How Airtel Capex is Helping in ARPU Growth and Customer Additions

Leading financial institutions have revealed the focus areas of the Capex of Bharti Airtel in its 4G and 5G networks and the impact on ARPU.
Airtel India Capex intensity in April-June 2023
Bharti Airtel, one of India’s leading telecommunications companies with presence in India and Africa, has made significant strides in its financial performance and network expansion, according to the latest reports from ICICI Securities.

Despite investing INR 93 billion in capital expenditure during Q1FY24, Bharti Airtel managed to reduce its net debt by INR 38 billion compared to the previous quarter. This remarkable feat showcases the company’s efficient financial management and commitment to strengthening its balance sheet.

The company’s guidance for the fiscal year 2024 remains unchanged at INR 280-310 billion for Capex, indicating its continued focus on network expansion and technological advancements. ICICI Securities predicts that the capital expenditure will normalize in the second half of FY24, reflecting Bharti Airtel’s strategic planning for the future.

In Q1FY24, Bharti Airtel’s India revenue saw a healthy growth of 4.5 percent quarter-on-quarter and an impressive 13.2 percent year-on-year, reaching INR 265 billion. Additionally, India’s EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) grew by 5.6 percent QoQ and an impressive 19.1 percent YoY, amounting to INR 142 billion. The strong revenue and EBITDA growth further underscore the company’s resilience in the competitive telecommunications market.

Bharti Airtel’s rural 4G expansion is progressing well, with approximately 60 percent completion achieved. The company expects to complete the remaining expansion by November-December 2023. Notably, the revenue per site for these rural areas has exceeded initial estimates, while costs have been lower than projected due to the company’s environmentally conscious approach. Bharti Airtel has leveraged renewable energy sources and avoided diesel sites, contributing to its cost-efficiency and sustainability.

The adoption of 5G technology is also underway, with data off-loading by 5G customers on the 5G network already reaching 30 percent. However, 5G handset shipments into India are still suboptimal, at only 48 percent of the total. Despite testing Fixed Wireless Access (FWA) using spectrum slicing in two circles, the low network capacity utilization for 5G suggests that spectrum slicing provides no substantial advantage at the moment. The rollout of 5G on a like-to-like basis is anticipated to add 4-5 times more data capacity, indicating Bharti Airtel’s commitment to enhancing its network capabilities.

It’s worth noting that Bharti has halted any capacity-led 4G deployment, potentially indicating a shift in its focus towards the widespread adoption of 5G technology.
Forecast on Airtel ARPUAirtel reported an elevated capital expenditure (Capex) of INR 93 billion in the first quarter of FY24. Despite this increase, the company has maintained its annual guidance for FY24, which remains at INR 280 billion to INR 310 billion, according to BNP Paribas.

The increased Capex in the first quarter was primarily directed towards the expansion of rural 4G and urban 5G coverage. As these expansion projects are completed, Airtel expects Capex to moderate in the latter half of the fiscal year.

Interestingly, despite the high Capex, Airtel managed to reduce network costs marginally. This achievement was attributed to the company’s efforts to cut diesel consumption significantly and its implementation of a “war on waste” program at high-cost sites. These measures have contributed to cost savings for the company.

Regarding the adoption of 5G technology, Airtel is utilizing it to offload 4G traffic. The current level of 5G utilization remains very low. The company mentioned that 5G provides 4-5 times higher capacity than 4G, but it is not significantly changing the customer experience at this stage.

During the discussion, Airtel addressed various key points:

On JioBharat: Airtel stated that it is still too early to assess the impact. However, it mentioned that the revenue contribution of feature phones has decreased to only 18 percent. In the past, this contribution was much higher when JioPhone, Jio’s first feature phone, was launched. Airtel intends to upgrade its clients to smartphones and has no plans to offer feature phones.

Airtel sees no constraints in offering fixed 5G wireless broadband through its non-standalone (NSA) network. However, Fixed Wireless Access (FWA) devices remain expensive, and the prices need to drop for FWA to become competitive with Fiber-to-the-Home (FTTH) broadband.

The company has started expensing some 5G operating costs, indicating its progress in adopting and integrating 5G technology into its operations.

Overall, Airtel’s focus on 5G deployment, network optimization, and cost reduction strategies seem to be positioning the company for the future. As the expansion projects conclude and 5G adoption continues, Airtel anticipates further improvements in its network capabilities and customer experience.

Bharti Airtel’s accelerated rollout of 5G network will significantly impact its market share gains in the coming years. The pace of market share gains is expected to pick up in the fiscal years F25 and F26, Morgan Stanley said.

One of the key areas where Bharti Airtel is projected to benefit from the 5G rollout is in high-value segments, particularly among 4G subscribers, both prepaid and postpaid. As the company expands its 5G network, it is anticipated to attract premium customers from weaker players in the telecom industry.

Over the past seven quarters, Bharti Airtel has already made significant strides in gaining market share from weaker players, particularly in the non-data subscribers category. During this period, the company’s market share in non-data subscribers has increased by an impressive 480 basis points (bps) to 54.7 percent in 4Q23, compared to 49.9 percent in 3Q21. Moreover, its overall subscriber market share has also seen substantial growth, rising by 290 bps to 35.7 percent in 4Q23, up from 32.8 percent in 3Q21.

With the advent of 5G and its expanded capabilities, Morgan Stanley predicts that Bharti Airtel’s gains in market share will accelerate, particularly in the premium 4G subscribers category. The firm estimates that the company’s market share in premium 4G subscribers will increase by 340 bps to 32.1 percent from Q1FY24 to F25e (end of fiscal year 2025). Additionally, they anticipate that Bharti Airtel’s overall subscriber market share will improve further to 33 percent by F25e, up from 30.6 percent in F23.

Airtel India has shown impressive growth in its wireless capital expenditure (Capex) during the first quarter of FY24, according to Kotak Securities. The wireless Capex increased by a further 18 percent quarter-on-quarter (QoQ) to reach Rs 78 billion, which is 2.2 times higher than the same period last year. The figure also surpassed the estimate by 11 percent. Interestingly, part of the 5G Capex is being capitalized, as network operating expenses (opex) declined by 0.5 percent QoQ, despite significant tower additions for 5G and rural rollouts.

During the quarter, Bharti Airtel added approximately 9.2 thousand towers QoQ, bringing the total number of towers to 284 thousand. However, the revenue per site remained flat at Rs 240 thousand per month, experiencing a slight decline of 3 percent year-on-year (YoY).

Bharti Airtel’s focus on cost optimization through its network cost take-out program has been successful, leading to a 0.5 percent decline in network opex, even with the rollout of 5G. The company achieved this by identifying and addressing high-cost sites, implementing solutions such as solar or improved batteries, renegotiating rentals, reconfiguring sites, and relocating them when necessary.

Management confirmed that the Rs 93 billion Capex in 1QFY24 was frontloaded, primarily due to the accelerated rural and 5G rollouts. They expect the India Capex for the entire FY2023 to remain within the previously guided range of Rs 280-310 billion. Furthermore, Bharti Airtel has ceased capacity investments in 4G and is now using 5G to offload up to 30 percent of the traffic on 5G-enabled sites. Despite the elevated Capex, the company generated approximately Rs 48 billion from its India operations. Additionally, the net debt-to-EBITDA ratio for India and South Asia (India-SA) decreased to 3.19X from 3.44X QoQ.

The company’s management reaffirmed its strategic focus on winning in the top 150 cities, which constitute nearly 40 percent of the overall telecom market in India and a significant portion of the market for postpaid, home broadband, and B2B services. They anticipate that 5G will play a pivotal role in accelerating the growth of the postpaid user base, especially as a significant percentage of users are now on family postpaid plans, resulting in lower churn.

Regarding Fixed Wireless Access (FWA) and 5G slicing, management highlighted that slicing is possible even with a non-standalone 5G architecture. Presently, the 5G network has ample capacity and can offer FWA services without requiring slicing. However, the cost of FWA Customer Premises Equipment (CPEs) is still not as economical as using fiber, which costs around US$90 per connected home, while FWA CPEs cost approximately US$160. Despite this, Bharti has initiated FWA trials in two cities to assess the potential of this technology.

In terms of other business segments, the normalized Capex for the Airtel business was Rs 6.1 billion in the first quarter, whereas in the previous quarter, it was elevated at Rs 15.6 billion, primarily due to a few deals-specific Capex.

Bharti Airtel also made progress in the Machine-to-Machine (M2M)/Internet of Things (IoT) segment, with the subscriber base increasing by 3.9 million QoQ to reach 19.9 million in 1QFY24, likely due to recent deal wins.

Overall, Bharti Airtel’s investments in network expansion and 5G technology, along with its cost optimization measures, have positioned the company for future growth and competitiveness in the telecom industry.