Bharti Airtel Rating ‘Buy’; Quantum of tariff hike a positive surprise

We raise our India mobile estimates by 8-15% to factor in tariff hike and expect Bharti to deliver 21% Consolidated Ebitda CAGR in FY22-24. Maintain Buy with a revised PT of Rs 925.

Bharti’s 20-25% hike in the prepaid tariffs reflects that its focus is moving towards boosting realisations as against gaining market share aggressively. We believe Reliance Jio may hike tariffs too as Bharti’s 20-50% premium offers significant headroom for Reliance Jio to raise tariffs.

Bharti raises prepaid tariffs by 20-25%: Bharti Airtel announced a 20-25% hike in prepaid tariffs effective from 26th November. After the sharp 60% increase in minimum prepaid voice tariffs in July-21, Bharti has raised these tariffs by another 25% to Rs 99 for a 28-day plan. Tariffs in the prepaid data segment have been revised by 20% across the board.

Magnitude of tariff hike surprises positively: Prepaid segment forms about 85% of Bharti Airtel’s India mobile revenues and a sharp 20-25% hike in this segment will provide a meaningful boost to Bharti’s overall estimates. While the 20% hike has surprised positively vs. our expectation of 7% hike in Q4FY22, we believe another tariff hike may be unlikely in Q4FY23. Consequently, we raise our ARPU estimates by 8-10% and expect Bharti to have Arpu of Rs 201 by FY24.

Why has Bharti raised tariffs now? We believe Bharti’s focus is slowly moving towards boosting realisations versus gaining market share aggressively. We had highlighted this change in intent after its segmented tariff hikes in July. We also note that the company’s subscriber churn in Q2FY22 was lower than expected despite sharp tariff hikes in the prepaid voice segment. This may have boosted its confidence on its ability to pass on tariff hikes. That said, post this hike, Bharti’s premium to Jio’s prepaid data tariffs has increased from 0-25% to 20-50% which is fairly high.

Will Reliance Jio raise tariffs? We believe so. Post current tariff hikes, the cheapest JioPhone plan is at a 37% discount to Bharti’s cheapest voice plan, making JioPhones more attractive to featurephone users. This may drive new subscriber additions for Reliance Jio. On the prepaid data side, Bharti’s 20-50% premium to Jio offers significant headroom for Reliance Jio to raise tariffs. We do note that Reliance may have to offset this increase in smartphone tariffs by adequate cuts in JioPhone Next’s pricing.

Raise estimates/PT: We raise our India mobile revenue/Ebitda forecast by 8-15% on higher ARPU estimates. Over FY22-24, we expect Bharti to deliver 17%/21% CAGR in consol. revenue/ Ebitda, assuming no further tariff hikes till Q4FY24. Despite our projection of $11-bn capex including $2 bn for 5G spectrum, we expect Bharti to deliver $5.3 bn of cumulative FCF over FY23-24. We raise our PT to Rs 925 which implies a consolidated EV/Ebitda of 8.8x, largely in line with Bharti’s 3-yr average of 8.6x. Maintain Buy.