 "ARPU gains, dividend trigger for Bharti Airtel as telecom enters new phase")
The telecom industry may be moving into a new phase. After several years of consolidation, the three private telecom operators may report 5-6.5 per cent quarter-on-quarter (Q-o-Q) increase in average revenue per user or ARPU in third quarter of financial year 2025 (Q3FY25), as the full effect of tariff hikes in July kicked in.
Pricing power is apparent with only 3+1 players (including BSNL).
Reliance Jio lost around 2 million subscribers Q-o-Q post-hikes, while Bharti Airtel may add around 3 million subscribers Q-o-Q. Vodafone Idea or VIL lost around 4 million customers Q-o-Q. Data usage per customer remains robust.
Reliance Jio retained 477 million subscribers (end-December), with ARPU growth of 6 per cent Q-o-Q to Rs 207 per month, resulting in estimated 4.6 per cent Q-o-Q revenue growth.
Airtel retained 355 million subscribers, with ARPU growing 6.5 per cent Q-o-Q to Rs 248 per month leading to 5.5 per cent sequential revenue growth Q-o-Q. VIL retained 201 million subscribers, with growth in ARPU of 5 per cent Q-o-Q to Rs 164/month.
Airtel with industry-leading ARPU and subscriber growth may also see 60 basis point or bps growth in operating profit margin, while VIL and RJio should also see similar margin expansion. Both RJio and Airtel should have margins above 53 per cent. VIL has lost some revenue market share to the others.
Analysts expect the uptrend in ARPU to continue at an annual growth of 10-12 per cent for the next three years. Investors will also be braced for a mega IPO for Jio while VIL may still need significant government support.
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Apart from Airtel’s wireless ARPU and operating profit growth, it is expected to report strong mobile broadband (MBB) subs addition, at 5.4 million in Q3FY25 (also added 2.1 million MBB subs in October 2024 as per TRAI data). Hence, the India wireless revenue should grow 4.8 per cent Q-o-Q to Rs 26,000 crore, and operating profit may rise 5.8 per cent Q-o-Q to Rs 15,000 crore. But the enterprise business may post lower operating profit growth of 1.9 per cent Q-o-Q, while the fibre segment will see slightly better subscriber gains (700,000 subscriber addition Q-o-Q).
Analysts are anticipating a rise in dividend payout in Airtel and a deleveraging of the balance sheet. HSBC expects dividend to rise by 114 per cent Y-o-Y to Rs 17/share in FY25 as free cash flow improves. By FY27, dividend may rise to Rs 34/ share in FY27. Consensus estimates for dividend per share are 30-45 per cent lower that HSBC’s estimates however.
One driver for higher dividends is rising cash flow needs at promoter entity Bharti Telecom (unlisted) or BTL as debt has increased. BTL owns 40.33 per cent stake in Bharti Airtel and interest expenses at BTL will be around Rs 3,200 crore after it borrowed to increase its stake in Airtel in Nov ‘24.
Mobile ARPU may hit Rs 300-plus by FY27 with revenue rising at 16 per cent annually over FY24-27. In home broadband, revenue may rise at an annual rate of above 23 per cent over FY24-27 as subscribers should more than double to around 15.9 million by FY27 from 7.6 million in FY24.
Over that period consolidated revenue should rise by around 13 per cent annually. Operating profit could grow annually at 15 per cent. Consolidated earnings per share could grow at 75 per cent over that period, as capex intensity should also decline to around 22 per cent of FY27 revenues from capex of around 30 per cent of FY24 revenues.
The return on invested capital should rise from around 10 per cent in FY24 to around 19 per cent in that period. Bharti Airtel India should reduce net debt/operating profit to 1.0 time by FY27 from around 2.7 times in FY24 as it will generate far more free cash flows.
In addition, Indus Towers where Airtel holds 50 per cent stake should do well due to network expansion by Airtel and VIL’s 5G network rollout. Accounting for valuation of the Indus stake plus a valuation of the Africa business implies the Airtel share still has substantial upside at current market price.