It also foresees return ratios exceeding 20 percent and historically high levels of free cash flow driving balance sheet deleveraging. Despite challenges, especially regarding Bharti’s unique approach to 5G rollout compared to its competitors, Antique believes that this will not significantly affect Bharti’s subscriber base or growth trajectory. In addition, it feels that current valuations do not adequately reflect the positive macro environment in the telecommunications sector.
On the back of these positives, the brokerage initiated coverage on the telecom major with a “buy” call and a target price of ₹1,505, which implies more than 22 percent of its CMP of ₹1,229.30, from April 10.
Stock Price Trend
The stock has already delivered nearly 59 percent in the last year and has gained over 19 percent in 2024 YTD, giving positive returns in 3 of the 4 months of the current calendar year so far.
Airtel shares were flat but in the green in April so far after a 9.4 percent jump in March. However, it fell 4.1 percent in February but grew 13.5 percent in January of this year.
The scrip also hit its record high of ₹1,244.95 last month on March 22, 2024. The stock is currently only 1.2 percent away from its peak. It also advanced more than 63 percent from its 52-week low of ₹752.70, effective April 18, 2023.
Investment Rationale
The brokerage listed 4 key reasons behind its bullish outlook. Let’s take a look.
Rate hike imminent; Bharti the biggest beneficiary: Antique expects the industry to take a 15-17 percent tariff hike after the elections. The last hike of around 20 percent was in December 2021. Bharti’s current ARPU (average revenue per user) of industry leading. ₹208 is ready to go up to ₹286 by the end of FY27, driven by tariff hike contributing ₹55, upgrade of 2G customers to 4G contributing ₹10, and customer upgrading to a higher data plan (both 4G and 5G) and moving to postpaid delivery ₹14, noted. It also sees Bharti’s subscriber base growing at 2 percent YoY against industry growth of 1 percent YoY
Capex intensity to fall after the launch of 5G; big jump in free cash flow on cards: According to the brokerage, Bharti Airtel projected a cost of approx ₹750 billion for the fiscal years 2024 to 2026, which includes expenses related to the rollout of 5G. After the completion of this launch, Antique anticipates a significant decrease in the intensity of capital. Its estimate suggests a capex of around ₹75,000 crore over a five-year period starting from fiscal year 2027, marking a significant reduction from the current annual run rate of about ₹19,000 crore to ₹20,000 crore for the wireless business alone.
In addition, the total capital in India, encompassing wireless, DTH, FTTH/FWA, and Enterprise, is expected to decrease from the current ₹26,500 crore per annum (FY24-26) to approx ₹23,000 crore per annum (excluding spectrum/AGR payments). This decline is particularly significant as a percentage of revenue, falling to 12 percent from the current 21 percent, given the anticipated long-term revenue growth of 10 percent CAGR, primarily driven by assumed ARPU growth, the brokerage noted.
Choice of 5G rollout spectrum/speed—no major impact: While Bharti’s choice of spectrum, especially the lack of sub-gigahertz and the choice of NSA (non-standalone) versus SA as well as the speed of launch may appear less aggressive against the key competitor, Antique believes it is calculated risk to optimize capitals, especially since 5G is not monetizable at the moment. It sees negligible impact on Bharti’s subscriber addition/ARPU due to: 1) Bharti strategically improving tower density/deploying small cells to improve capacity and reach in key demand centers and 2) Although subscriber was relatively high in the industry, the high ARPU. The 4G customer seems relatively low, likely to help support the subscriber base until Bharti decides to switch to SA and opt for sub-gigahertz for better coverage.
Africa has a big runway for growth; Enterprise and FTTH significant contributors to growth: The brokerage pointed out that Bharti is among the top two players in 13 of the 14 African markets in which it operates, with revenue growth of 16 percent annually over the past five years. The target market remains underpenetrated with only 39 percent being data subscribers and overall penetration is low. The brokerage expects 6 percent CAGR revenue growth over the next three years.
Additionally, Enterprise recorded a five-year revenue and EBITDA CAGR of 10 percent and 12 percent respectively. It further estimates a 9 percent CAGR over the next three years. Home broadband presents a multi-year double-digit growth opportunity according to Antique, due to the low penetration levels compared to other developing countries. Also, FWA (fixed wireless access) is set to facilitate higher penetration, taking its current 7mn base to 13mn by FY27 and a revenue/EBITDA CAGR of 27 per cent/ 28 per cent, the brokerage predicted.
Evaluation and Ratings
“While the consensus two-year forward EV/EBITDA valuation of 8.2x might seem high compared to the last 10-year average, this period has witnessed the highest competitive intensity leaving most incumbents’ finances in poor shape. However, with the industry set to emerge stronger over the next three years with historic high free cash flows and over 20 percent return ratios, we believe the valuation is cheap,” Antique explained.
Antico projects a 9.8 percent compound annual growth rate for revenue in Bharti Airtel’s Indian wireless business, propelled by a 2.3 percent increase in subscribers and a 7.3 percent increase in average revenue per user (ARPU). The significant ARPU growth is expected due to an imminent rate hike expected right after the elections. Excluding this factor, the ARPU CAGR stands at 6 percent, driven by several factors:
– Two minor rate increases are expected in fiscal years 2028 to 2033 (8-9 percent increase).
– Conversion of 2G subscribers to 4G.
– Change from prepaid to postpaid services.
– Increased data consumption per user.
– Offering bundled services including over-the-top (OTT) content.
Disclaimer: The opinions and recommendations made above are those of individual analysts or trading companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
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Published: 11 Apr 2024, 12:32 IST