Bharti Airtel set to ride its best financial performance phase in over a decade, says Antique; sees over 22% upside

Bharti Airtel is set to ride its best financial performance phase in over a decade, believes global brokerage house Antique Broking. According to the brokerage, this performance will be driven by various factors including tariff hikes, 2G upgrades, robust enterprise and Fibre to the Home (FTTH) growth, and a reduction in capital expenditure following the rollout of 5G over the next three years.

It also anticipates return ratios exceeding 20 percent and historic high levels of free cash flow driving balance sheet deleveraging. Despite challenges, particularly regarding Bharti's unique approach to 5G rollout compared to its competitors, Antique believes this won't significantly impact Bharti's subscriber base or growth trajectory. Moreover, it feels that current valuations do not adequately reflect the positive macro environment in the telecom sector.

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On the back of these positives, the brokerage has initiated coverage on the telecom major with a ‘buy’ call and a target price of ₹1,505, implying an over 22 percent upside from its CMP of ₹1,229.30, as of April 10.

Stock Price Trend

The stock has already delivered almost 59 percent returns in the last one year and 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 have been 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 had risen 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 just 1.2 percent away from its peak. It has also advanced over 63 percent from its 52-week low of ₹752.70, hit on April 18, 2023.

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Investment Rationale

The brokerage has listed 4 key reasons behind its bullish outlook. Let's take a look.

Tariff hike imminent; Bharti the biggest beneficiary: Antique expects the industry to take a 15–17 percent tariff hike post the elections. The last hike of about 20 percent was in December 2021. Bharti’s industry-leading current ARPU (average revenue per user) of ₹208 is set to go up to ₹286 by end FY27, driven by a tariff hike contributing ₹55, upgradation of 2G customers to 4G contributing ₹10, and customer upgradation to a higher data plan (both 4G and 5G) and moving to postpaid delivering ₹14, it noted. It also sees Bharti’s subscriber base growing at 2 percent p.a. against industry growth of 1 percent p.a.

Capex intensity to fall post the 5G rollout; big jump in free cash flow on cards: As per the brokerage, Bharti Airtel has projected a capex of approximately ₹750 billion for the fiscal years 2024 to 2026, which includes expenses related to the 5G rollout. Following the completion of this rollout, Antique anticipates a significant decrease in capex intensity. Its estimation suggests a capex of around ₹75,000 crore over a five-year period starting from fiscal year 2027, marking a notable reduction from the current annual run rate of approximately ₹19,000 crore to ₹20,000 crore for the wireless business alone. 

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Furthermore, the total capex in India, encompassing wireless, DTH, FTTH/FWA, and Enterprise, is expected to decline from the present ₹26,500 crore per annum (FY24-26) to approximately ₹23,000 crore per annum (excluding spectrum/AGR payments). This decline is particularly significant as a percentage of revenue, dropping to 12 percent from the current 21 percent, owing to the anticipated long-term revenue growth of 10 percent CAGR, primarily driven by assumed ARPU growth, noted the brokerage.

Choice of spectrum/ pace of 5G rollout—no major impact: While Bharti’s choice of the spectrum, especially the lack of sub-giga hertz and the choice of NSA (non-standalone) vs SA as well as the pace of rollout may appear less aggressive vs the key competitor, Antique believes it is a calculated risk to optimise capex, especially given that 5G is not monetisable as of now. 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) Though subscriber churn has been relatively high in the industry, the high ARPU 4G customer churn appears relatively low, likely to help sustain the subscriber base till Bharti decides to shift to SA as well as choose sub-giga hertz for better coverage.

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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 out of the 14 African markets it operates in, with revenue growth of 16 percent p.a. over the last five years. The target market remains under-penetrated with only 39 percent being data subscribers and overall penetration being low. The brokerage expects a 6 percent CAGR revenue growth over the next three years.

Moreover, Enterprise has 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 as per Antique, given the low penetration levels compared to other developing countries. Also, FWA (fixed wireless access) is set to facilitate higher penetration, driving its current 7 mn base up to 13 mn by FY27 and revenue/ EBITDA CAGR of 27 percent/ 28 percent, predicted the brokerage.

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Valuation and Estimates

"While the consensus two-year forward EV/EBITDA valuation of 8.2x might appear high compared to the last 10-year average, this period witnessed the highest competitive intensity leaving most incumbents’ financials in bad 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 inexpensive," explained Antique.

Antique projects a 9.8 percent compound annual growth rate for revenue in Bharti Airtel's India wireless business, propelled by a 2.3 percent increase in subscribers and a 7.3 percent growth in average revenue per user (ARPU). The significant ARPU growth is anticipated due to an impending tariff hike expected immediately after the elections. Excluding this factor, the ARPU CAGR stands at 6 percent, driven by several factors:

- Two minor tariff hikes are expected in fiscal years 2028 to 2033 (8-9 percent increase).

- Conversion of 2G subscribers to 4G.

- Shift from prepaid to postpaid services.

- Increased data consumption per user.

- Offering bundled services including over-the-top (OTT) content.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.