Bharti Airtel - At CMP, market is factoring negligible tariff hike! - ICICI Securities

We see a huge margin of safety in Bharti Airtel (Bharti) as our working shows the stock price is factoring negligible tariff hike. However, Vodafone Idea (VIL) will require a big tariff hike of >40% by FY23 to meet its cashflow needs. Even our base case assumption of 15-20% hike by FY22E is conservative. Also, Bharti's performance in past few quarters has shown significant resilience; it was the only operator to transfer a sizeable part of the tariff hike into ARPU and has grabbed higher incremental market share of mobile broadband subs. Bharti is our high-conviction BUY notwithstanding the rising risk from AGR liability and sooner than expected 5G rollout.

- AGR risk is rising, but should be manageable. Ongoing AGR hearing in SC indicates likely rising risk of liabilities from the spectrum traded from Videocon and Aircel. Videocon's AGR liability is Rs14bn and Aircel's Rs124bn. Hearing has not concluded and we don't want to take any view. If we take the worst case liability, which is the entire due payable, then Bharti's incremental liability is Rs138bn (Rs25/sh). However, Bharti has traded only 29% of Aircel spectrum and Aircel bought these spectrums only in FY11 (AGR liability is from FY03), hence assigning the entire liability would be unjustifiable.

- Bharti's FY22E implied ARPU at CMP infers no tariff hike. Bharti stock price has corrected to Rs520, down 12% from peak in May'20, on downward revision of weight by MSCI and rising risk of AGR liabilities. However, we believe, at CMP, the stock is factoring an ARPU of ~Rs165, which is a comparable increase of only 14% from Q1FY21 ARPU. Bharti can achieve this ARPU increase without any tariff hike through conversion of 2G subs to 4G (which helps ARPU rise by 2-3% QoQ) and faster growth in postpaid subs. Our base case assumption ARPU of Rs187 implies a tariff hike of only 15-20%, which we believe is conservative. Notably, operators have recommended 5-9x increase in data prices during consultations on floor tariff.

- Vodafone Idea (VIL) requires ARPU increase of Rs79 for cash breakeven. Contrary to Bharti, VIL requires a high ARPU increase of Rs79 to remain a going concern. In FY23, VIL will need cashflow of Rs320bn to service the deferred spectrum EMI payment, AGR dues EMI (assuming payment period of 15 years), capex and interest on bank borrowings. Against this, VIL has only Rs80bn of EBITDA (adjusted annualised EBITDA for Q1FY21) and additional cost saving of Rs40bn. VIL may require an increase of Rs79 in ARPU, which results in ARPU rise of ~70%. VIL too will benefit from rise in 4G customers, but it would be lower than Bharti. A lot of cash burn can be funded from capital infusion, but VIL would still require tariff hike of >40% in next three years. Therefore, the required tariff hike for maintaining a three-player market is significantly higher than our base case assumption.

- Significant rise in Bharti's underlying performance adds to confidence. Bharti has shown significantly superior execution in past few quarters: 1) it was the only operator in our view which was able to transfer a significant part of tariff hike into ARPU (i.e. very little leakage). This was due to the quality of customer base and benefit of it being primarily SIM, and 2) its mobile broadband customer-addition is matching that of the market leader, which implies Bharti is grabbing higher incremental share of mobile broadband subs market. We believe, on only smartphone basis Bharti should have performed much better.

- 5G rollout tidbits. Investors are concerned about sooner than expected rollout of 5G in India. Though we believe 5G rollout can happen sooner, we don't see it becoming mainstream consumer telecom technology soon. The reasons are: 1) 5G ecosystem is evolving and is targeted mainly at enterprise use cases. 4G will remain the mainstream consumer technology and 5G will be used for de-clogging network capacity in dense locations such as malls, stadiums, etc; 2) operators don't have excess spectrum in 4G to refarm to 5G particularly in low and mid bands, and consumer 5G cannot be launched solely on 3,500MHz band (very poor propagation capability); 3) disintegration of hardware and software should make 5G network rollout cheaper; further, Bharti is already preparing for 5G network integration with its existing network; and 4) we don't see total non-spectrum capex rising significantly as 5G network investment would start when 4G rollout is complete. Therefore, 5G capex envelope will replace 4G. There would not be significantly higher incremental network capex.

Shares of BHARTI AIRTEL LTD. was last trading in BSE at Rs.520 as compared to the previous close of Rs. 525.5. The total number of shares traded during the day was 788876 in over 9958 trades.

The stock hit an intraday high of Rs. 529.4 and intraday low of 517.6. The net turnover during the day was Rs. 412471313.

Source : Equity Bulls

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