Bharti Airtel: Risk-reward ratio turns favourable

Data set to contribute about 50% of incremental mobile revenue over FY14-17 on rapid subscriber growth

After a long, while Bharti Airtel is seeing sustained investor interest, as headwinds are seen to be abating in the domestic business. The stock is up 13 per cent over three months and 42 per cent over six months. The change in sentiment has largely been driven by improvement in the India business over the past 18 months. The primary reason is steady improvement in profitability and expectations of cash flows returning to positive territory in FY15. In the domestic business, margins have improved by 600 basis points over the past five quarters and customer churn has stabilised.

While this has been apparent from the company's quarterly results, there are factors that are leading to a lot more optimism around the stock. In FY14, the company's operating cash flows jumped 55.2 per cent to Rs 22,800 crore, largely driven by better working capital management and overall improvement in profitability. The Street has a lot more confidence now that the company will be able to service debt and fund capital expenditure lined up over the next three years. Analysts were worried about the company's spectrum payouts and capex of Rs 64,000 over FY15-17. Despite the payouts and capex, CLSA believes Bharti's hefty cash flow of Rs 98,800 crore should enable net debt to fall from 2.6 times Ebitda in FY14 to 1.6 times by FY17. "Bharti's balance sheet is improving and sector consolidation will be an added opportunity," the brokerage adds. In the current financial year, IIFL Institutional Equities expects the company to be free cash-positive (excluding spectrum payouts), on continued improvement in operating cash flows.

Data is a big opportunity for the company, the market believes. The total data volumes on the company's network have increased the customer base by 53 per cent year-on-year in FY14. CLSA expects Bharti's mobile-data consumers to jump 2.3 times to 88 million by FY17 and data to contribute about 50 per cent of incremental mobile revenue over FY14-17. This would drive an Ebitda CAGR of 14 per cent in the same period. According to the management, data already contributes $1 million in revenues a day.

The Street has also welcomed the company's move to unlock value through sales of passive infrastructure in its African and Bangladesh operations. While the African business has not delivered on the profitability front and most of the market remains cautious, CLSA has an optimistic view on that, too. The brokerage says the company is showing net margin improvement in eight of the 17 African markets it is present in.