Key takeaway: Bharti’s recent 9% fall from peak offers a more attractive entry point into the stock. First, a comparison of Arpu/per capita GDP ratio in 45 countries suggests that there is sufficient headroom for Arpus to rise further. Second, 5G auction is unlikely in 2022 and an ample supply with a set auction calendar could lead to a more disciplined spectrum capex in future. Lastly, valuations are reasonable relative to growth. We reiterate ‘buy’ with price target of Rs 925.
Stock down 9% from peak: Since the steep 20-25% tariff hikes announced by Bharti and its peers in November, Bharti Airtel’s stock is down 9% and has underperformed Nifty by 9%. This has been driven by three key concerns. First, scope for further rise in sector Arpus after two punchy hikes in the past two years. Second, imminent 5G capex and lastly, discomfort with valuations of Bharti Airtel. We take a closer look to address these concerns in this note.
Immense scope for Arpus to rise: Our analysis of Arpu/per capita GDP ratio for 45 countries reveals that countries with per-capita GDP in the range of US$1000-3000 have an Arpu/GDP ratio of 1.9-2.1%. As against this, India’s current sector Arpu of Rs 159 implies an ARPU/GDP ratio of 1.3%. Assuming entire flow-through of recent tariff hikes, sector Arpus could reach Rs187 which would take up Arpu/per capita GDP ratio to 1.6% – still lower than the 2% levels seen for countries with comparable income levels. At 2% Arpu/per capita GDP ratio, India’s sector Arpu could reach Rs240 – offering another 27% upside, implying significant scope for Arpus to rise further.
5G capex unlikely in 2022: With the government extending 5G trials till May-22, 5G auctions can take place only after 1HCY22. Also, the government has announced its intentions of conducting spectrum auctions during 4Q of every fiscal year, which suggests that 5G spectrum auctions may take place in 4QFY23. In our view, operators may not rush to acquire spectrum since there is ample spectrum availability and certainty of unsold spectrum being auctioned every year. That said, we do model 5G spectrum spend of Rs 300bn in FY24.
Premium valuations reflect strong growth: Bharti has witnessed a sharp re-rating driven by consolidation and an improving pricing environment. This has resulted in its consol. EV/Ebitda valuation range to rise from 7.2x over last 10 years to 8.6x over past three years. When we adjust for Africa and Towers business, Bharti India’s EV/Ebitda valuations have also re-rated from 8x over last 10-years to 11x over last 3-years. This is higher than regional telcos, and is justified in our view given Bharti’s superior growth outlook.
Reiterate ‘buy’ with Rs 925 PT: Over FY22-24, we expect Bharti to deliver 17%/21% CAGR in consol. revenue/EBITDA, assuming no further tariff hikes till 4QFY24. Despite our projection of US$11bn capex including US$2bn for 5G spectrum, we expect Bharti to deliver US$5.3bn of cumulative FCF over FY23-24 and see its ROCEs improve to 14%. We reiterate our Buy call on Bharti with PT of Rs 925, based on India EV/Ebitda of 9.8x.