Bharti Airtel - Enterprise business - under-appreciated; unleashing digital opportunity - ICICI Securities

In continuation to our deep diving into enterprise business (link), we are evaluating Bharti Airtel's (Bharti) enterprise business housed under Airtel Business. Airtel Business is under-appreciated considering it is the most profitable business for Bharti with ROIC of 35-40% in the past three years and EBITDA CAGR of 13% over FY17-21, which underpins our optimism for the business. Airtel Business will benefit from the shift to new sales model for tapping SME opportunity which is adopting digital solutions like never before. Considering SME buy-bundled services unlike customised solutions by large enterprises, Airtel benefits from existing relationships and launch of new digital platforms. Nxtra (data centre and cloud offerings) has grown >3x over FY18-20, and is likely to grow over >3x in next 3-4 years. Digital platforms like Airtel IQ, Airtel Secure and Airtel IoT open doors in new-age digital solutions which are growing fast >30-50%. We see a significant upside risk to our growth estimate of 6.5% CAGR for enterprise revenue (FY21-23E). Reiterate BUY on Bharti.

- Airtel Business is the most profitable business for Bharti. Airtel Business contributed 14% to consolidated revenue and 12% to EBITDA in FY21. Airtel Business revenue has grown at CAGR of 7.1% over FY17-21 to Rs144bn and EBITDA has grown at 12.9% CAGR to Rs55bn. It has generated FCF (EBITDA minus capex) of Rs132bn in past five years; in past three years ROIC has been 35-40%. Airtel Business offers products and services including voice, data, collaboration, cloud, data centre, security, IoT, network integration, managed services, and digital services. Airtel Business has sub-sea cable network of 365k-Rkms, covering 50 countries. In the past two years, Airtel Business' market share has grown by 800bps to 31%, which establishes its prowess.

- Company changing business model to capture huge SME opportunity. Airtel Business gets 80% revenue from 20% customers and it sees huge opportunities in farming and hunting. It has made changes in business model - 1) in-source SME sales force (earlier outsourced) which should improve SME sales channel; 2) building omni-channel digital capabilities for customer acquisition and servicing; 3) entered new areas including data centres, Airtel Secure, Airtel IQ, Airtel Cloud and Airtel IoT; and 4) revamped teams' incentive structure with targets for hunting and farming.

- Strong presence in fast growing India market. Airtel Business' revenue grew at CAGR of 6.5% compared to 0.6% CAGR revenue growth for TCom. Airtel Business India non-voice enterprise revenue can continue to grow faster on higher contribution from new segments of security, cloud and cloud communications. It is also a beneficiary of IoT adoption and rollout of private network by industries for automation. We see Airtel's India non-voice enterprise revenue growing in mid-teens at least over the next few years.

- Cloud - betting big on data centres. Nxtra Data offers 1,98,000 sqft of data centre space in 10 data centres. Nxtra Data revenue has grown by 3.2x over FY18-20 to Rs11bn; EBITDA has grown by 3x to Rs2.8bn. India data centre market is expected to grow 3x in next four years to 1,100-1,200MW. We expect Nxtra revenue to grow faster with the launch of more data centres and strong relationship with hyperscalers who are looking to expand presence in India. Further, Nxtra also offers public cloud, private cloud and hybrid cloud services and helps enterprises migrate to cloud architecture.

- Digital services - rising up in value chain which is likely to boost TAM. Airtel Business has also developed multiple platforms and services, which are adjacent to connectivity solutions and help the company grab a higher share of ICT spending by enterprises. The services launched by Airtel Business include:

1) Airtel IQ - a cloud communication platform for customer engagement through customers' preferred channels - calls or SMS and mobile or web app using APIs and software tools. It is designed for easy adoption (plug and play) into any application using easy API. Airtel Business has gained good traction for the product with on-boarding of 50 customers including Swiggy, HDFC Bank etc. The opportunity for Airtel IQ is quite high with underlying market opportunity in India at US$1.6bn and growing fast. Airtel IQ total addressable market will increase once it is launched in other geographies;

2) Airtel Secure is multi-layered, full service cybersecurity offerings designed to safeguard enterprises against threats. It has partnerships with ~8 cybersecurity product companies which enables it to offer the entire suit of security services. India security market is estimated at US$700mn. Airtel Business has ~100 customers on Airtel Secure and the list is growing fast; and

3) Airtel IoT is an integrated platform offering end-to-end solutions powered by a variety of connectivity technologies. Airtel IoT has >7,000 active customers with >6mn IoT device deployments already. It is adding, on an average, >12k IoT devices per day, which is a testimony for demand for IoT services. India IoT market stands at US$1bn and is growing fast.

- Rising contribution from new-age solutions likely to drive higher valuations for enterprise business. We remain excited on enterprise business within telecom due to 1) rising investment by enterprises into new-age solutions driving higher total addressable market; 2) telcos have done reasonable investments in digital solutions for enterprise business (unlike B2C, which are captured largely by startups or technology companies); and 3) 5G may drive higher growth for connected devices which should augur well for telcos. Further, we like Bharti's strategy to enter new services such as cloud communications, security and cloud which should help the company grow faster in next decade. We see these services commanding sales multiple compared to 11x EBITDA multiple assigned by us. The company also plans to house digital business in parent in new proposed structure which should help drive higher value. Data centre business in Bharti is under-appreciated, which has been growing fast and may continue to do so for the next few years. Carlyle has valued the business at US$1.2bn; we see value for this business growing fast as we see revenue from the segment rise by 3x in next few years.

Shares of BHARTI AIRTEL LTD. was last trading in BSE at Rs. 530.35 as compared to the previous close of Rs. 529.65. The total number of shares traded during the day was 269188 in over 5257 trades.

The stock hit an intraday high of Rs. 535.5 and intraday low of 528.25. The net turnover during the day was Rs. 143029901.

Source : Equity Bulls

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