Bharti’s market share gains in 4G subscribers, an increase in average revenue per user, and an improving tariff outlook from the government’s stake in Vodafone Idea Ltd., are the ‘key’ reasons for Jefferie’s ‘buy’ recommendation. That should help Bharti drive 13% growth in its mobile ARPUs over fiscal 2023–25. Market share gains are likely to accelerate amid 5G rollouts. While we cut our estimates by 1-4% to factor tariff hike delays, we upgrade Bharti to Buy as, after a 13% fall since Nov-22, the stock offers 16% upside potential to our rolled forward PT of Rs 900.
Share gains among 4G users driving ARPUs: Bharti has seen an acceleration in market share gains among active 4G users, evident from its 60% incremental market share in 2HCY22 vs. its overall market share of 30%. This has helped Bharti Airtel improve its subscriber mix and raise its daily ARPU by 4.4% over 2HCY22. With another 107m voice subscribers on its network yet to upgrade to data, Bharti’s ARPUs will likely rise by 4-5% annually due to the improvement in subscriber mix.
Intensifying focus on boosting ARPUs: After favourable market share movements in Haryana and Odissa, where Bharti had discontinued its Rs 99 plan in November, the company has extended this move to 19 circles recently contributing to over 90% of its India mobile revenues. This move will add 2% to Bharti’s revenues by Q1FY24 and more importantly, indicates that Bharti is looking to boost ARPUs even if it leads to some churn among low-ARPU subscribers’. This move might result in losing some low-ARPU subscribers, but the company is willing to take that risk to achieve its goal.
Improving tariff outlook: The govenment ’s recent decision to convert a portion of VIL’s debt to equity, is likely to align its interests in favour of a tariff hike. Moreover, this is also likely to shift Bharti/Jio’s focus away from market share gains towards market expansion. While the pace of tariff hikes has disappointed recently, the govt’s recent move could drive positive surprises. Over FY23-25, we now expect a single tariff hike of 15% towards end-CY23 resulting in 1-3% cuts to our FY23-25 Arpu estimates.
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An effective duopoly in the works: VIL may potentially be able to secure incremental funding given govt’s support but this is unlikely to match Bharti/Jio’s capex plans of US$9/25bn over the next three years. Furthermore, VIL is likely to witness accelerated market share losses as 5G becomes mainstream. Initials signs are already visible in recent market share trends where in VIL has lost 3ppt market share in metro circles in 3QFY23. Per our calculations, Bharti’s fair value could rise by Rs 120/share in a duopoly.
Upgrade to Buy: We cut our revenue/Ebitda estimates by 1-4% to factor the change in tariff assumptions and expect 16-17% Cagr in Bharti’s consolidated revenue/Ebitda over FY23-25. Our analysis suggests a fair value of Rs 710 to Rs 1,020, implying an 8% downside and 32% upside in the worst/best case. We upgrade Bharti to Buy with PT of Rs 900 offering 16% upside and implies exit multiple of 7.6x EV/Ebitda—in line with 10-year averages.