Airtel emitting strong signals; improving margins along with debt-reduction

Bharti Airtel reported encouraging results for the April-June quarter (Q1) of 2023-24 financial year (FY24) with consolidated revenues and earnings before interest, taxes, depreciation, and amortization (Ebitda) of Rs 37,400 crore and Rs 19,750 crore, respectively. The revenues were up 4 per cent quarter-on-quarter (Q-o-Q) and up 14 per cent year-on-year (Y-o-Y). Ebitda was up 5 per cent Q-o-Q and up 19 per cent Y-o-Y.
 

The adjusted profit after tax (PAT) was Rs 2,900 crore, after accounting for an exceptional forex loss of Rs 3,420 crore due to devaluations of Naira (Nigerian currency). Cost controls and network optimisation led to improved margins despite continued capex.
 

Airtel added a net 0.8 million post-paid subscribers, and the churn rate in mobile business stayed stable Q-o-Q at 2.8 per cent.

Data traffic was up 7 per cent Q-o-Q and usage was at 21 gigabytes (GB) per month. Mobile Arpu (average revenue per user per month) in India hit the Rs 200 mark (up 3.6 per cent Q-o-Q and up 9.3 per cent Y-o-Y). The India wireless business reported an Ebitda margin of 53.7 per cent (up 111 bps Q-o-Q), with the benefit of an increase in minimum recharge plans, along with ongoing cost optimisation.
 

However, 4G subscriber net additions was at 5.6 million (Q-o-Q) which was weaker than net additions in the last two quarters (6.5 - 7.4 million range). Rival Jio had higher net additions.
 

Revenue grew across segments for Airtel. Homes revenue grew by 6 per cent Q-o-Q (25.4 per cent Y-o-Y), and Airtel business had revenue growth of 5.6 per cent Q-o-Q and 15.8 per cent Y-o-Y. Capex for the consolidated business was at $1.2 billion (down 8 per cent Q-o-Q) due to lower Airtel Africa capex (down 52 per cent Q-o-Q) despite higher India business capex (up 3.8 per cent Q-o-Q). The India mobile business saw capex increase by 17.8 per cent sequentially. 

By the calculation, Ebitda minus capex, operating cash flow was at $1.1 billion (up 26 per cent Q-o-Q) while India operating cash flow increased to $585 million (up 10 per cent Q-o-Q). The net consolidated debt decreased by $574 million Q-o-Q ($25.3 billion in Q1FY24 versus $25.9 billion in Q4FY23) with Africa net debt lower by around $200 million Q-o-Q. Net debt to Ebitda stands at 2.63x vs 2.83x in Q4FY23 after Airtel did part pre-payment of Rs 8,000 crore spectrum liabilities. Net debt excludes financial lease obligations of Rs 58,900 crore. If those are included, the ratio is 3.2x.
 

Management assesses network optimisation has led to a 0.5 per cent decline in network operating expenditure (opex), despite 5G rollout. Operating cost per site per month declined Q-o-Q, driven by a focus on reducing costs at very high-cost sites (50,000 sites with network opex of over Rs 100,000 per month). Capex guidance stays in the range of Rs 28,000 crore - Rs 31,000 crore for FY24.

The company has stopped investments on 4G and is using 5G to offload up to 30 per cent of 4G traffic on 5G-enabled sites. One priority is deleveraging to bring net debt: Ebitda to 2x. 

Target valuations should include the 56 per cent stake in Airtel Africa which is profitable (PAT of Rs 700 crore and Ebitda margin of about 50 per cent) and also the 47 per cent stake in Indus Towers. Analysts should take political and regulatory risks across Africa into account as well as brace for potential devaluations. 

The improving margins and Arpu plus the debt-reduction are all positive factors driving share price. If the duopoly continues, Arpu can be expected to rise further, driven by tariff hikes as well as conversions from prepaid to postpaid and upgrades from 2G to 4G.
 

According to Bloomberg, only three of analysts polled in August have a ‘reduce’/’underweight’, and one is ‘hold’; the rest 20 are bullish on the stock. Their average target price is Rs 962.5, indicating an upside of 8 per cent from current levels of Rs 891.