TRAI released its quarterly Telecom financial data for 3QFY22. Below are the main highlights:

Steady revenue growth – Bharti and RJio are the main winners

The telecoms industry grew by 4% quarter-on-quarter (AGR including NLD), supported by the price increases announced in December 21 by the three telecom operators. Bharti/RJio saw 7%/3% QoQ growth, adjusted for the sale of INR15b spectrum from Bharti to RJio (in Mumbai, Delhi and Andhra Pradesh), of which INR10b was received in advance, while the rest was due to the transfer of deferred spectrum responsibility. Subsequently, Bharti/RJio obtained 34.9%/40% market share (including AGR, NLD). Bharti gained 90 bps in market share to 34.9%, its highest ever.

Bharti and RJio consolidate their position

The industry is witnessing the consolidation of SIM cards, as evidenced by subscriber flow (total subscribers dropped by 1% QoQ). Industry AGR ARPUs increased 6.8% quarter-on-quarter. Bharti and RJio were the primary beneficiaries of VIL’s subscriber QoQ decline of 2%, diluting the 2% ARPU growth from the rate hike and translating into AGR revenue growth of only 1% QoQ . Bharti recorded ARPU growth of 6.8% and was able to maintain its subscriber base at 355.6 million, as it was the main beneficiary of SIM card consolidation. Although RJio’s 6% QoQ ARPU was partially affected by cleaning up 2% of idle SIM cards, it was able to increase its overall revenue by 3%.

Bharti takes advantage of VIL’s bias towards Metro and A circle

Bharti gained 10% QoQ in Metro and Circle A, faster than Circles B and C. He gained 150bps in Circle Metro and A, adjusted for payment for selling spectrum to RJio on 2QFY22. Unveiling four circles – Gujarat, Uttar Pradesh (West), Haryana and Bihar, he won in every circle. VIL has grown in all walks of life, taking advantage of price increases. Growth was higher in Circle B/C at 4%/7%, but lower in Circle A. Subsequently, it lost market share in Circles A and B. RJio remains the undisputed leader in Metro and A, B, and C circles, but its market share plateaued at 3QFY22.

Evaluation

  • Bharti: With Google’s cash injection of INR 52 billion and strong operating cash flow from tariff hikes, Bharti is expected to see healthy deleveraging of INR 80-100 billion (6%) and annual deleveraging supported by INR 200 billion (15-20%). We see potential revaluation benefits in the Indian and African businesses, aided by steady earnings growth. Assigning a FY24E EV/EBITDA of 10x/5x to Bharti’s India Mobile/Africa business, we arrive at our SoTP-based TP of INR 910.
  • IV: The large amount of cash needed to service its debt leaves a limited upside for shareholders, despite the opportunity for higher operating leverage from any source of ARPU increase. Its low EBITDA would make it difficult to service its debt without injecting external funds. Assuming 10x EV/EBITDA and net debt of INR1.975b, leaves limited opportunity for its shareholders.
  • RJio will reap the benefits of price increases that will accrue in the near term as we see a healthy improvement in ARPU. We attribute an EV/EBITDA multiple of 17x on Mar’24E’s EBITDA, arriving at TP of INR 890/share (for its 66% stake). The higher multiple captures the digital revenue opportunity, potential price increases and stable market share gains.