20% CAGR in India mobile Ebitda estimated over FY22-24; TP raised to Rs 850 from Rs 685; risk-reward is favourable; ‘Buy’ retained
The government’s four-year moratorium on AGR/spectrum payments will offer VIL cashflow relief and could lead to government taking up a sizable stake in VIL. However, Bharti’s usage of its Rs 117-bn annual cashflow relief for capex will accelerate market share shifts in its favour. We expect Bharti to gain 340bps market share to 39% over FY22-24 driving 20% Cagr in India mobile Ebitda. We raise our PT to Rs 850 on higher multiples to factor in potential growth acceleration. BUY
Government announces a number of reforms: The Government approved a number of reforms addressing three broad areas for the sector. Firstly, it has allowed a four-year moratorium on AGR and spectrum payments on an NPV neutral basis to provide near-term liquidity. Secondly, it has made investments easier and more attractive by removing Spectrum Usage Charge (SUC) and allowing surrender of spectrum for spectrum acquired in future auctions and also fixing an auction calendar. Thirdly, it has approved removal of non-telecom revenues from Adjusted Gross Revenue (AGR) calculations and relaxed KYC requirements which should support margins.
Govt. likely to take stake in VIL: The four-year moratorium on AGR and spectrum dues will offer Rs 250-bn annual cashflow relief to Vodafone Idea (VIL), improving its chances of surviving for longer. The govt. has allowed telcos/VIL to pay interest on deferment of payments through equity. Per our calculations, the government could own 26% of VIL at the end of four-year period, if VIL chooses to pay the cumulative interest of Rs 90 bn through equity, assuming shares are issued at CMP.
Is duopoly still in play? Yes it is but a bit delayed. Ignoring VIL’s entire spectrum and AGR dues, VIL’s financial dues of Rs 225 bn need a quarterly Ebitda of Rs 5.6 bn for servicing interest. While VIL’s Ebitda in Q1FY22 was at Rs 12.8 bn, a 13% fall in its Q1FY22 mobile revenues will result in its Ebitda falling below the Rs 5.6-bn threshold. This decline in revenues is possible given that Bharti will likely redirect annual cashflow relief towards network investments, which will accelerate its market share gains.
Risk reward remains favourable: The survival of VIL could drive a delay in tariff hikes; however, in such a scenario, Bharti is likely to gain more subscribers/market share. Over FY22-24, we expect Bharti Airtel’s market share to rise by 340bps to 39%. While we maintain our estimates, we raise our PT to Rs 850/share on higher multiples for India mobile and non-mobile businesses. Our PT implies a consolidated EV/ Ebitda of 8.9x, which is in line with Bharti’s current 1-year forward multiple of 9.1x and at 10% premium to its 3-year average. Further market share gains from VIL could add another Rs 80/share to our PT, while no tariff hikes over FY23/24 with same subscriber assumptions and lower multiple could see a bear case valuation of Rs 625/share. With risk reward favourable, we reiterate Buy.