Bharti Airtel's valuations to sustain on market share & cash flow gains

(This report has been updated)

The stock of telecom major Bharti Airtel (Bharti) has gained 28.4 per cent since the start of the financial year 2024-25 (FY25).
These gains could sustain given market share improvement, lower capex intensity, customer upgrades and expectation of more price hikes going ahead. 

Given these triggers, brokerages believe that premium valuations for the stock are justified. The stock is trading at 11.5 times its enterprise value to operating profit and this is 30 per cent higher than the average over the last five years. 

The key triggers are continued market share gains and improvement in the average revenue per user or ARPU. Even as Vodafone Idea’s (VIL) market share declined to an all-time low with market share loss in 16 out of 22 circles, Bharti and Jio have continued to post gains. Bharti gained 35 basis points of market share in the June quarter as compared to FY24.

Akshat Agarwal and Ayush Bansal of Jefferies Research said, “Notably, Bharti gained 90 basis points market share from both VIL and Jio, in C-circles, suggesting traction on its rural expansion strategy. Bharti maintained its market share leadership in metros and remains a close second in A-circles reflecting its strength in urban-centric markets.”

Most brokerages highlight that gains for the market leaders (Bharti and Jio) would continue till VIL completes its network rollout. Further, revenue growth for the sector has bottomed out and tariff hikes taken in June should start reflecting in the current quarter. 

Goldman Sachs Research points out that wireless revenues for Bharti have been consistently growing faster than that of peers, with the company adding 250 basis points of revenue market share in the last two years. They expect the positive trends to sustain helping the company add a further 200 basis points market share over the next three years. 

In addition to market share gains, analysts led by Manish Adukia of Goldman Sachs Research point out other tailwinds such as organic growth levers including 4G and postpaid customers and future tariff hikes. They expect the next hike in FY26 and forecast Bharti India’s revenues to grow at 16 per cent annually over FY24-27 and 14 per cent at a consolidated level. Given the operating leverage and mix, the operating profit is expected to grow at a faster 21 per cent annually over the same period. 

Expectations of more hikes would reflect in higher ARPUs and improve the cash flows of the market leaders.

JM Financial Research expects India wireless business tariff hikes to be more frequent given the consolidated industry structure and higher ARPU requirement for Jio to justify significant 5G capex and potential listing plans. 

Dayanand Mittal and Shivam Gupta of the brokerage expect Bharti to be the biggest beneficiary of higher tariffs given the sticky and premium quality of its subscribers. They expect India wireless ARPU to grow annually at 11 per cent to ~310 in FY28 driving consolidated operating profit 13 per cent over FY24-28. 

The growth in ARPUs and moderation of capex would drive the company free cash flows from FY25 enabling the company to reach the net cash flow position by FY29. Bharti’s free cash flow is expected to rise from ~41,000 crore in FY24 to ~56,000 crore by FY26. 

The strong cash flows are expected to lead to a higher shareholder payout with a 50 per cent payout ratio at the consolidated level with dividend pegged at $6 billion over the next three years. A flat capex and strong operating performance would result in doubling the return on invested capital to over 20 per cent by FY27 from less than half that in FY24.

The improving cash flows should help improve the balance sheet and bring the net debt to near zero by FY28 from $16 billion as of June ‘24. 

Goldman Sachs Research believes that the 100 per cent valuation premium to global telcos (and 30 per cent over its five year average) is warranted given the inflection in Bharti’s cash flow, balance sheet and returns profile.