Growth prospects, deleveraging to drive gains for Bharti Airtel stock

There have been several positive signals in Bharti Airtel with revenue market share (RMS) growth, better visibility of profits from Africa, and enough free cash flow to pursue deleveraging.

Airtel’s 4G and 5G data subscriber net additions were 5.6 million in Q1FY24, and 24.5 million in the last 12 months.

Airtel currently has 230 million data subscribers on 4G/5G, which is about 70 per cent penetration of its base of 339 million subscribers.

The trend is also towards average revenue per user (ARPU) growth, which is now at Rs 200.

The ARPU rise has helped operating profit grow by 5.6 per cent (quarter-on-quarter) Q-o-Q in Q1FY24.

The post-paid subscriber base is around 40 million of Bharti’s 230 million 4G/5G subscribers and 339 million total subscribers.

The post paid subscribers generate ARPU at around 200 per cent premium to blended ARPU.

Bharti does charge tariffs about 20 per cent higher than its major competitor Jio, which could be a competitive disadvantage in a market that is still an effective duopoly since Vodafone Idea hasn’t the resources to rollout 5G yet.

Bharti has also witnessed RMS gains, which is up 60 basis points to 36.7 per cent in Q1FY24 and there has been 5 per cent RMS gain in the last three years.

Its latest gains have been led by B and C circles while it leads in metros and ‘A’ circles/markets.

Assuming Airtel can continue to hike tariffs and still gain another 2 per cent market share, it would touch Rs 257 ARPU by FY26.

Without tariff hikes, it would need to add 50 million more subscribers (gain 4 per cent unit market share) to reach the same revenues by FY26.

The company claims its 5G capex has peaked in Indian network rollout. Bharti Airtel is now deleveraging.

The Q1FY24 net debt/operating profit was down to 2.6 times and leverage could drop below 2 times by FY25.

Investors could be hoping for dividend payouts going forward if leverage drops further and operating cash flow continues to rise.

Bharti targets 5G coverage in top 5,000 cities by March 2024 and it is also still rolling out 4G in rural networks.

The FY24 capex will remain elevated, but it should fall by FY25.

Bharti carried 164 petabytes of daily data traffic in Q1FY24, and this is 60-65 per cent of 4G capacity utilisation.

Data capacity by FY24-end would rise to 3.5 times of the Q1FY24 traffic levels as 5G capacity will augment this.

The capex-to-sales ratio should reduce to 20 per cent in the medium-term from the current 29 per cent.

Home broadband remains a key focus area with per-capita home broadband data usage at 247 gigabytes/month (Jio 280 GB).

Airtel Africa saw a decline in free cash flow to $230 million due to spectrum payouts but operating profit rose.

The consolidated FCF of Rs 21,200 crore in FY23 was boosted by Rs 6,600 crore increase in capex creditors.

Bank and market borrowings account for only 19 per cent of Bharti’s net debt.

The company has a longstanding case pertaining to claims of Rs 15,100 crore of outstanding one-time spectrum charges by the DoT.

So far Rs 8,500 crore has been provided for, and another Rs 6,600 crore is “contingent liability”.

One competitive risk is the potential revival of Vodafone Idea and another is the possibility of new promotional offers by Reliance Jio.

There are regulatory and political risks in Africa and possible risks due to local currency depreciation.

Given the positive signals with regards to growth and deleveraging in India and Africa, the company could attract investment interest.

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