Markets
For Airtel, tariff hikes would be the icing on the cake
Summary
- Airtel has already seen significant Arpu growth through strategic customer migration to 4G/5G. Potential tariff hikes could further enhance revenue without the need for extensive new investments
Before delving into Bharti Airtel Ltd’s March quarter (Q4FY24) results, it's crucial to address a common concern in the Indian mobile telecom industry: the notably low Arpu (average revenue per user) in the country.
If comparable population is a factor worth considering, then let's look at China. While Airtel’s Arpu is ₹209, China Mobile's Arpu is about ₹550. However, before investors get excited about Airtel’s Arpu catching up, they should note the significant difference in per capita income. In 2023, China’s per capita income stands at $12,500, nearly five times that of India, driven by the size of its economy.
Although there is talk of mobile tariff hikes after the elections, an underappreciated fact is that Airtel has managed to increase its Arpu from ₹194 in Q4FY23 to ₹209 currently without any significant price hike.
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This was achieved through the migration of 2G/3G customers to 4G/5G, premiumization via higher data consumption plans, and an increase in post-paid subscribers.
As such, Airtel’s 2G/3G subscriber base has declined to 99.5 million by FY24-end from from 111.2 million at the end of FY23. It added 28.6 million 4G/5G subscribers, of which nearly 40% were likely the result of upgradation, as the company has not suffered any significant loss of customers.
Looking ahead, it is likely that the remaining 2G/3G customer base, currently at 28% of the total customers, will also transition to 4G/5G. This shift would yield dual benefits. First, Airtel can gain from higher Arpu (as 4G tariffs are relatively higher) even without tariff hikes. Second, there would be cost savings as redundant networks can be shut down.
Moreover, higher data consumption, bundling of OTT plans, among others, lead to premiumization of plans, further boosting Arpu. Lastly, there is potential to grow the higher Arpu post-paid subscriber base, currently about 7% of the total.
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Assuming that the mobile customer base grows by 3% CAGR with Arpu moving up to ₹230 over the next two years to FY26, Airtel could generate cumulative cash flow of nearly ₹1 trillion.
For perspective, the company had a consolidated net debt of ₹2 trillion as of March and the cash flow from Indian mobile operations could be half of that over the next two years. These numbers could get a boost if there is any tariff hike as and when it happens.
A significant portion of this cash flow will help deleverage the balance sheet, with 5G capex intensity largely over.
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To be sure, Airtel’s return ratios, RoCE (return on capital employed) and RoE (return on equity), appear depressed because it has already spent ₹80,000 crore on 5G capex, about 25% of its total capital outlay, without any tangible return so far.
The company is yet to announce differentiated tariffs for 5G over 4G, as the base of 5G subscribers is still small, about 20% of its total subscribers. Growth in 5G has remained muted so far, with most handsets priced above ₹10,000.
Meanwhile, the valuation of the African telecom business, at 10x its operating cash flow, and the value of a 48% holding in Indus Tower almost offset Airtel’s net debt.
At current market capitalization of ₹7.8 trillion, the valuation is about 13x Ebitda (earnings before interest, taxes, depreciation, and amortization) of Indian mobile services business based on FY26 estimates.
Points that merit attention before evaluating the stock’s valuation include the utility nature of the business, providing steady cash flows compared to other industries. With capex expected to moderate in FY25 and potential tariff hikes, Airtel has set the tone to be on firm ground.
