-bound in the near term, though our long-term BUY view remains intact.
Low probability of near-term price hike may lead to soft earnings
Over the last three years (FY20-23E), Bharti reported a CAGR of 19%/34% in India Mobile revenue/EBITDA, driven by multiple tariff hikes (strong 40% increase in ARPU), a shift from 2G to 4G subscribers, and SUC (spectrum usage charge) savings leading a significant FCF generation. Going forward, we see low probability of a tariff hike in the near term and heightened competition for market share among telcos, which may increase churn and drive SIM consolidation. As a result, we factor in India Mobile revenue/EBITDA growth of 11%/43% over FY23-25E v/s 19%/34% growth over FY20-23E.
BHARTI AIRTEL Stock Research Report: Frontloading of 5G and rural capex
Bharti has guided for India Mobile capex of INR750b for the next three years, as it aims to roll out 5G across urban areas by Mar’24 and ramp up rural densification. But, with INR310b capex in FY23 and INR360b in FY24 (based on FY23 exit run rate), we believe Bharti will significantly exceed its INR750b capex target. A new technology upgrade cycle has just started, and historically capex intensity has always stepped up with the launch of new technology upgrade, with continued heavy investments over the next 4-5 years. This was also evident during the 4G rollout when Bharti’s annual India Mobile capex increased to INR200b from INR150b. The current low-teens 5G device penetration may accelerate in the next couple of years as the 5G ecosystem develops, requiring deployment of additional spectrum bands (only 3500Mhz now), standalone 5G architecture and VO5G calling which may require heavy investments.
Near-term deleveraging could be limited
Bharti’s operational performance has been strong for the past few years, driving healthy FCF generation. However, investments in 5G auction, along with AGR liabilities, have led to limited deleveraging. Going forward, soft earnings growth (low probability of near-term tariff hike) and heavy capex may reduce FCF generation. Bharti’s cumulative OCF/FCF (post interest) of INR1.4t/ INR360b for the next two years and inflows from the ~INR210b rights issue could help it reduce debt. Gross/net debt (including lease liability) currently stand at INR2.3t/INR2.1t, which we expect to decline to INR2.0t/INR1.5t in FY25.
Longer-term growth story intact
While near-term earnings growth may remain soft, we believe Bharti and RJio should be the key beneficiaries of the structural change in the telecom sector. Unlike 3G/4G investment cycles when high capex was accompanied by heightened competition, which led to limited monetization opportunities, the current market situation is far superior. Both RJio and Bharti should benefit from VIL’s dwindling market share as the latter seeks a large capital raise to upgrade its network. Further, in the long term, there should be opportunities to monetize heavy investments as the Indian telecom market size of INR2.2t is largely catered by merely two sizeable players – RJio and Bharti, with far lower competitive intensity.
Valuation – High capex should overplay on valuations
The stock is trading at 6x on consolidated FY25E EV/EBITDA, with the India business trading at 9x and Africa at 3x. We have factored in 13% consol. EBITDA growth over FY23-25E (without factoring in tariff hike) with a 3-5% FCF yield. Given the softness in profitability and increased capex, the FCF generation and deleveraging pace should moderate in the near term. As a result, the stock could remain range bound in the short term. However, the improving monetization opportunity may offset high capital intensity, driving better earnings and FCF generation in the next two years. We derive our SOTP-based TP of INR950 based on FY25E EV/EBITDA of 10x for the India Mobile business and 5x for the Africa business.
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