Expected gains in Q3FY24 for Airtel hinge on fare hike, steady growth

Bharti Airtel’s Q3FY24 results were in line with expectations. Africa also had good results adjusting for currency volatility. The consolidated revenue of Rs 37,900 crore was in line with the consensus, and increased 2 per cent sequentially. India saw growth of 3 per cent for the wireless segment, 4 per cent for home segment and 4 per cent for Direct-To-Home (DTH) and 2 per cent for the enterprise segment.

Mobile subscribers saw net additions of 3.3 million to 345.6 million. The average revenue per user (ARPU) rose to Rs 208, up nearly 3 per cent quarter-on-quarter (Q-o-Q). Consolidated operating profit was Rs 19,800 crore, with 2 per cent Q-o-Q growth. Margins moderated 40 basis points Q-o-Q to 52.3 per cent. A 20 bps increase in India mobility was offset by a decline of 60 bps in enterprise and 70 bps drop in Africa.

The cost of finance increased 28 per cent Q-o-Q to Rs 6,650 crore due to a Rs 1,250 crore jump in derivatives and exchange fluctuations. The reported profit of Rs 2,440 crore (earnings per share of Rs 4.1) rose 82 per cent Q-o-Q, partly benefiting from a lower tax rate of 30 per cent (down from 47 per cent in Q2FY24), and including exceptional impact of Rs 130 crore due to currency devaluation.

Net debt moderated to Rs 2 trillion. The capex was steady at Rs 9,300 crore. Net debt, including lease obligations, declined Rs 4,950 crore with a Rs 6,100 crore Q-o-Q increase in cash and cash equivalents, and investments.

 

Till December in the current financial year, net debt declined by Rs 11,000 crore. The annualized net debt (including leases) to operating profit ratio was at 2.5 times (2.6 times in Q2FY24). The consolidated capex for the nine months is Rs 29,000 crore. Operating free cash flow rose to Rs 10,770 crore from Rs 10,460 crore in Q2FY24. Net debt may have peaked out, given the completion of 5G rollout, declining capex levels and better cash flows.

Bharti has a higher quality subscriber mix. The 4G subscriber additions were 7.4 million (7.7 million in the previous quarter), going up to 245 million. Airtel has 65 million 5G subscribers, about 15-16 per cent of smartphone users, and the share could rise to 25 per cent of handsets in 2025 since 60-80 per cent of handsets shipments are 5G. Data volume grew 1 per cent Q-o-Q with average data usage rising to 22 GB/month.

Africa revenue increased 2 per cent Q-o-Q to Rs 10,300 crore. Net subscriber additions were at 3.5 million (4.6 million in Q2), taking the total to 151 million subscribers. ARPU for Africa increased 3 per cent Q-o-Q to $2.6 in constant currency. The operating profit of Rs 5,060 crore moderated 1 per cent Q-o-Q, with margins contracting 70 bps Q-o-Q to 49.1 per cent.

The management said it won’t take a specific tariff hike for 5G, but tariff hikes for the entire base are a question of ‘when not if’. Entry-level fixed broadband tariffs were hiked which led to only 0.36 million additions.

Capex will moderate in FY25. The balance sheet will deleverage and the target net debt/operating profit is at 2x.

Optimism is driven by the possible tariff hikes and sustained steady growth. Return ratios have improved. Most analysts have upgraded valuations.