Price hike, capex moderation key for further gains in Bharti Airtel stock

From its lows this month, the stock of Bharti Airtel is up 14 per cent. The gains for the telco have come on the back of expectations that market share consolidation, tariff hike and lower capex should boost margins and profits. 

While the company is a key player in the Indian market, it also has a leadership position in major markets of Africa. The company has 140 million subscribers in Africa spread across 14 countries.

In India, Airtel has four business segments. They are Mobile, Home Services (Broadband), Digital TV (Direct-to- home) and Airtel Business (Enterprise services). It has also diversified into Payments Bank, AdTech and data centres. The mobile business is by far the largest with 340 million subscribers.

Consolidation in India’s telecom market has left three key private players. Bharti (revenue market share or RMS of 37 per cent) and Reliance Jio (RMS 46 per cent) have gained at the cost of Vodafone Idea or VIL (RMS or 17 per cent). There may be further consolidation though VIL has raised funding and is trying to become competitive.

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One key factor is that all three operators have been able to take tariff hikes.

However, all three have incurred (and may need to incur) huge capex as 5G is rolled out. Bharti Airtel hopes capex in FY25 will reduce as urban 5G rollout is completed.

For Airtel, prospects look bright if it can continue to take calibrated tariff hikes to push average revenue per user or ARPU up as it reduces capex. In Q4FY24, capex hit 28 per cent of sales, due to one-offs like fibre purchases.

Optimists are talking about possible free cash flows of Rs 44,000 crore in FY25 if all goes well in terms of capex reduction and tariff hikes. However, the share price has risen and the valuations seem to factor in future prospects.   

Bharti’s Q4FY24 consolidated operating profit was at Rs 19,700 crore (down 2.8 per cent Q-o-Q but up 3.7 per cent Y-o-Y). This was lower than consensus, due to Nigerian Naira currency devaluation. The India wireless operating profit was in-line at Rs 12,200 crore (up 2 per cent Q-o-Q and up 15.6 per cent Y-o-Y). Higher net subscriber additions (6.7 million) and 4G/5G adds (7.8 million) were offset by flatter APRU at Rs 209. The operating profit margin remained stable Q-o-Q at 55.1 per cent. The Fibre-To-The-Home business was strong but enterprise growth was slow.

Consolidated capex was Rs 1,200 crore higher Q-o-Q at Rs 10,500 crore with India capex Rs 700 crore higher Q-o-Q at Rs 8,500 crore. The management guided that FY24 saw peak capex and it will moderate in FY25. The Board cleared a final dividend of Rs 8/share. Net debt, excluding lease liabilities, declined Rs 1,400 cr Q-o-Q to Rs 141,000 crore with a ratio of net debt:operating profit of 1.79 times.

India wireless business net subscribers rose by 6.7 million to 352 million with churn lower Q-o-Q at 2.4 per cent in Q4FY24 (vs 2.9 per cent Q-o-Q). The 4G/5G net additions were also stronger at 7.8 million in Q4FY24 (vs 7.4 million addition in Q3FY24).

The mobile broadband 4G/5G subscribers constitute 72 per cent of total subscribers. But India wireless ARPU increased only Rs 1 Q-o-Q to Rs 209. It was Rs 208 in Q3FY24.

The key assumptions for a bull case is wireless tariff hikes while staying competitive.

Management said that tariff hikes would be critical to improve return on capital employed. Apart from this, assuming no further currency shocks, Africa financials will improve in rupee terms and there is a chance of better enterprise segment growth as the business cycle picks up.

Valuation is where analysts remain divided, given different assumptions on tariff hike quantum and on capex moderation. Targets vary considerably from Rs 1,225, which would be a considerable downside, to Rs 1,640 a share. The consensus target price is Rs 1,460 which is marginally higher than the current market price.