Note from Bharti Airtel – Buying: Government Aid to Help Company Gain Market Share Faster

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We are increasing our PT to Rs 850 on higher multiples to account for a potential acceleration in growth. TO BUY

The government’s four-year moratorium on AGR / spectrum payments will provide relief from VIL’s cash flow and could lead the government to take a significant stake in VIL. However, Bharti’s use of his annual cash relief of Rs 117 billion for capital spending will accelerate market share shifts in his favor. We expect Bharti to gain a market share of 340 basis points to 39% in FY 22-24, resulting in a Cagr of 20% in mobile Ebitda in India. We are increasing our PT to Rs 850 on higher multiples to account for a potential acceleration in growth. TO BUY

The government announces a number of reforms: The government has approved a number of reforms covering three main areas for the sector. First, it authorized a four-year moratorium on AGR and spectrum payments on a NPV neutral basis in order to provide short-term liquidity. Second, it made investments easier and more attractive by removing spectrum usage charges (SUCs) and allowing spectrum return for spectrum acquired in future auctions and also setting an auction schedule. Third, he approved the removal of non-telecom revenues from Adjusted Gross Income (AGR) calculations and relaxed KYC requirements that should support margins.

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Govt. Likely to Take Stakes in VIL: The four-year moratorium on AGR and spectrum royalties will provide annual cash relief of Rs 250 billion to Vodafone Idea (VIL), improving its chances of surviving longer. The govt. allowed telecoms / VIL operators to pay interest on deferred payments through equity. By our calculations, the government could own 26% of VIL at the end of a four-year period, if VIL chooses to pay the cumulative interest of Rs 90 billion through equity, assuming the shares are issued at the end of a four-year period. CMP.

Is the duopoly still at stake? Yes it is but a little late. Ignoring the full spectrum of VIL and AGR contributions, VIL’s financial contributions of Rs 225 billion requires quarterly Ebitda of Rs 5.6 billion for interest servicing. While VIL’s Ebitda at T1FY22 was Rs 12.8 billion, a 13% drop in its T1FY22 mobile revenues will cause its Ebitda to fall below the threshold of Rs 5.6 billion. This drop in revenue is possible given that Bharti will likely shift its annual cash flow relief towards investments in the network, which will accelerate its market share gains.

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The risk reward remains favorable: the survival of VIL could delay tariff increases; however, in such scenario, Bharti is likely to gain more subscribers / market share. During FY22-24, we expect Bharti Airtel’s market share to increase by 340 basis points to 39%. While we maintain our estimates, we are increasing our PT to Rs 850 / share on higher multiples for mobile and non-mobile businesses in India. Our PT involves a consolidated EV / Ebitda of 8.9x, which is in line with Bharti’s current 1-year forward multiple of 9.1x and a 10% premium over its 3-year average. Further market share gains from VIL could add another Rs 80 / share to our PT, while no price increase in FY 23/24 with the same subscriber assumptions and a lower multiple could result in a bear case appraisal of Rs 625 / share. With a favorable risk-return, we repeat Buy.

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