Bharti Airtel – Buy

Recommended PriceRs.1,302
Target (Rs)Rs. 1,502
Upside15.4%
Investment period 1 Year

Bharti Airtel, based in India, is a major global provider of communication solutions, serving over 500 million customers in 18 countries across South Asia and Africa. It is one of the world’s top three mobile service providers and reaches over two billion people with its network. In India, Airtel is the largest provider of integrated communication services and holds the second largest mobile operator position in Africa. Airtel’s offerings for regular customers include high-speed mobile internet services like 4G and 5G, Airtel Xstream Fiber with internet speeds up to 1 Gbps, and various streaming services for music and videos. It also provides digital payment and financial solutions. For business clients, Airtel offers a range of services such as secure internet connectivity, cloud and data centre services, cyber security, Internet of Things (IoT), advertising technology, and CPaaS (Airtel IQ), which is a platform for customer engagement.

Why should you invest in Bharti Airtel?

Tariff hikes and subscriber upgradation remain key pillars of growth

Bharti Airtel is set for significant growth in the telecom sector. After a 20% tariff increase in December 2021, there is an expected additional hike of 15%-17% post-elections which Bharti Airtel is well-placed to benefit from. Currently, the company leads with an Average Revenue Per User (ARPU) of Rs. 208, which is likely to increase with the upcoming tariff hikes. The company also expects to grow its subscriber base faster than the industry average, aiming for a 2% annual growth compared to the industry’s 1%.

A major growth driver for Bharti Airtel is the upgrade of customers from 2G to 4G technology, with about 4 million users making the switch every quarter. This shift is significant as it indicates a rapid adoption of more advanced technology by Airtel’s customer base. Additionally, the migration of current 4G users to more expensive plans due to their higher data needs also boosts revenue.

Moreover, Bharti Airtel is expanding its reach in rural areas and benefiting from overall increased data usage, which currently averages 21.7 GB per customer each month. This higher usage is another factor that will likely enhance ARPU. The company’s business model is also highly efficient, requiring minimal operational expenses for adding new customers, which greatly enhances profits due to operational leverage. Over the last two years, Bharti Airtel has shown strong financial efficiency, with an impressive EBITDA margin of 75% on incremental revenue, highlighting its ability to turn revenue growth directly into profit.

Future trajectory fuelled by telecom dominance and financial services expansion in Africa, and robust enterprise business performance

Bharti Airtel has been excelling in the telecom sector, especially in Africa where it is among the top two mobile service providers in almost all the markets it serves. From FY18 to FY23, Airtel Africa saw its revenue increase by 16% annually and its EBITDA, a measure of profitability, grow by 26% each year. This success is due to more customers, higher average revenue per user (ARPU), and better profit margins. Despite a large customer base, only 39% use data services, showing significant potential for growth in a market where overall telecom usage is still low.

Furthermore, for the future, Bharti Airtel expects its revenues to grow by mid-single digits annually and its EBITDA by high-single digits from FY23 to FY27, even considering a one-time currency devaluation in FY24. The company has also ventured into financial services through its Mobile Money platform in Africa, taking advantage of the region’s less developed banking sector. By Q2FY24, this service contributed 17% to Airtel’s revenue, with 36.5 million customers transacting USD 56 billion.

Besides telecom, Airtel is expanding its enterprise business, offering modern tech solutions like cloud services, data centres, security, and Internet of Things (IoT). Over the last five years, this sector has seen a 10% revenue growth and a 12% rise in EBITDA. IoT is a promising area for Airtel, already holding a 50% market share in segments like smart metres and connected vehicles. As technology adoption increases, Airtel is well-positioned to capitalise on these emerging opportunities, leveraging its strong market presence and diverse offerings.

Valuation and Outlook

Bharti Airtel is on the brink of a significant financial upswing, potentially the best in over a decade, thanks to several key factors. These include planned increases in service charges, upgrades from older 2G networks to faster 4G, and strong performance in its business and home fibre-optic services. Additionally, costs are expected to drop after the company finishes setting up its 5G networks over the next three years. Financial experts predict that the company’s earnings could exceed 20% due to record high cash flow which will help reduce debt. Despite concerns over Airtel’s cautious 5G strategy compared to competitors like Jio, Airtel has managed to maintain its customer base and increase its market share. This strategy focuses more on enhancing 4G in rural areas rather than aggressively rolling out 5G. The upcoming rise in average earnings per user, driven by a rate hike expected after the elections and other factors like more people moving to 4G and opting for bundled services, supports a positive outlook for the company. Therefore, it’s recommended to buy Airtel’s stock, expecting a 15.4% growth within a year.

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