Bullish on India: Bharti Airtel to win as India goes digital; 5G at home, abroad fuel growth

Bharti Airtel is set to gain advantage through its business home and abroad, and by expanding 5G offerings, digital services and customer base

As India’s digital economy expands to $1 trillion by 2030, driven by telecom companies, to a large extent, Bharti Airtel is likely to emerge as a big winner.

The Sunil Bharti Mittal-led telecom company has the potential to ride the digital growth, since it can bring the much-needed investments for network expansion and enhancing coverage.

Bharti Airtel is set to consolidate its position further where rivals falter, both at home and abroad, and by expanding 5G offerings, digital services and customer base.

From starting its operation in 1995, to AR Rahman’s iconic caller tune in 2002, launching India’s first 4G service in 2012 and launching 5G in October 2022, Airtel has come a long way.

Consolidation and home growth

India’s telecom market is increasingly becoming a duopoly – dominated by Bharti Airtel and Reliance Jio. Several companies have gone bankrupt or have merged with other entities. Other players are bleeding money and users.

Vodafone Idea, after merging operations in 2018, is now struggling with funding issues and losing subscribers. The company lost 12.8 lakh subscribers in June 2023. It’s a similar story for BSNL, despite the PSU getting revival packages from the government. It lost 18.7 lakh subscribers in June, according to data from the Telecom Regulatory Authority of India (TRAI).

Since Reliance Industries hasn’t announced IPO plans for Jio Infocomm, Bharti Airtel has the opportunity to deliver attractive returns to investors. Analysts are also bullish on Bharti Airtel on expectations of tariff hikes.

Bullish on India

India mobile business

During the 5G spectrum auctions in 2022, the company spent Rs 43,040 crore to acquire 19,867.8 MHz spectrum, consisting primarily of 3.5 GHz and 26 GHz bands. Its India mobile services revenue increased 12 percent YoY to Rs 20,392.4 crore in Q1FY24 and the ARPU reached Rs 200.

Motilal Oswal attributed the increase in ARPU to premiumisation of customers by converting prepaid customers to postpaid ones, which almost doubled ARPU, data consumption and monetisation. The number of postpaid customers increased 13.5 percent YoY to 2 crore in this quarter.

The company also expects more demand for postpaid services as only 6 percent of its customers use postpaid in India. In markets like Brazil and Thailand, the number is high at 40-50 percent. “So the opportunity is vast in this segment and it should be a growth lever,” the brokerage said.

Airtel’s African safari: Growth sighting

Airtel started its operations in Africa in 1998 by launching in the island-nation of Seychelles. Revenue of African mobile services increased 20.4 percent YoY to Rs 11,316.8 crore in this quarter. The African mobile services revenue has now grown to more than 55 percent of the company’s India mobile revenues. The customer base grew 8.8 percent YoY to 14.3 crore.

Brokers are confident about the company’s prospects in the region. “Airtel Africa is trading at 3.5x EV/EBITDA on FY23 and 2.8x on FY25E. Airtel Africa has consistently delivered strong earnings growth for the last 3-4 years, with a ~19% CAGR over FY19-23. A strong balance sheet with low leverage and healthy FCF further adds to the strong capabilities,” said Motilal Oswal.

Home services

Motilal Oswal said the company expanded its footprints in the home business -- its fibre-based broadband services. From being present in 100 cities in FY2020, it has expanded to 1,225 cities in the last three years. This segment added 413,000 customers in the quarter and now stands at 65 lakhs. It delivered a revenue growth of 25.4 YoY to Rs 1,162.1 crore in the quarter.

According to Axis Securities, “the company has a strong strategy of hunting (offering different solutions to existing customers (mainly 50 million customers having strong financial conditions) and mining new customers”.

Bharti Airtel’s portfolio also consists of Digital TV services and Business services. The company also began testing Airtel Finance in some market places.

Valuation

Motilal Oswal added that the stock would be range-bound in the short term due to the high capex incurred by 5G rollout but has the potential to grow EBITDA by 40-50 percent and reduce debt by 50 percent.

Geojit said the cost-saving measures by the company and regular addition of new customers will improve performance in the near term.

Motilal Oswal has given a SOTP-based target price of Rs 1,020 -- an upside of 15 percent -- while Geojit has given a target price of Rs 954, expecting a return of 9 percent.