Bharti Airtel - Moneycontrol

Emkay Research is also available on www.emkayglobal.com and Bloomberg EMKAY<GO>. Please refer to the last page of the report on Restrictions on Distribution. In Singapore, this research report or research analyses may only be distributed to Institutional Investors, Expert Investors or Accredited

Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore.

CMP: Rs 452 as of (October 28, 2020)

TP: Rs 684 (■) 12 months

Rating: BUY (■) Upside: 51.4 %

India Equity Research | Telecommunications October 28, 2020

Result Update

Bharti Airtel Refer to important disclosures at the end of this report

Striking it well

Change in Estimates EPS Chg FY21E/FY22E (%) (30.6)/(3) Target Price change (%) NA Target Period (Months) 12 Previous Reco BUY

Emkay vs Consensus

EPS Estimates FY21E FY22E Emkay (5.1) 20.9 Consensus (11.2) 13.3 Mean Consensus TP (12M) Rs 683 Stock Details Bloomberg Code BHARTI IN Face Value (Rs) 5 Shares outstanding (mn) 5,456 52 Week H/L 612 / 350 M Cap (Rs bn/USD bn) 2,465 / 33.37 Daily Avg Volume (nos.) 2,59,17,120 Daily Avg Turnover (US$ mn) 171.5

Shareholding Pattern Sep '20 Promoters 56.2% FIIs 17.6% DIIs 21.7% Public and Others 4.5%

Price Performance (%) 1M 3M 6M 12M Absolute 2 (20) (7) 21 Rel. to Nifty (3) (23) (26) 20

Bharti reported a strong quarter with an 8% beat on EBITDA, supported by a healthy rebound in both India and Africa. India Wireless surpassed expectations by delivering ARPU growth of 3% qoq and strong subscriber additions.

Net subscriber additions of 14mn qoq, the highest since Q1FY19, was backed by higher port-ins and lower churn. India wireless recorded strong operating leverage, resulting in margin expansion of 200bps qoq.

FCF generation stood at Rs46bn despite a rise in capex. We expect FCF generation of Rs223bn over FY21-23E and we have not factored in any 5G capex yet. Tariff hike remains the key trigger for accelerated deleveraging, re-rating and funding potential 5G capex.

While we have deferred the tariff hike expectation to FY22 (due to lack of clarity), FY22-23E EBITDA get upgraded by 4% on the strong Q2 performance, which has also restricted the cut in FY21 EBITDA to a mere 1%. We retain Buy with a SoTP-based TP of Rs684.

Relative price chart

Source: Bloomberg This report is solely produced by Emkay Global. The following person(s) are responsible for the production of the recommendation:

Naval Seth [email protected] +91 22 6624 2414

Sonali Shah [email protected] +91 22 6624 2482

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Bharti Airtel (LHS) Rel to Nifty (RHS)

All round beat on operating performance: Consolidated revenue and EBITDA exceeded our projections by 4% and 8%, respectively. After many quarters of provisions, the absence of a meaningful exceptional item in the quarter was also sentimentally positive. Higher interest cost and depreciation charge accompanied by lower other income resulted into a net loss, albeit sizably lower than previous quarters. Within non-wireless, all segments, barring Home Broadband, saw healthy growth in the operating performance, with 6% sequential gain in DTH and Passive Infrastructure businesses. The India data customer base surprised positively and rose to 55.2% from 53.3% in Q1. Postpaid share was stable sequentially, while the churn improved to 1.7% from 2.2% in Q1.

Outlook: Strong 4G subscriber additions, ARPU growth despite seasonality, FCF generation and rebound in the Africa business are all clearly indicative of Bharti’s superior prowess. With a clarity on the AGR front, there are two key triggers that shall help in driving the stock going forward: 1) tariff hike and 2) clarity on timelines and quantum of 5G capex. Although we believe that a tariff hike is in the imminent future, an absence of one will not be severely detrimental for Bharti as highlighted in our recent sector note (curious case of tariff hike). We continue to highlight that no tariff hike in the worst case till FY23 and no 5G capex will still result into deleveraging, although at slower pace. Lastly, the push in the enterprise and home broadband seems promising. Key risks include: 1) any adverse regulatory regime; 2) lower-than-expected tariff hike; 3) weak economy, along with currency depreciation in the African markets; 4) additional bullet payment towards AGR penalty impacting liquidity; 5) sooner-than-anticipated 5G capex.

Please see our sector model portfolio (Emkay Alpha Portfolio): Telecommunications (page 14)

Financial Snapshot (Consolidated) (Rs mn) FY19 FY20 FY21E FY22E FY23E Total Revenue 8,07,802 8,75,390 10,28,493 11,75,681 12,70,779 EBITDA 2,58,189 3,64,823 4,67,160 5,79,001 6,29,317 EBITDA Margin (%) 32.0 41.7 45.4 49.2 49.5 APAT (24,413) 80,512 (27,944) 1,13,857 1,73,371 EPS (Rs) (4.5) 14.8 (5.1) 20.9 31.8 EPS (% chg) (227.7) 0.0 (134.7) 0.0 52.3 ROE (%) (2.7) 8.2 (3.0) 12.2 15.9 P/E (x) (101.0) 30.6 (88.2) 21.7 14.2 EV/EBITDA (x) 13.8 10.0 8.6 6.4 5.3 P/BV (x) 2.6 2.4 2.9 2.5 2.1 Source: Company, Emkay Research

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Bharti Airtel (BHARTI IN) India Equity Research | Result Update

Emkay Research is also available on www.emkayglobal.com and Bloomberg EMKAY<GO>. Please refer to the last page of the report on Restrictions on Distribution. In Singapore, this research report or research analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore.

October 28, 2020 | 2

Q2FY21 performance India business registered a sequential 10% rise in EBITDA, led by the wireless segment,

while the performance of the African business also picked up after being impacted in the previous quarter due to foreign exchange.

India wireless ARPU of Rs162 accompanied by strong 4G subscriber additions (+10% qoq) is indicative of better subscriber mix and positive impact of reverse migration (better recharges), and was above our estimates.

Apart from the Home Broadband segment (which we believe was on account of rapid expansion), all segments of the company saw a healthy rise in operating performance.

Exhibit 1: India & South Asia business snapshot Rs mn Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 YoY (%) QoQ (%) Total revenues 1,54,608 1,59,002 1,75,540 1,76,919 1,88,471 21.9 6.5 EBITDA 63,298 65,119 74,622 77,968 86,032 35.9 10.3 EBITDA / Total revenues 40.9% 41.0% 42.5% 44.1% 45.6% 471 bps 158 bps EBIT 4,601 6,559 14,835 17,350 24,165 425.2 39.3 Profit before Tax -17,071 -12,097 -15,814 -143 -3,768 (77.9) 2,534.7 Net Income -10,163 -8,799 -12,602 -1,487 -7,168 (29.5) 382.1 Capex 27,576 41,155 95,476 34,749 56,761 105.8 63.3 Operating Free Cash Flow 35,723 23,964 -20,854 43,219 29,271 (18.1) (32.3) Cumulative Investments 29,03,597 29,38,934 29,78,435 30,10,127 30,63,713 5.5 1.8 Network sites

India 1,85,582 1,89,857 1,94,409 1,96,145 2,01,192 8.4 2.6 of which broadband sites 1,81,825 1,88,591 1,92,068 1,94,205 1,99,464 9.7 2.7 Source: Company, Emkay Research

Financial performance Reported consolidated revenues stood at Rs258bn, up 7.7% qoq (4% higher than our

expectations).

EBITDA of Rs116bn was up 11.9% qoq, implying margin of 45.2% (+167bps qoq).

India operating expenses rose 3% qoq, led by a 10% increase in license fees and a 7% sequential rise in network opex. This was partially offset by a meaningful decline in employee expenses (-13% qoq) and SG&A costs (-7% qoq). SG&A costs have declined 14% since Q4FY20.

Consolidated net loss stood at Rs7.6bn. This was due to lower other income and higher interest charge. There was a net exceptional charge of Rs281mn, and a one-off charge of ~Rs493mn

pertaining to employee restructuring. This was offset in part by Rs212mn in tax benefits for one of the subsidiaries, which has been included in the tax expenses.

India Mobile: EBITDA increased 12.8% qoq, with EBITDA margins expanded 200bps qoq to 42.6%.

Data volume increased 6% qoq. However, average usage/sub saw a slight drop of 1% qoq to 16.4GB.

Data customer addition was strong and the base rose 9% sequentially to 162mn. Data customer as % of mobile customer was 55.2% vs. 53.3% in Q1FY21. 4G data customer addition grew 10% qoq to 152.7mn at the end of the quarter.

Blended churn rate dipped to 1.7% vs. 2.2%.

Airtel Business (Enterprise): EBITDA rose 5% qoq to Rs13.4bn with EBITDA margin of 37.3% (+105bps qoq).

Passive Infrastructure: EBITDA increased by 6% qoq, with revenues rising 8% sequentially.

Home Broadband: Revenue rose 2% qoq. However, EBITDA disappointed by declining 3% sequentially along with EBITDA margin contraction of 240bps qoq. The telco expanded its reach to 145 cities (48 cities through LCO’s) vs. 117 cities in the previous quarter.

DTH: Revenue and EBITDA rose 1% and 6% qoq, respectively.




October 28, 2020 | 3

Other highlights Net debt, inclusive of lease liabilities, stood at Rs1.37tn (vs Rs1.16tn in Q1). We believe

that this was due to a change in accounting policy as AGR liabilities are factored in debt this time around as against current liabilities in the previous quarter. Current liabilities dropped by Rs344bn in the quarter.

Consolidated capex stood at Rs67.9bn vs. Rs39.8bn in Q1FY21. India capex was at Rs55.9bn vs. Rs34.4bn in Q1FY21.

FCF during the quarter stood at Rs46bn, while operating cash flow stood at Rs50.6bn.

Exhibit 2: After slowdown in Q1, capex rose due to higher site rollouts

Source: Company, Emkay Research

Exhibit 3: Operating free cash generation stood strong despite rise in capex


Exhibit 4: FCF has risen meaningfully in H1FY21


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October 28, 2020 | 4

Exhibit 5: Trend of India Wireless KPIs: ARPU and subscriber addition beat our expectations Particulars Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 YoY (%) QoQ (%) ARPU (Rs) 128 135 154 157 162 27 3 MOU (mins) 848 898 965 994 1,005 18 1 Traffic (bn mins) 717 759 822 820 861 20 5 Subscribers (Mn) 279 283 284 280 294 5 5 Pre-Paid Churn 2.1% 2.6% 2.6% 2.2% 1.7%

Data metrics

Subscribers (mn) 124 138 149 149 162 31 9 Of which no. of 3G/4G customers (mn) 103 124 136 138 153 48 10 As % of customer base 44.5% 48.9% 52.4% 53.3% 55.2%

Total MBs on the network (bn) 4,829 5,547 6,453 7,240 7,640 58 6 Data usage/ User (GB) 13.1 13.9 15.0 16.7 16.4 25 (1) Source: Company, Emkay Research

Exhibit 6: Trend of DTH segment KPIs: there was strong subscriber addition in the quarter Particulars Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 YoY (%) QoQ (%) Digital TV subs (mn) 16.2 16.3 16.6 16.8 17.4 7.3 3.3 Net additions (000’s) 181 101 304 226 549 203.1 142.8 ARPU (Rs) 162 162 123 149 148 (8.8) (0.8) Monthly Churn 1.6% 1.8% 1.0% 1.3% 1.5% (5.1) 16.8 Source: Company, Emkay Research

Exhibit 7: Trend of Home Services segment KPIs: subscriber addition moderated after rising sizably in the previous quarter Particulars Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 YoY (%) QoQ (%) Subscribers (mn) 2.4 2.4 2.4 2.4 2.6 9.7 5.3 Net Additions (000's) 8 2 63 34 129 1,515.9 280.2 Average Revenue Per User (ARPU) 777 787 803 802 783 0.8 (2.4) Source: Company, Emkay Research




October 28, 2020 | 5

Exhibit 8: Actual vs. Estimates (Q2FY21)

Rs mn Actual Estimates % variation Comment

Emkay Consensus Emkay Consensus

Revenue 2,57,850 2,47,161 2,45,718 4% 5% Strong performance in India wireless and Africa business

EBITDA 1,16,420 1,07,737 1,08,362 8% 7% Beat in India business (9%) and Africa (12%) EBITDA Margin 45% 44% 44% 156 bps 105 bps

PAT -7,632 -1,073 806 -611% -1047% Due to higher interest and tax outgo Source: Company, Bloomberg, Emkay Research

Exhibit 9: Quarterly financials Rs mn Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 YoY (%) QoQ (%) H1FY21 H1FY20 YoY (%) Mobile 1,70,075 1,75,504 1,95,619 1,94,373 2,11,096 24.1 8.6 4,05,469 3,35,265 20.9 Home Services 5,475 5,546 5,725 5,785 5,874 7.3 1.5 11,659 11,180 4.3 Enterprise Total 33,312 33,177 33,762 35,019 35,821 7.5 2.3 70,840 65,392 8.3 Others 7,892 8,038 6,050 7,452 7,571 (4.1) 1.6 15,023 15,201 (1.2) Passive Infrastructure 16,673 16,662 16,826 16,421 17,663 5.9 7.6 34,084 33,935 0.4 Total gross Sales 2,33,427 2,38,927 2,57,982 2,59,050 2,78,025 19.1 7.3 5,37,075 4,60,973 16.5 Inter-segmental eliminations 22,114 19,456 20,755 19,663 20,175 (8.8) 2.6 39,838 42,281 (5.8) Net Sales 2,11,313 2,19,471 2,37,227 2,39,387 2,57,850 22.0 7.7 4,97,237 4,18,692 18.8

Access charge 26,389 27,109 28,270 28,011 29,229 10.8 4.3 57,240 52,016 10.0 as % of sales 12.5 12.4 11.9 11.7 11.3 11.5 12.4

Network Operating 49,689 49,345 52,015 51,036 54,564 9.8 6.9 1,05,600 96,325 9.6 as % of sales 23.5 22.5 21.9 21.3 21.2 21.2 23.0

Employee Expenses 9,464 9,651 10,316 11,566 11,008 16.3 (4.8) 22,574 18,105 24.7 as % of sales 4.5 4.4 4.3 4.8 4.3 4.5 4.3

Marketing Expenses 20,404 23,031 24,404 23,927 24,274 19.0 1.5 48,201 46,147 4.5 as % of sales 9.7 10.5 10.3 10.0 9.4 9.7 11.0

License Fee 16,995 17,877 20,570 20,768 22,355 31.5 7.6 43,123 35,386 21.9 as % of sales 8.0 8.1 8.7 8.7 8.7 8.7 8.5

Total operating expenditure 1,22,941 1,27,013 1,35,575 1,35,308 1,41,430 15.0 4.5 2,76,738 2,47,979 11.6

EBITDA 88,372 92,458 1,01,652 1,04,079 1,16,420 31.7 11.9 2,20,499 1,70,713 29.2 Depreciation 69,351 69,408 70,550 72,268 74,211 7.0 2.7 1,46,479 1,36,938 7.0 EBIT 19,021 23,050 31,102 31,811 42,209 121.9 32.7 74,020 33,775 119.2 Other Income 3,466 3,715 9,220 4,805 1,489 6,294 6,411

Interest 31,872 32,816 41,302 34,562 37,604 18.0 8.8 72,166 65,800 9.7 Non-operating expenses 3,07,110 10,500 70,040 1,17,457 493 1,17,950 3,21,804

PBT -3,16,495 -16,551 -71,020 -1,15,403 5,601 101.8 104.9 -1,09,802 -3,47,418 (68.4) Tax -85,039 -10,379 -20,335 38,175 5,517 106.5 (85.5) 43,692 -91,109 (148.0) PAT before MI -2,31,456 -6,172 -50,685 -1,53,578 84 100.0 100.1 -1,53,494 -2,56,309 (40.1) Minority interest 2,148 5,704 2,600 7,419 7,293 239.5 (1.7) 14,712 6,886 113.7 PAT MI -2,33,604 -11,876 -53,285 -1,60,997 -7,209 96.9 95.5 -1,68,206 -2,63,195 (36.1) share of associates 3,155 1,523 915 1,666 -423 (113.4) (125.4) 1,243 4,086 (69.6) PAT -2,30,449 -10,353 -52,370 -1,59,331 -7,632 96.7 95.2 -1,66,963 -2,59,109 (35.6)

Margins (%) (bps) (bps) (bps) EBIDTA 41.8 42.1 42.8 43.5 45.2 333 167 44.3 40.8 357 EBIT 9.0 10.5 13.1 13.3 16.4 737 308 14.9 8.1 682 EBT (149.8) (7.5) (29.9) (48.2) 2.2 15,195 5,038 (22.1) (83.0) 6,089 PAT (109.1) (4.7) (22.1) (66.6) (3.0) 10,610 6,360 (33.6) (61.9) 2,831 Effective Tax rate 26.9 62.7 28.6 (33.1) 98.5 7,163 13,158 (39.8) 26.2 (6,602) Source: Company, Emkay Research




October 28, 2020 | 6

Africa operations – Q2FY21 financial performance Consolidated revenue stood at US$965mn (up 14.3% yoy/13.4% qoq), EBITDA came

in at US$437mn (+17.5% yoy and 16.5% qoq) with margin at 45.3% (+122bps yoy). Voice revenue rose 5.3% yoy (11.5% in CC terms), driven by expansion of the distribution

network and network infrastructure.

Voice ARPU declined marginally by 0.4% yoy in CC terms to US$1.4.

Data revenue increased 31.3% yoy on CC terms, driven by data customer growth of 24.1% yoy and accelerated 4G network rollout. Data customer base rose to 34% vs. 33.2% in Q1.

During the period, overall data usage was up 81% yoy and 5% sequentially on the back of an increase in the customer base and 47.4% yoy rise in data usage per customer. However, data usage per customer declined marginally on a sequential basis.

Although declining on a yoy basis, PAT surged 67% sequentially on a low base to US$70mn from US$42mn in Q1FY21. Higher tax outgo and finance charges led to a yoy decline in PAT.

The board approved a progressive new dividend policy as a result of a strong business performance, significant growth opportunities and aim to reduce leverage. The company intends to grow dividend annually by mid-to-high single digit percentage from the base of US$4cents per share for FY21, until reported leverage falls below 2.0x.

Exhibit 10: Consolidated Airtel Africa financials (in reported terms) Particulars (USD mn) Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 YoY (%) QoQ (%) H1FY21 H1FY20 YoY (%) Total revenue 844 883 899 851 965 14.3 13.4 1,816 1,640 10.7 EBITDA 372 399 397 375 437 17.5 16.5 812 720 12.8 EBITDA margin 44.1% 45.2% 44.2% 44.1% 45.3% 44.7% 43.9%

Net Income 90 90 65 42 70 (22.2) 66.7 112 215 (47.9) Capex 147 150 246 66 149 215 246 (12.6) Operating FCF (EBITDA - Capex) 225 249 151 309 287 27.6 (7.1) 596 473 26.0 Source: Company, Emkay Research

Consolidated KPIs (Africa) The subscriber base was up 4.4% qoq at 116.4mn from 111.5mn in Q1FY21. Data

customer base stood at 40mn (34% of subscriber base) vs. 31.9mn in Q2FY20 and 37mn in Q1FY21. ARPU at US$2.8, rose 7.7% qoq.

Mobile money revenue increased by 27.9% yoy on a reported basis, driven by customer base growth (+29.6%) and transaction value growth (+56.4%). Mobile money ARPU growth of 3% was driven by an increase in the transaction value and a higher contribution from merchant payments, cash out and recharge of mobile services through Airtel Money.

Total Capex was US$149mn vs. US$147mn in Q2FY20.

Net Debt as of Q2FY21-end was US$3.5bn vs. US$3.4bn in Q1FY21. Net debt to EBITDA

was flat at 2.2x.

Exhibit 11: KPI trend Particulars Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 YoY QoQ ARPU ($) 2.8 2.8 2.8 2.6 2.8 0.0% 7.7% Subscribers ('000) 1,03,881 1,07,140 1,10,604 1,11,461 1,16,371 12.0% 4.4% Data

Data Customer base (000's) 31,910 32,887 35,443 36,972 39,596 24.1% 7.1% As % of total base 30.7% 30.7% 32.0% 33.2% 34.0%

Data Revenue (US$ mn) 229 247 260 267 283 23.6% 6.0% Source: Company, Emkay Research




October 28, 2020 | 7

Nigeria Revenues from Nigeria were at US$377mn in Q2, up 15% yoy and 11% qoq.

Revenue growth in CC terms was 23.1%, partially offset by currency devaluation and customer usage, particularly in voice.

Growth was driven by voice revenue growth of 15.8% and sustained growth in the data segment.

Data revenue was up 36.7% in CC terms and remained the largest contributor to revenue growth.

Exhibit 12: Nigeria performance (in reported terms) Particulars (USD mn) Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 YoY (%) QoQ (%) H1FY21 H1FY20 YoY (%) Total revenues 327 355 377 341 377 15.3 10.6 718 640 12.2 EBITDA 174 194 209 182 204 17.2 12.1 386 341 13.3 EBITDA margin 53.2% 54.6% 55.4% 53.4% 54.1% 90 74 53.8% 53.2% 52 Capex 62 64 145 30 67 8.1 123.3 97 115 (15.8) Operating FCF (EBITDA - Capex) 112 130 64 152 137 22.3 (9.9) 289 225 28.4 Source: Company, Emkay Research

East Africa Reported revenue in East Africa increased by 17.9% yoy (CC growth of 26%), which was

partially offset by some currency devaluation.

Revenue growth was driven by growth in all segments, with voice revenue up by 17.2%, data revenue by 28.7% and mobile money revenue increasing by 50.1% yoy on a CC basis.

Voice revenue was up 17.2% in CC terms, largely driven by customer growth of 13.9% and increased usage per customer of 17.9% yoy.

Exhibit 13: East Africa performance (in reported terms) Particulars (USD mn) Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 YoY (%) QoQ (%) H1FY21 H1FY20 YoY (%) Total revenues 301 313 310 305 355 17.9 16.4 660 578 14.3 EBITDA 123 127 125 129 163 32.5 26.4 292 234 25.0 EBITDA margin 40.9% 40.6% 40.3% 42.3% 45.9% 505 362 44.2% 40.4% 380 Capex 30 61 61 19 62 106.7 226.3 81 60 35.5 Operating FCF (EBITDA - Capex) 93 66 64 110 101 8.6 (8.2) 211 174 21.4 Source: Company, Emkay Research

Rest of Africa Reported revenue grew 8.8% yoy, while CC growth was 6.4% yoy.

Revenue growth was largely driven by data, mobile money and other revenues and was partially offset by voice revenues.

Voice revenues declined 0.9% largely due to reduction in interconnect charges in a few markets as well as a decrease in international and roaming revenues.

Mobile money revenue grew 8.9% yoy, supported by growth in the customer base and expansion in the distribution network.

Exhibit 14: Rest of Africa performance (in reported terms) Particulars (USD mn) Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 YoY (%) QoQ (%) H1FY21 H1FY20 YoY (%) Total revenues 217 218 215 209 236 8.8 12.9 445 426 4.5 EBITDA 76 82 70 74 73 (3.9) (1.4) 147 140 4.9 EBITDA margin 35.0% 37.6% 32.6% 35.4% 30.9% (409) (447) 33.0% 32.9% 10 Capex 54 24 40 16 20 (63.0) 25.0 36 68 (47.2) Operating FCF (EBITDA - Capex) 22 57 31 58 53 140.9 (8.6) 111 72 54.2 Source: Company, Emkay Research




October 28, 2020 | 8

Exhibit 15: Changes in estimates

Particulars (Rs mn) FY21E FY22E FY23E

Old Revised % Change Old Revised % Change Old Revised % Change Revenue 10,34,685 10,28,493 -0.6 11,33,464 11,75,681 3.7 12,13,263 12,70,779 4.7 EBITDA 4,72,402 4,67,160 -1.1 5,55,250 5,79,001 4.3 6,03,961 6,29,317 4.2 EBITDA Margin % 45.7 45.4 -23 bps 49.0 49.2 26 bps 49.8 49.5 -26 bps

PAT -1,11,739 -1,45,894 30.6 1,17,432 1,13,857 -3.0 1,84,731 1,73,371 -6.1 EPS (Rs) -20.5 -26.7 30.6 21.5 20.9 -3.0 33.9 31.8 -6.1 Source: Company, Emkay Research

Exhibit 16: Key revenue assumptions Rs mn FY19 FY20 FY21E FY22E FY23E India and Asia

Mobile 4,19,977 4,64,216 5,58,895 6,70,386 7,34,483 Home Service 22,391 22,451 22,525 20,668 23,261 Airtel business 1,24,537 1,32,330 1,42,798 1,53,810 1,64,577 Passive 68,185 67,424 68,347 71,630 75,076 Others 41,904 29,238 31,257 34,361 37,193 Africa 2,23,463 2,42,170 2,83,809 3,13,254 3,32,405 Total gross revenue 9,00,457 9,57,830 11,07,631 12,64,110 13,66,996 Less: Eliminations 92,655 82,439 79,162 88,430 96,217 Net Revenue 8,07,802 8,75,391 10,28,493 11,75,681 12,70,779 Source: Company, Emkay Research

Exhibit 17: SoTP based valuation Particulars Sept'22 Core India business (ex-towers, ex-Africa)

Enterprise value (Rs bn) 4,471 EBITDA (Rs bn) 416 EV/EBITDA (x) 11 Net debt (Rs bn) 1,138 Equity value (Rs bn) 3,333 Equity value (Rs/share) 611

Bharti Infratel valuation Current market cap (Rs bn) 344 Bharti's shareholding (%) 53% Infratel net debt (Rs bn) 43 EV (Rs bn) 205 Equity Value (Rs bn) 182 Per Share value (Rs/share) 34

Africa business valuation Enterprise value (Rs bn) 615 EBITDA (Rs bn) 154 EV/EBITDA (x) 4.0 Net debt - (Rs bn) 235 Equity value (Rs bn) 381 Bharti's stake 56% Per share value (Rs/share) 38

Target Price (Rs/share) 684 Source: Company, Emkay Research




October 28, 2020 | 9

Exhibit 18: 1-year forward P/B valuation band


Exhibit 19: 1-year forward EV/EBITDA valuation band


Earnings call highlights India Wireless: Management reiterated that it will follow up on tariff hikes as it does

not want to lead the hikes and distort the current premium gap that Airtel has as

compared to peers.

Post-paid subscriber addition of 710K in Q2 was driven by the Omni channel distribution, stepping up the acquisition of corporate subscribers and higher consumer prepositions in the stores.

2G subscriber additions were attributed to strong port-ins, while strong 4G subscriber additions were backed by strong smartphone shipments.

Doing away with IUC to zero will not have any negative impact on financials as voice traffic is largely symmetric now.

Generic content is not differentiator to win subscribers. The Impact of increased data consumption will be lower than the past.

There may be spectrum auction early next year and if 5G spectrum pricing is not brought down, Bharti will not participate.

Building digital capabilities (Fly Wheel): The company continues to focus on 1) acquiring quality customer, 2) higher wallet share of subscribers, and 3) eliminate waste. 50% of the business is online with 40% of high-end customer addition is through the Omni channel. Distribution: The company continues to expand distribution, and the DTH segment saw

customer addition due to distribution related synergies. Network: Augmentation of network is underway and the telco has crossed the 200K

sites threshold. It has also deployed in-house developed 4G small cells. There are ~13mn subscribers using Voice over Wi-Fi.

Partnerships: Bharti continues to follow a partnership model with leading players in the industry.

Home Broadband: Focus areas are − 1) Rapid expansion of coverage with 1mn Home pass added in cities of presence; 2) acceleration of LCO partnerships with adding 29 cities on network in Q2; 3) full power of services of both Bharti and third party, along with Airtel Xtreme offerings; 4) pricing adjustment with the rise in competitive intensity. The impact of price reduction will reflect from Q3 and ARPU will be under pressure.

In Sep’20, the company added a record number subscribers.

DTH business: The reason for subscriber addition acceleration was distribution leverage from the wireless business.

Enterprise: 1) Quality of services and network resilience with lower costs (added 7.6tb of capacity across the networks, made investment in customer experience); 2) launched various solutions, collaboration with AWS for cloud services; 3) digital engagement of enterprises with their customers (recently launched Airtel IQ to accelerate the same). Current EBITDA margins of ~37% is sustainable going forward

1.01.52.02.53.03.54.04.55.0

Oct

-11

Apr-1

2O

ct-1

2Ap

r-13

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-13

Apr-1

4O

ct-1

4Ap

r-15

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-15

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6O

ct-1

6Ap

r-17

Oct

-17

Apr-1

8O

ct-1

8Ap

r-19

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-19

Apr-2

0O

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0

1yr Fwd PB Mean STd+1 STd-1

4.0

6.0

8.0

10.0

12.0

14.0

Oct

-11

Apr-1

2O

ct-1

2Ap

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-13

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-15

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-17

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-19

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1yr fwd Ev/Ebitda Mean STd+1 STd-1




October 28, 2020| 10

Capex: Q2 capex was driven by a surge in data and spill over from Q1. Peak levels of capex are behind.

Net debt increases due to accounting of AGR penalty. FDI/FPI approvals: The company is expecting approvals for the subsidiaries and all

approvals shall come in within 3-4 weeks and maximum of 4 months.

Infratel merger: The merger should be completed in the next 20 days or so, if all closing adjustments are complete.

Exit from Ghana: The telco is in process of transferring its stake to the government. The exit is on account of the fact that the company was not able to generate enough profitability in the geography. The company has taken a one-time charge of $25mn toward the same.




October 28, 2020| 11

Key Financials (Consolidated) Income Statement Y/E Mar (Rs mn) FY19 FY20 FY21E FY22E FY23E Total Revenue 8,07,802 8,75,390 10,28,493 11,75,681 12,70,779 Expenditure 5,49,613 5,10,567 5,61,333 5,96,680 6,41,462 EBITDA 2,58,189 3,64,823 4,67,160 5,79,001 6,29,317 Depreciation 2,13,475 2,76,896 2,95,027 3,05,727 3,11,832 EBIT 44,714 87,927 1,72,133 2,73,273 3,17,484 Other Income 2,912 19,346 11,294 13,500 15,500 Interest expenses 97,008 1,39,918 1,36,018 1,15,755 88,965 PBT (49,382) (32,645) 47,409 1,71,018 2,44,020 Tax (34,193) (1,21,823) 54,844 40,109 54,201 Extraordinary Items 28,508 (4,02,344) (1,17,950) 0 0 Minority Int./Income from Assoc. (12,780) (15,190) (24,712) (24,000) (24,000) Reported Net Income 4,095 (3,21,832) (1,45,894) 1,13,857 1,73,371 Adjusted PAT (24,413) 80,512 (27,944) 1,13,857 1,73,371 Balance Sheet Y/E Mar (Rs mn) FY19 FY20 FY21E FY22E FY23E Equity share capital 19,987 27,278 27,278 27,278 27,278 Reserves & surplus 9,29,740 9,79,923 8,33,495 9,71,665 11,58,153 Net worth 9,49,727 10,07,201 8,60,773 9,98,943 11,85,431 Minority Interest 1,35,258 2,49,847 2,74,559 2,98,559 3,22,559 Loan Funds 12,54,283 14,82,281 17,38,403 14,74,647 11,31,016 Net deferred tax liability 11,297 16,877 16,877 16,877 16,877 Total Liabilities 23,50,565 27,56,206 28,90,612 27,89,026 26,55,883 Net block 21,04,657 23,35,378 24,43,094 23,22,859 21,76,175 Investment 1,57,110 2,54,765 2,54,765 2,54,765 2,54,765 Current Assets 4,90,208 10,17,647 9,27,907 10,07,644 10,75,395 Cash & bank balance 81,055 1,58,927 29,009 65,893 1,10,681 Other Current Assets 3,61,732 8,08,260 8,38,344 8,75,263 8,93,562 Current liabilities & Provision 4,01,410 8,51,584 7,35,154 7,96,241 8,50,452 Net current assets 88,798 1,66,063 1,92,753 2,11,402 2,24,943 Misc. exp 0 0 0 0 0 Total Assets 23,50,565 27,56,206 28,90,612 27,89,026 26,55,883 Cash Flow Y/E Mar (Rs mn) FY19 FY20 FY21E FY22E FY23E PBT (Ex-Other income) (NI+Dep) (52,294) (51,991) 36,115 1,57,518 2,28,520 Other Non-Cash items 0 0 0 0 0 Chg in working cap (1,12,284) 6,187 (1,56,608) 18,235 31,247 Operating Cashflow 2,18,261 2,23,604 2,525 4,47,819 5,26,450 Capital expenditure (3,48,616) (5,07,617) (4,02,743) (1,85,492) (1,65,149) Free Cash Flow (1,30,355) (2,84,013) (4,00,218) 2,62,327 3,61,301 Investments 4,476 (97,655) 0 0 0 Other Investing Cash Flow 0 0 0 0 0 Investing Cashflow (3,41,228) (5,85,926) (3,91,449) (1,71,992) (1,49,649) Equity Capital Raised 0 7,291 0 0 0 Loans Taken / (Repaid) 1,40,948 2,27,998 2,56,122 (2,63,756) (3,43,631) Dividend paid (incl tax) (11,692) (12,766) (12,766) (12,766) (12,766) Other Financing Cash Flow 1,71,774 4,38,644 3,10,595 1,82,343 1,79,242 Financing Cashflow 2,04,022 5,21,249 4,17,933 (2,09,934) (2,66,120) Net chg in cash 81,055 1,58,927 29,009 65,893 1,10,681 Opening cash position 66,706 81,055 1,58,927 29,009 65,893 Closing cash position 81,055 1,58,927 29,009 65,893 1,10,681 Source: Company, Emkay Research




October 28, 2020| 12

Key Ratios Profitability (%) FY19 FY20 FY21E FY22E FY23E EBITDA Margin 32.0 41.7 45.4 49.2 49.5 EBIT Margin 5.5 10.0 16.7 23.2 25.0 Effective Tax Rate 69.2 373.2 115.7 23.5 22.2 Net Margin (1.9) 10.2 (0.7) 11.1 14.9 ROCE 2.1 4.2 6.5 10.1 12.2 ROE (2.7) 8.2 (3.0) 12.2 15.9 RoIC 2.2 3.9 7.0 10.8 13.3

Per Share Data (Rs) FY19 FY20 FY21E FY22E FY23E EPS (4.5) 14.8 (5.1) 20.9 31.8 CEPS 34.7 65.5 49.0 76.9 88.9 BVPS 174.1 184.6 157.8 183.1 217.3 DPS 1.8 2.0 2.0 2.0 2.0

Valuations (x) FY19 FY20 FY21E FY22E FY23E PER (101.0) 30.6 (88.2) 21.7 14.2 P/CEPS 13.0 6.9 9.2 5.9 5.1 P/BV 2.6 2.4 2.9 2.5 2.1 EV / Sales 4.4 4.1 3.9 3.2 2.6 EV / EBITDA 13.8 10.0 8.6 6.4 5.3 Dividend Yield (%) 0.4 0.4 0.4 0.4 0.4

Gearing Ratio (x) FY19 FY20 FY21E FY22E FY23E Net Debt/ Equity 1.2 1.2 1.8 1.3 0.7 Net Debt/EBIDTA 4.3 3.2 3.3 2.2 1.4 Working Cap Cycle (days) 3.5 3.0 58.1 45.2 32.8

Growth (%) FY19 FY20 FY21E FY22E FY23E Revenue (2.2) 8.4 17.5 14.3 8.1 EBITDA (14.2) 41.3 28.1 23.9 8.7 EBIT (58.7) 96.6 95.8 58.8 16.2 PAT (62.7) (7,959.1) 0.0 0.0 52.3

Quarterly (Rs mn) Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Revenue 2,11,313 2,19,471 2,37,227 2,39,387 2,57,850 EBITDA 88,372 92,458 1,01,652 1,04,079 1,16,420 EBITDA Margin (%) 41.8 42.1 42.8 43.5 45.2 PAT (2,30,449) (10,353) (52,370) (1,59,331) (7,632) EPS (Rs) (42.2) (1.9) (9.6) (29.2) (1.4) Source: Company, Emkay Research

Shareholding Pattern (%) Dec-19 Jan-20 Mar-20 Jun-20 Sep-20 Promoters 62.7 59.0 59.0 56.2 56.2 FIIs 16.4 19.4 20.3 20.2 17.6 DIIs 14.2 15.5 15.8 18.4 21.7 Public and Others 6.8 6.2 4.9 5.3 4.5 Source: Capitaline




October 28, 2020| 13

RECOMMENDATION HISTORY TABLE

Date Closing Price TP Period

(months) Rating Analyst

23-Sep-20 434 684 12m Buy Naval Seth

01-Sep-20 546 684 12m Buy Naval Seth

31-Jul-20 555 684 12m Buy Naval Seth

05-Jul-20 581 684 12m Buy Naval Seth

20-Jun-20 573 684 12m Buy Naval Seth

20-May-20 594 684 12m Buy Naval Seth

10-Mar-20 496 591 12m Buy Naval Seth

05-Feb-20 533 591 12m Buy Naval Seth

30-Dec-19 461 507 12m Buy Naval Seth

30-Nov-19 442 507 12m Buy Naval Seth




18-Sep-19 336 367 12m Hold Naval Seth

03-Aug-19 344 367 12m Hold Naval Seth

25-Jun-19 349 307 12m Sell Naval Seth

09-Jun-19 357 307 12m Sell Naval Seth

15-May-19 331 307 12m Sell Naval Seth

07-May-19 325 302 12m Sell Naval Seth

08-Apr-19 326 277 12m Sell Naval Seth

01-Feb-19 286 277 12m Reduce Naval Seth

27-Nov-18 301 246 12m Reduce Naval Seth

26-Oct-18 274 246 12m Reduce Naval Seth

29-Aug-18 344 327 12m Hold Naval Seth

27-Jul-18 335 327 12m Hold Naval Seth

26-Apr-18 376 406 12m Hold Naval Seth

26-Feb-18 389 439 12m Hold Naval Seth

29-Jan-18 405 439 12m Hold Naval Seth

19-Jan-18 457 518 12m Accumulate Naval Seth

24-Nov-17 456 551 12m Accumulate Naval Seth

02-Nov-17 499 551 12m Accumulate Naval Seth


RECOMMENDATION HISTORY CHART

Source: Bloomberg, Company, Emkay Research

240

332

424

516

608

700

30-O

ct-1

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8

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16-O

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08-O

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BUY Hold SellAccumulate Reduce PriceTarget Price




October 28, 2020| 14

Emkay Alpha Portfolio – Telecommunications EAP sector portfolio

Company Name BSE200 Weight

EAP Weight

OW/UW (%)

OW/UW (bps)

EAP Weight (Normalised)

Telecommunications 1.94 1.92 -1% -2 100.00 Bharti Airtel 1.59 1.66 5% 7 85.56 Bharti Infratel 0.24 0.22 -12% -3 11.16 Tata Communications* 0.00 0.04 NA 4 2.07 Vodafone Idea 0.11 0.00 -100% -11 0.00 Cash 0.00 0.02 NA 2 1.21 Source: Emkay Research

High Conviction/Strong Over Weight High Conviction/Strong Under Weight

Sector portfolio NAV Base Latest 01-Apr-19 28-Jan-20 28-Apr-20 28-Jul-20 25-Sep-20 27-Oct-20

EAP - Telecommunications 100.0 130.8 125.3 146.5 117.0 116.1

BSE200 Neutral Weighted Portfolio (ETF) 100.0 106.9 99.2 118.6 96.9 95.1

*Performance measurement base date 1st April 2019

Source: Emkay Research

NAV chart

Source: Emkay Research

Please see our model portfolio (Emkay Alpha Portfolio): Nifty

Please see our model portfolio (Emkay Alpha Portfolio): SMID

“Emkay Alpha Portfolio – SMID and Nifty are a supporting document to the Emkay Alpha Portfolios Report and is updated on regular intervals”

75

92

109

126

143

160

Apr-19 Jun-19 Aug-19 Nov-19 Jan-20 Mar-20 Jun-20 Aug-20 Oct-20

NAV

EAP - Telecommunications BSE200 Neutral Weighted Portfolio (ETF)

Analyst: Naval Seth Contact Details [email protected] +91 22 6624 2414

Sector Consumer Durables, Media & Entertainment, SMID and Telecom

Analyst bio Naval holds an MBA in Finance and has more than 12 years of experience in equity research. His team currently covers 18 stocks spread across three different sectors.


https://web3.emkayglobal.com/ResearchAccess/Upload/Nifty_Oct20.pdf

https://web3.emkayglobal.com/ResearchAccess/Upload/SMID_Oct20.pdf

mailto:[email protected]



October 28, 2020| 15

Emkay Rating Distribution

Ratings Expected Return within the next 12-18 months. BUY Over 15% HOLD Between -5% to 15% SELL Below -5%

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October 28, 2020| 16

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October 28, 2020| 17

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Other jurisdictions In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

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