Despite 3.4% q-o-q increase in India revenue, Bharti’s India opex was flat, demonstrating operating leverage of the business model.
Bharti Airtel (Bharti) posted strong Q1FY20 numbers with 2.7% q-o-q revenue growth (1.9% Street’s estimate) and 32.9% Ebitda margin (32.0% Street’s estimate), after adjusting for reporting changes. The 1.5 mn dip in subscriber base indicates Sim consolidation in the industry, while 2.8% q-o-q ARPU improvement, to Rs 129, indicates that Bharti has capitalised on 2G to 4G movement by leveraging its superior network.
Key engagement operating metrics remained strong with 8.4 mn 4G subscriber addition and 13.1% data volume growth. We believe Bharti is taking advantage of Vodafone Idea’s relatively weak network to consolidate most of the data users on its network. Hence, it is well positioned to take advantage of pricing improvement in the smartphone segment, which we expect Reliance Jio (RJIO) to initiate from Q4FY20. Maintain Buy with DCF-based revised TP of Rs 414 (from Rs 406) as we roll over to Q3FY21e.
Sustained growth in India mobility
India mobility’s revenue rose 2.2% q-o-q to Rs 109 bn as Bharti was able to capitalise on subscriber movement from 2G to 4G. Revenue growth in other businesses was also strong—enterprises business up 6.8% q-o-q, DTH business up 9.3% q-o-q and homes business up 3.1% q-o-q. Despite 3.4% q-o-q increase in India revenue, Bharti’s India opex was flat, demonstrating operating leverage of the business model. We expect the India mobility business to continue to clock ~70% incremental Ebitda margin.
Capitalising on improving industry structure
We believe the industry structure is fundamentally changing with all operators looking to deleverage their balance sheets by selling non-core assets like fibre & towers and operators are designing tariff plans to ensure they get maximum ARPU from customers. With this discipline in place, we believe operators will follow RJIO’s lead in taking price hike for smartphone customers from Q4FY20. Bharti, with its strong 4G subscriber addition, is well placed to capitalise on higher smartphone pricing.
Outlook: Numbers reassuring
We believe stability in the subscriber base, bundled offerings in lieu of Airtel Thanks and agile pricing will help Bharti maintain growth momentum. The stock is trading at 6.8x FY21e EV/Ebitda. We maintain ‘BUY/SO’ with revised target price of Rs 414.