Bharti Airtel Ltd (BHARTIARTL) Q2 FY23 Earnings Concall Transcript

Bharti Airtel Ltd (NSE: BHARTIARTL) Q2 FY23 Earnings Concall dated Nov. 01, 2022

Corporate participants:

Gopal Vittal — Managing Director & Chief Executive Officer

Soumen Ray — Chief Financial Officer

Harjeet Singh Kohli — Group Treasurer

Analyst:

Manish Adukia — Goldman Sachs — Analyst

Piyush Choudhary — HSBC — Analyst

Sanjesh Jain — ICICI Securities — Analyst

Subhradeep Mitra — UTI Mutual Fund — Analyst

Kunal Vora — BNP Paribas — Analyst

Vivekanand Subbaraman — Ambit Capital — Analyst

Nicholas Barrett — Macquarie — Analyst

Rohit Kothari — GZ Ventures — Analyst

Presentation:

Operator

Good afternoon, ladies and gentlemen. I’m Vandhana, the moderator for this webinar. Welcome to the Bharti Airtel Limited Second Quarter Ended September 30th, 2022 Earnings Webinar. Present with us today is the senior leadership team of Bharti Airtel Limited.

I must remind you that the overview and discussions today may include certain forward-looking statements that must be viewed in conjunction with the risk that we face. Post the management opening remarks, we will open up for an interactive Q&A session, interested participants may click on raise hand option on Zoom application to join the Q&A queue. The participant may click this option during my opening remarks itself to ensure they find a place in the queue. Upon announcement of name, participants to kindly click on unmute myself in the pop-up on screen and start asking the question post introduction.

With this, I would like to hand over to Mr. Gopal Vittal for the opening remarks.

Gopal Vittal — Managing Director & Chief Executive Officer

Thank you. Good afternoon ladies and gentlemen, thank you for joining us on this webinar to discuss Bharti Airtel’s results for the quarter ended 30th September, 2022. Also present with me on this webinar are Soumen, Harjeet and Arpan. I want to focus this quarter’s earnings call on three things. Our performance and the strength of our portfolio; an update on 5G and why we believe this further in the short-term, give our business a flip and finally the opportunity in the rural.

Before I dive in, a few words on ESG. During the quarter we progressed towards our ESG targets. Nxtra became India’s first data center company to deploy fuel-cell technology. The aim here is to reduce carbon emissions through a cleaner hydrogen ready fuel supply, while unlocking cost benefits. Nxtra is committed to achieving 50% of its power requirements through renewable energy sources in the next 12 months. Our core network operation have started experimenting with solar power and diesel elimination have given us confidence on getting to our ESG goals.

Our headquarters at Gurgaon received GOLD LEED certification last month. This certification is based on LEED v4, a next-generation standard for green buildings, design, construction, operations and performance. As a recognition of our ethics and transparency, we received the prestigious Golden Peacock GLOBAL Award for Excellence in Corporate Governance for 2022.

Let me now turn to our performance and portfolio. We’ve had another steady quarter for Bharti Airtel. Our consolidated revenues for the quarter grew sequentially by 5.3% to reach 34,000 — little over INR34,520 crores. In India, our EBITDA margins improved to 51.8%, benefited by continued cost control and the SUC benefits which were part of the seminal telecom reforms of last year. 5G spectrum acquisition optically increased our debt levels, while our deleveraging continuing on the back of tight fiscal prudence and strong operating leverage.

Equally we continued our own risk program to help fuel margin improvements. Despite this performance, our South Asia and India return on capital employed is at 8.4%. For a business that takes risks and puts in substantial capex in order to drive digital adoption, we believe this level of is ROCE is very low. The only way to help remedy this situation is our tariff correction.

Let me now comment on our various businesses and while each part of our portfolio creates greater customer stickiness, while driving premiumization. Let me start with Airtel Payments Bank. Our Payments Bank has now crossed the milestone of 50 million monthly transacting users and clocked $25 billion of annualized GMV. Our take rates are now at 0.61%, the highest in the industry. This translates into an annual revenue run rate of INR1,233 crores, and we’re the only profitable fintech player in Industrial. The interesting and unspoken part of this business is that our telco churn comes down almost 50% the moment the customers bank account number is the same as their mobile number.

Our digital services saw an annualized revenue of INR960 crores, up from the previous quarter’s run rate, growing sequentially at well over double digits. I mentioned before that these services are being built on some very significant digital capabilities, that are helping our core business. We see our business in three parts, the underlying digital infrastructure, including the massive data infrastructure we have created, the digital experience layout that follows the customers through their lifecycle, enabling them to discover, buy, experience, prefer. And finally our digital services layout, it leverages the foundation to create revenue streams at very low capital out place. This is what makes our Digital play special.

Now on to the Airtel business. This business as I’ve said before is a jewel in our portfolio. Over the last many years we’ve delivered sustained profitable and competitive growth in this business. This quarter we continued our momentum to deliver strong sequential growth of just under 7%. This will help cement our position in the B2B market, by adding a landmark of being the largest listed player in the B2B space in the country. Based on the results sticking [Phonetic] with the other players, it is clear we have solidified our position and gained revenue market share.

The consistency of our performance can be attributed to four underlying reasons. The trust we enjoy with our customers. The value we place to privacy of data and transparency in dealings. A steadfast focus on emerging businesses, including CPaaS, security, datacenters, cloud, IOT. And solid execution of our go-to-market strategy going wide and deep, wide to cover more accounts where we’re not growing as well; and deep to create much more meaningful relationships with our customers by selling them with more-and-more products and solutions.

Let me now turn to our Homes split. Our broadband business continued its acceleration on the back of a growing need for reliable and consistent broadband in India. We are now present in 1,060 cities through a combination of our own infrastructure and the LCO model. So that does add 417,000 customers and report about 7% sequential revenue growth during the quarter.

While the DTH business saw a decline of 2% — 2.6%, I’m actually glad the outcome of the strategy we put in-place a few months ago is showing early signs of having delivered and creating some momentum. Our strategy was simple, double down on the largest cable markets of the South Maharashtra and Bengal; simplified pricing and make it easier for customers to choose their content. And finally, bring the full power of our convergence proposition to win in the high-value game. And while doing that, bundle OTT content, linear content along with broadband and mobile, which is Airtel Black. This strategy is now seeing threshold. The months of August, late August and September have seen growing momentum. October has been even stronger.

To give you an accurate picture of the business, we are now harmonizing the definition of what constitutes a customer for our mobile business. As a result, we are applying the same stringent criteria for this business. A customer will be recognized as such only if he or she is a revenue earning customer, this means that the customer has to give us some revenue in a rolling 30 day period. We use the same definition in our mobile business as well. I am more confident than ever before that we will deliver market-beating performance in this business going-forward.

Let me now turn to the mobile segment. The mobile business saw sequential revenue growth of 4% on the back of up trading, continued feature phone and smartphone upgrades, and our focus on data monetization. Based on our digital capabilities to get users to buy extra data on any day within the plan cycle, when their allowance runs out. As a result, our ARPU moved from INR183 to INR190. This was achieved on the back of 5 million 4G net additions, but recovering from last quarter. Our postpaid segment saw a net additions of 300,000. With this, we are now the decisive leaders in postpaid. In sum, we delivered steady results to grow our market-share across all businesses. I believe we are very well-positioned as a portfolio due to two critical reasons.

Each part of our portfolio helps our overall premiumization strategy by moving people up on the ARPU level. From feature phones, data users to postpaid, to broadband and eventually Airtel Black, we see a clear doubling of our every step. We see this ARPU later providing us a strong runway for growth. The second reason is that when a customer buys more than one product in our portfolio, be it a digital service, consumer product or an additional B2B product, we see a dramatic reduction of churn. So the way to think of our business objectives when you look at our portfolio is simple. Grow share of wallet on the one-hand and drive stickiness on the other.

Let me now turn to the second part of my opener, 5G. There are four advantages we go for 5G. That works seamlessly on all 5G devices — sorry, the 5G works seamlessly on all 5G devices. All of Xiaomi, OPPO, Vivo, and Realme devices are now ready for our network. Samsung and OnePlus will be fully ready in the next couple of weeks. Apple soon thereafter, it looks like Apple will be ready by around mid November to early December. This cannot be said with alternate technologies where many devices will deliver either an inferior experience or simply not work on 5G. A second advantage that we offer is a superior experience. With our anchor band, riding on the underlying 4G layout, our 5G band covers an additional 100 meters to provide a compellingly superior experience. The third advantage is that our solution is more power and carbon efficient for India. Finally, the cost of producing a gigabyte in India is the lowest for Airtel.

On to our plans for rollout. We’ve now commenced our Airtel 5G Plus launch starting with key cities. By March 2024, we expect to cover all towns in urban India, as also key rural areas. As the network starts getting built-out, we will see a significant part of our existing data traffic on 4G move to Airtel 5G plus. This is important since it will allow us to gradually move more-and-more spectrum to 5G at the flick of a button. We have also started testing the SA mode on 5G. This mode maybe relevant for some enterprise use cases. While these specific use cases are very niche, we’re already doing our trials to serve our customers where needed. We are also testing our millimeter wave spectrum of fixed wireless access. You will hear more about our plans on fixed wireless access in the coming months.

Finally let me just comment on the use cases. The use cases for 5G are still nascent, outside of high-speed broadband. That said, we are working across a large number of companies including startups to test our use cases. These use cases span experiential education using virtual reality, connected ambulances to save lives, productivity enhancements and manufacturing in agriculture, logistics and entertainment. These were showcased recently at India Mobile Congress. Over time, some of these use cases will potentially be game-changing for the country.

At the end, while many of these use cases would come into India over the next few years, we believe there is a series of short-term opportunity to grow share and disproportionately win quality customers, leveraging the power of 5G. Given the financial impressed situation that one of the players in the industry is going through, we feel that the moment is right for Airtel pulling ahead and being decisively the most aspirational brand in India. With this we hope to get a further lead, particularly in the postpaid segment.

Let me finally turn to rural. In the last 10 years, we’ve moved up population under coverage from around 87% to 96%. Yet we believe there is still headroom for expansion and growth. We now see over 40% of Industry 4G net-adds coming from rural areas. And believe the time is right to bridge a substantial part of the coverage gap in mobile against the leading player in industry. As we do this, we are applying a whole host of lessons that we have learned. They’re using our data science models to determine exactly where to go. At the same time, we’re sending our people to the field to determine exactly where the opportunity is. Even more important, we have designed and built lower-cost sites that will allow us to expand profitably.

As you are aware, we take great pride in treating every single network tower as a factory in itself and we monitor the revenue and profitability across all 254,000 locations. So our plan to expand rural coverage based on these lessons will lead to sustained competitive performance and return profitably. With the [Indecipherable] footprint we now have, this will provide customers with a very good proposition, thereby fueling our growth. In sum, we are now at an exciting juncture.

Our portfolio is deep and resilient. It acts as a virtuous flywheel for our business, creating greater stickiness and providing opportunities to grow the share of wallet. Our performance consistency in large measure due to the strength of our simple strategy backed by this powerful portfolio. We are ready and rolling with 5G. While in the short-term there may not be too many NextGen use cases. We believe Airtel 5G plus will be a strong lever for us to grow quality customers. Finally, rural, where our network coverage is lower, is a massive opportunity for us and we will use all the lessons we’ve launched to rollout prudently adequately.

With this, I want to open the floor for the Q&A session.

Questions and Answers:

Operator

Thank you very much, sir. We will now begin the Q&A interactive session for all the participants. [Operator Instructions] Interested participants may click on raise hand option on Zoom application to join the Q&A queue. Upon announcement of name, participant to kind of click on unmute myself in the pop-up on screen and start asking the question post introduction.

The first question comes from Mr. Manish Adukia from Goldman Sachs. Mr Adukia, you may please unmute your side and ask your question now.

Manish Adukia — Goldman Sachs — Analyst

Yes, hi good afternoon. Thank you so much for taking my questions. My first question is on — Gopal, on the market share dynamics that you talked about as a result of 5G, where you said that, especially with postpaid segment you do expect that market shares could potentially move ups for Airtel. Just wanted some clarification, are you suggesting that you expect your market share trends to accelerate? I mean they have already been expanding in the last few quarters, so as a result of 5G, do you expect that trend to accelerate? And a related question to that, why should market share dynamics change? I mean the number three-player has generally been weak into the balance sheet and free-cash flow, so what would change as a result of 5G that you believe your market share could further inch up higher?

And my second question is on free-cash flow. The India business has started generating meaningful amount of free-cash flow and with no near-term spectrum payment, the free-cash flow is only likely to go up higher. So, how do you think about the use of cash over the next two or three years, given spectrum and AGR payments are still some time away? Thank you.

Gopal Vittal — Managing Director & Chief Executive Officer

Thank you. I think I don’t want to comment on whether our market share will accelerate or not. I think you just have to look at our track-record thus far has been consistent and steady, with rural market share substantially over the last eight to 10 quarters, we believe there still is a big runway for growth, competitive growth. And this is really around two parts, one is our strategy of going rural, which is where we have a big gap with our leading competitor and we believe that this could be an opportunity for us to recover ground, given that we are not present in many of these villages across the country.

The second part is really a high-value game and this is what plays to our strategy. I think our own whole strategy is based on quality customers and whatever we do, whether it is the way we drive stickiness through multiple services in [Indecipherable] or whether we use our data science models to actually drive greater share of wallet, all of that plays to advantage. I think 5G in addition to this, is a fill-in to actually have a narrative going, which actually makes us a very aspirational brand. And for us, the reason we are also excited about this is, our technology which is Airtel 5G Plus will really work on every single device.

Like I mentioned, I think Samsung, there are 27 models of 5G, 6G models are already very and enabled. The rest will happen by late October — sorry, early November, so around 10th to 12th of November. OnePlus, all 17 models will work on our network; Vivo, all 34 models will work on our network; Realme, all 24 models will work on our network; Xiaomi, again all 23 models will work; and OPPO, all 14 models will work. Apple has 13 models, they will have their release around first week of November and by mid December we should have it already.

Now, I can’t say the same for our competition, because we’re choosing a different technology. So for all of these reasons, I think we have a real window opportunity to really step-up our Airtel customer experience and as you know, Manish, ultimately customers want experience and, that’s really where we want to focus on.

On the free-cash flow front, on the use of cash, I think we’re a prudent company, we’ll continue to pay-down our debt. Retire some of our bank debt. Make sure that we prudently pay-off, again whenever prepayments are to be done. So that will also be done. And the third part is really capex, where we will be looking at rolling out both 5G, as well as rural in the coming year and there could be some elevation of capex in the short-term, which is fundamentally an advancement of capex from the following year. So if you take ’23, ’24, we may advance some capex from ’24-’25 to ’23-’24.

Manish Adukia — Goldman Sachs — Analyst

Thank you. Just a quick follow-up question on the market share response. You also talked about in your opening remarks about a need for tariff repair. So are you suggesting that the increase in-market share and tariff repair in the industry can go hand-in-hand or do you think until, let’s say, the market share dynamics fully play-out, there should not be any meaningful tariff, let’s say, intervention in the foreseeable future?

Gopal Vittal — Managing Director & Chief Executive Officer

Well, I hope that our wish would certainly be the tariff repair happens sooner rather than later, because remember there is a massive investment that is happening there, you see at INR190 odd, we do have the highest ARPU in the industry. The fact is that this ARPU was actually higher seven years, with almost INR200.

Secondly, if you look at the pricing structure today in India, whether it is ARPU or whether it is the rate per megabyte, rate per gigabyte, is the lowest in the world. Lower than sub-Saharan Africa, Lower than our neighbouring countries here, lower than Southeast Asia, a little on the developed markets. So, every player will want a return on capital. Our belief is that 8.5% return on capital is very low. I mean. You don’t need to take the risk that we do in putting in all of these investments, despite you can be — just put it in a bond and still earn around that level of interest.

So the fact is that this return on capital used to go up and the only way that it can go up is if there is a direct correction, and we’re not talking about massive corrections. We’re already at INR190 ARPU, we need to see one round when of correction, when it will happen? I’m not at the liberty to say, because it’s not just across right, I mean if we do it and the competition doesn’t follow, then we have a problem. So, we are watching this space and we will see it when the time is right.

Manish Adukia — Goldman Sachs — Analyst

Thank you so much. I’ll jump back into queue all the best.

Operator

Thank you very much, Mr Adukia. The next question comes from Mr. Piyush Choudhary from, HSBC. Mr. Choudhary, you may please unmute your site and ask your question now?

Piyush Choudhary — HSBC — Analyst

Yes, hi thanks, this is Piyush from, HSBC. Couple of questions. Firstly on the subscriber trends, we are seeing some tepid growth since last one year and you alluded to rural push now. So in light of that can you give us like whether Bharti subscriber growth or industry subscriber growth will remain muted or you think it could accelerate from here going forward? Secondly. If — there has been a steady and strong execution and market share gains for you. At this point of time, what do you foresee as key risk or challenges to the business and if any, what are the steps taken to mitigate that? Thank you.

Gopal Vittal — Managing Director & Chief Executive Officer

I think that, the first answer to the first question, Piyush, is that, as I mentioned in the last earnings call as well, we have seen pressure on semiconductor prices over the last six to eight months, which pushed up — actually since March of 2022 actually, which have pushed up the price of smartphones in the industry. So if you go back in time and look at the entry level smartphones, these used to be about INR6,500 vis-a-vis a feature phone which would in the ballpark INR1,000. Today, an entry level smartphone is more like INR9,000, INR8,500 to INR10,000, a reasonably good phone is about INR10,000, close to INR10,000.

So, now imagine a poor customer who has a feature phone and he has made a decision to come into our shop and change to a smartphone. And he has in his mine has been told that the price is about INR6,500 to INR7,000, he lands up in the store and finds that it’s actually INR10,000. He is going to walk back and go away, and that’s why we’re seeing across the industry a 30% odd reduction in feature phone, smartphone appliances, by the way it’s a costly industry.

Now, typically what happens, at least I’ve seen it, in a few more categories when you have a period of high inflation, it takes some time for this shock to settled in. So the second time he comes back, he knows it’s INR10,000, when he comes back, he is prepared to pay INR10,000. So I think this has to — these are the ways to ride this out. We’ve seen some improvement in 4G upgrades this quarter, as you know, it’s not a big improvement. We were at 5 million, I think last quarter we were close to 4 million or just under 4 million. So since there has been some improvement, but it’s not good enough and we are hoping that this fires back, this comes back.

On the second question on risks. I think that there are always risks in this business. I think there is risk in every business, so we have a robust process of risk and assessing risk within the company. But if you were to pin me now and say what are the big risks? I think I see it more as opportunities, but certainly there are some risks, we had risks around geopolitical, risks on supply that’s now sorting. I think supplies of equipment is one, but the bigger one is really around talent and attrition generally post pandemic has been there for most industries. We are slightly lower than what I have heard is the attrition across other companies. But it’s a continuous process of making sure that we play to our strengths of really the culture that we offer our employees, which is a culture of empowerment, a culture of ownership and that is something that we just keep reinforcing and find ways to get across for every person who joins us newly.

Piyush Choudhary — HSBC — Analyst

Thanks a lot, Gopal.

Operator

Thank you very much, Mr Choudhary. The next question comes from Mr. Sanjesh Jain from ICICI Securities. Mr. Jain, you may please unmute your side and ask your question now.

Sanjesh Jain — ICICI Securities — Analyst

Good afternoon Gopal, thanks for taking the questions. First from my side is on the ARPU, 3.6% look extremely strong. Can you help us understand what’s leading such a strong ARPU growth? You did mention about data monetization, but I think that has been a case for a while, but why such a big inflation in this quarter? And also help us understand how sustainable it is? Can this kind of data monetization opportunity can continue for few more quarters where despite no tariff hike, we should be able to achieve 2% plus kind of sequential growth in ARPU? That’s the first question.

Second is on the data, digital revenue. I think for the first time we have disclosed that number for the quarter at INR960 crore, which has grown double-digit sequentially. Can you, help us understand how much of it is coming from the enterprise of the business, how much of it is coming from the consumer side of the business, and within the consumer, what is really driving the growth in the digital services? These are my initial two questions. Thank you.

Gopal Vittal — Managing Director & Chief Executive Officer

Thank you Sanjesh. Sanjesh, I think the — I will not comment on what our estimates are for the future and whether they sustainable. I’ll just tell you like the reasons why this ARPU has gone up. I think the point number-one is that, we are now applying a lot more sophisticated understanding of which customers really go after. And the acquisition of machinery that we have, while the churn looks on face of it elevated. I think improving every week the quality of acquisitions, that’s one driver.

The second driver is the upgradation from feature phone to smartphone, which is an ongoing thing as you know, that’s the 5 million that we talked about. The third is the premiumization from — within prepaid to postpaid. But I think this quarter we also did what we call data monetization which you referred to, where I think we use a lot of very contextual and scientific figures to identify an individual consumer who is growing through his or her data allowance on a given day, if you see, most of our prepaid plans are 28 day plans or 56 day plans. So the moment you go through that allowance on that given date, we were really able to dramatically improve the experience of buying a one day, three day, or seven day data top-up for that map cycle. I think it is a combination of all of this, which led to the ARPU performance.

I think on the digital revenue. We have three screens of digital revenue. One is our market-based revenue, which is where we use the — we use content and things like that and also we are doing some pilots on financial services, where we are distributing credit cards and we offer some of our partners on platform plus trying our some lending based on understanding of our data, along with content, so that’s the marketplace piece. Second is our advertising part, which is really using our platform to try advertising revenues. And the third is Airtel IQ, which is our SaaS model, which really solves specific problems using our core networks stack. And that is really what the three drivers of the Saas. We are — we are not yet disclosing very specifically now each of this add-on, because simply because these are still nascent, still volatile, so at the right point in time we are going to assure that we will start disclosing more digital results.

Sanjesh Jain — ICICI Securities — Analyst

Thanks Gopal. Just couple of bookkeeping questions. One on the cost inflation, I think selling expenses have significantly gone up. Why — and this trend has been at least about the player where we announced the result, this has been a common thing. And the second one is, how much SUC is still pending for us, which may accrue as in next quarter? So that’s it from my side, thank you.

Gopal Vittal — Managing Director & Chief Executive Officer

Soumen, you want to take this?

Soumen Ray — Chief Financial Officer

Yes, I think on SG&A, there are multiple initiatives, which has gone into the market, we are driving our own GTM team, we’re rolling out new outlets and also there has been a certain amount of the attrition which has continued in the market, which has put up the SG&A. As far as SUC is concerned, we’re — as you know, it was rolled-out mid of August, so we’ve realized half of it, half to be carried forward to the next quarter, so next quarter we’ll realize the full-quarter benefit.

Sanjesh Jain — ICICI Securities — Analyst

So will it be in the ballpark number of close to INR300 crores to INR350 crores still coming in the next quarter?

Soumen Ray — Chief Financial Officer

No, a little bit lesser, more in the range of about INR250 crores.

Sanjesh Jain — ICICI Securities — Analyst

Thanks Soumen. Thank you very much Gopal, thanks for all the answers and best of luck for the coming quarters.

Gopal Vittal — Managing Director & Chief Executive Officer

Thank you, thank you.

Operator

Thank you very much Mr. Jain. The next question comes from Mr. Subhradeep Mitra from UTI Mutual Fund. Mr. Mitra, you may please unmute your side and ask your question now.

Subhradeep Mitra — UTI Mutual Fund — Analyst

Yes, hi, thank you for the opportunity. Just wanted to have your guidance on the tower addition, given that we are now rolling out 5G across India. So over the next two to three years if you could give out, what would be the expected level of tower addition, which you are looking for from your set of, the tower companies?

Gopal Vittal — Managing Director & Chief Executive Officer

So what do you mean by tower efficient, I didn’t understand.

Subhradeep Mitra — UTI Mutual Fund — Analyst

Tower addition.

Gopal Vittal — Managing Director & Chief Executive Officer

Tower addition, I see. Okay, got it. That’s the only question Subhradeep?

Subhradeep Mitra — UTI Mutual Fund — Analyst

Yes, that’s the only question.

Gopal Vittal — Managing Director & Chief Executive Officer

I think the existing 5G technology is basically going on to the existing towers. So we are unlikely to be in the median drop, we have a short-term for the next couple of years, two, three years, building more sites on account of 5G, because as I mentioned, the propagation of 3.5 gigahertz is 100 meters more, on the downlink effect is there, than the 2.3 gigahertz, the 3G band. Because of the more that we’ve applied, which is on Airtel 5G Plus, you do get a 100 meters more on the downlink and that gives you phenomenal experience even indoors, without any densification.

Over time, as the capacity grows every 5 years, 7 years out, 10 years later as the capacity start growing, yes, there will be some densification, but right now there is no sign of that. I think the place we are creating more towers, which will be leaner towers, will be for rural areas, where we are trying to see what we can do to reduce our dependence on diesel and really go in for very lean sites which actually come at a much lower cost than the operating cost per month that we are subjected to today on networks on account of fuel and rental.

Subhradeep Mitra — UTI Mutual Fund — Analyst

Sure. Thank you so much.

Operator

Thank you very much, Mr. Mitra. The next question comes from Mr. Kunal Vora from BNP Paribas. Mr. Vora, you may please unmute your side and ask your question now.

Kunal Vora — BNP Paribas — Analyst

Yes, hi, thanks for the opportunity. My first question is on margins, how should we look at EBITDA margin on incremental revenue going forward, with investment in 5G and rural coverage? Would the margin on incremental revenue get impacted? You already — like you — in the past you talked about 60%, 65% margin on incremental revenue, would that still hold?

Gopal Vittal — Managing Director & Chief Executive Officer

So, I think, Kunal, firstly, as you can imagine the 5G will certainly roll on additional cost and unless there is a serious — an improvement in tariffs, this will be an additional cost on the P&L. That said, I think we have to work harder on our — in this program. And we are looking at all kinds of avenues to see what we can do on war on waste, which includes further elimination of diesel, use of solar to reduce the overall energy bill, particularly in rural areas where we have space to put up solar solutions.

We’re looking at further digitization of our business to bring down costs for serving customers. I think in the short-term there has been an elevation in sales and distribution costs because of competitive intensity or on account of channels commissions, we want to use a lot more sophisticated techniques to see how we can be even more efficient in what we offer channels to acquire right quality customers, so there is a whole bunch of things. I think we just have to work harder to stay in the same place and that is our effort right now.

Kunal Vora — BNP Paribas — Analyst

Sure, sure. That’s helpful. Just a follow-up on the first question on churn, like that it remains fairly elevated, 3.3% monthly, almost 40% annual. When do we see that stabilizing?

Soumen Ray — Chief Financial Officer

Yeah. I think — this is Soumen, as I mentioned, this is elevated and we are not happy with the level of churn and I think the large reason for the churn is less churn of tenured customers who’ve been with us more than nine, 12 months, but really poor quality of acquisition. And this is why I said that we are really trying to see what we can do to improve the quality of acquisition, so that we can get a control on this churn. This is why they are happening in the market, because fundamentally there is an arbitrage in pricing where a new SIM is available for probably a lower-price, given the channel commissions than what you would pay for an existing plan, and that leads to arbitrage. It is something that’s a menace in this industry, it’s been there for many, many years, it’s gotten worse in the last few months. But I think we just have to find a way to get more cleaver and more sophisticated about what we do and there are many pilots that have done in the last 30 days, 40 days and we are hoping that some of these will rollout now in the coming weeks and months. Right, thanks. My second question is, if I observe, like IoT and M2M connections almost doubled over the last one year. Can you help us understand the potential size of this market, what are the main use case, what are the customers really doing, the growth trajectory which we can expect and also what kind of ARPU you are making on these IoT and M2M connections?

Gopal Vittal — Managing Director & Chief Executive Officer

Yes. I think that historically what we’ve done is like. I think was three-four years ago we moved this M2M business under the B2B reporting, because it’s really a B2B business. But the reason we called it out in our investor pack this time as far as postpaid is because we wanted you to get a fair comparison of what really is our postpaid business when compared to competitors, because that’s when they report postpaid, we reported along with M2M and IoT. And this is why we disclosed it, because we wanted you to get a true and fair representation of what’s happening.

I think the M2M business is driven by multiple use cases, fleet management, it’s growing the cards, it’s going into ATMs, it’s going in into meters, large contracts, large plans by governments to move to a electronic metering based on IoT devices. And GSMA did a study, I think a few years ago, where they were talking about 2 billion machine-to-machine devices over the next few years. So this is something that certainly has a — is a big growth opportunity.

The individual ARPU of an individual SIM is very low, I’m not at liberty to disclose a specific number, but it’s very low that remember also the consumption that we’re using it is very low. And also it’s a corporate paid connection, so that extend we’re getting, we are not being paid for a SIM, we are being paid for, say, 50,000 or 100,000 or maybe 5,00,000 SIMs, where you have one billing and you are getting the money.

This is a place we have spent a lot of our times, creating this M2M platform of ours. Our engineers have built it, this platform is amongst the best in the world. We offer all kinds of flexibilities where a customer is able to provision a SIM on the fly, can do it by themselves, as in, you don’t actually even contact Airtel. The SIM is just delivered to them and they can decide where to use it and when to use it. They can take it off, they can get all kinds of analytics with it. So, these are the use cases that we are actually building a part of this, which is actually exactly what our customer is looking for.

Kunal Vora — BNP Paribas — Analyst

But like this number has almost doubled to almost 13 million, 14 million in last one year.

Gopal Vittal — Managing Director & Chief Executive Officer

It’s growing fast. So it is growing fast.

Kunal Vora — BNP Paribas — Analyst

What kind of growth would you expect going forward? Do you think this kind of growth is sustainable?

Gopal Vittal — Managing Director & Chief Executive Officer

Well, I hope so. I think as more and more — again, I’m not giving you a target or a forecast, but as more and more automation comes in across many, many industries, as more and more efficiency is being sort through using the power of information, then yes, these are opportunities that everybody is going look for, because it’s actually much lower in terms of cost, that said, we need people to do it immediately for example. Or attract there’s one highly, you want to know what is the speed at which it’s going, is it over-speeding, is it traveling at the wrong time. Is it in the right — is it moving in the right direction as we wanted to. All of this is possible with this, although it is not possible to even look at some of this, so many customers find this extremely useful, because there is value.

Kunal Vora — BNP Paribas — Analyst

Sure. That’s it from my side, thank you.

Operator

Thank you very much, Mr. Vora. The next question comes from Mr. Vivekanand Subbaraman from Ambit Capital. Mr. Subbaraman, you may please unmute your side and ask your question now.

Vivekanand Subbaraman — Ambit Capital — Analyst

Hi, thank you for the opportunity. I have two questions. So firstly, Gopal, you’ve been highlighting how the non-mobile revenue streams are becoming more and more important, and we have been seeing strong growth traction both in B2B and Homes. So just wanted to understand from you, in terms of your vision for the non-mobile businesses, how do you see the contribution trend in the next few years? So that’s question one. Secondly, any thoughts on the substantial headcount addition that you have done in the last nine months and in this quarter in particular, anything you want to call-out here? Thank you.

Gopal Vittal — Managing Director & Chief Executive Officer

Okay. Thank you for that. I am very excited about our entire portfolio outside of wireless. I think that every part of our portfolio is important, within this, B2B is a jewel in the portfolio consistently and I explained to you all the reasons. I do believe that we are operating in a 40,000 crore connectivity market, but there’s also an adjacent market, which is another 40,000 crores to 50,000 crores, which comprises of CPaaS, it comprises of cloud, it comprises of cyber security, data centers. And all of these play to our strengths under one digital. And this is where we are now building a stronger portfolio, so I see a runway for B2B over a period of time as we expand forth from a connectivity to beyond connectivity.

In connectivity itself there a big opportunity, so I can give you — let me give you a few example there. We have a customer in Bangalore who is a large Internet company, by going deep in the B2B space, we were going to double the revenue within a six month period. We have a customer in Delhi, who is a financial services player, and we were able to quadruple the revenue, by actually going deep, which is really operating the full portfolio of B2B solutions.

So when you look at these case studies, and I think a few quarters ago, I did mention another customer, a bank or a financial services in Bombay, where we were able to grow almost four times. So when you look at these examples, whether it’s in banking, it’s in technology space, it’s in IT, ITeS, these are opportunities which are particularly exciting for our field teams and we’ve got the maintenance into a toolkit, which becomes a consistent way by which is replicated more and more across.

The other part I do want to comment on is in our Homes business, because you know again it’s a very interesting business, broadband as you know, they are exploring and we are right there really at the forefront of finding drivers. DTH has been a draw, a drag. But I think with the recent strategy that we’ve put in place, and hoping that next quarter we are able to report a better outcomes.

On headcount, I think it — Soumen you want to talk about that?

Soumen Ray — Chief Financial Officer

Yes. So, the SME segment, we have channel partners, who have deployed direct sale forces. We believe that the SME needs to be attended to in our much more standardized and elevated method, so that the width and the depth can be achieved, what Gopal referred to. So we have in-sourced more than 1,000 people on that account, who were earlier, so called, off-roles, so that is why you see a significant jump-in the headcount.

Vivekanand Subbaraman — Ambit Capital — Analyst

Okay the headcount point is very clear. Gopal, one small follow-up on the enterprises business. So, has voice become that insignificant that the growth trends in enterprises now will be materially different from, let’s say, what we were delivering in FY ’20, FY ’21, because now we are consistently growing at double-digits on the revenue side year-on-year?

Gopal Vittal — Managing Director & Chief Executive Officer

Sorry, I missed that question. Can you just repeat that, there was a bit of a problem in the line, just repeat that.

Vivekanand Subbaraman — Ambit Capital — Analyst

Sure. So, Gopal, my question was on the B2B side, has voice within the B2B revenue become so insignificant that we are now consistently able to deliver double-digit growth led by connectivity and the other service revenue streams, is that how one should look at it? The reason I’m asking is, this segment was stuck in a rut over FY ’17 to FY ’21.

Gopal Vittal — Managing Director & Chief Executive Officer

So obviously it’s becomes smaller in terms of its relative contribution, it’s still reasonable. And yes, this is the one part of the business that’s not growing. To that extend, the underlying growth is actually faster. So this is why with Airtel IQ and with all the CPaaS offerings,we are trying to move a lot of this on to the cloud, so we’ll try to approach it in a different way. But yes, that is one of the headwinds in the business, but outside of that, all the other parts of the portfolios are growing, connectivity part, we are growing gain share because of the expansion that we are able to do, and all the non-connectivity that is beyond connectivity, all the adjacencies, these are virgin markets where we really like, every deal we win is an incremental revenue and incremental market share to us.

Vivekanand Subbaraman — Ambit Capital — Analyst

All right, very clear, all the best.

Operator

Thank you very much Mr. Subbaraman. The next question comes from Mr. Nicholas Barrett [Phonetic] from Macquarie. Mr. Barrett, you may please unmute your side and ask your question now.

Nicholas Barrett — Macquarie — Analyst

Yes, we are okay now, Vandhana? Yes, okay, sorry, thank you. A slightly complicated question maybe, but looking at your Indian — your mobile ARPU, your mobile tariff for India. You discontinued a number of very low ARPUs, maybe nine months ago and then you restructured your ARPU pyramid maybe six months ago, I got the dates wrong probably. And your ARPU keep increasing, right. So, do you think that the change in the pricing structure and in the pyramid that you’ve done over several quarters is still leading to further ARPU gross tariff growth today, meaning that it takes some time for consumer to decide to upgrade from feature phone to a smartphone, it takes time to decide to spend that kind of money that there is probably some substantial increase in tariff levels for some consumers, do you think this — there is some rippling effects, some delayed effect or long-lasting effect of the change in your operating structure?

Gopal Vittal — Managing Director & Chief Executive Officer

No, I think that the shedding of customers that we did was, if I remember right, almost two years ago. I think where we shed close to 49 million customers in one — basically in a few months and I think that served us very well, because it de-clogged our networks, it focused our organization, we chose the right quality customers and really simplified our business. So that’s the reason we did it, and it’s worked very well for us in hindsight. At that point it was risky decision, there was a lot of concerns, whether it will work or not, but we did some pilots and we — then we rolled it up.

I think, ever since then, the drivers of ARPU increase are wither a tariff, which is compared to two rounds of tariff these or it’s feature phone, smartphone upgradation, or it’s monetization of data or it’s the movement from prepaid to postpaid and so on and so forth. So those are the four drivers and those stay in tact and that hasn’t changed in the last three years.

Nicholas Barrett — Macquarie — Analyst

So that’s what I meant Mr. Vittal, the two rounds of tariff increase, do you think this still plays a part in the increase in ARPU that we still see this quarter, last quarter?

Gopal Vittal — Managing Director & Chief Executive Officer

That was all done, that typically gets done in three months, so no.

Nicholas Barrett — Macquarie — Analyst

Okay, okay, understood.

Gopal Vittal — Managing Director & Chief Executive Officer

The last time last — the last tariff increase I think happened in somewhere in the November 2020.

Nicholas Barrett — Macquarie — Analyst

Understood. We’ve seen your mobile revenue in India very clearly voice minutes are going down and data volumes are going up, right? How much does that explain the increase in EBITDA and EBIT margins?

Gopal Vittal — Managing Director & Chief Executive Officer

No, it has nothing to do with EBITDA and EBIT margins. I think the — we are in the business of actually getting customers and getting ARPU. I think those are the two drivers of our business, customers into the ARPU that will get really in the revenue that we generate. The reason that people buy data packs is because they a lot more value. Yes, voice minutes have declined in this quarter, that could be on account of seasonal factors or just the fact that maybe we’ve reached a point where we could only see the value and continuing to speak more and more and more and they have other things to do. So we — I think the real driver for our business is the movement from feature phones to smartphone and the moment they get on to a smartphone, getting on the data, consuming data, so that we’ll get the full ARPU that they have tapered off to an increase [Phonetic].

Nicholas Barrett — Macquarie — Analyst

So you would say, therefore that EBITDA, EBIT margin on voice and data are similar?

Gopal Vittal — Managing Director & Chief Executive Officer

Well, we don’t — I don’t — well, we don’t have reported in that manner, so here on just a little bit both business, yes. I say it, the way you were asking.

Nicholas Barrett — Macquarie — Analyst

Understood. Last thing from me, sorry for being long. You talked about capex, when do you see or over which time period do you see peak capex?

Gopal Vittal — Managing Director & Chief Executive Officer

Well, I think that we have a — the following year is a — we are going to both rollout 5G as well as rural. And like I mentioned, I think our capex has been moderately around the, INR23,000 crore, INR24,000 crore number per year. There could be some advancement of capex from the following year, which is the ’24-’25 year which is ’24-’25, but we will keep you very flexible, we will see now what the uptake is. We will watch this space on rural, we’ll make sure that we are trying to see the power of our data science models and see if it’s actually translating to revenue, we do the same thing on 5G.

So this is a modular business and especially on radio investments, you can turn them in and off or off and on, let’s say, in the matter of 30 days to 60 days, so just the timeline required to actually shift the material from the factories into the warehouses. So this is highly modular and we will wait-and-watch how it plays out. To determine what the ultimate level of capex will be for the following year.

Nicholas Barrett — Macquarie — Analyst

Have you decided how to price, how to sell 5G?

Gopal Vittal — Managing Director & Chief Executive Officer

I think that right now we are — the plans that we offer are the same, so both 5G and 4G is at the same price, to that extent data is data. And if you bought a 5G device, your data will work on 5G. Right now that’s the way it performs.

Operator

Thank you very much Mr. Barrett. The next question comes from Mr. Rohit Kothari from GZ Ventures [Phonetic]. Mr. Kothari, you may please unmute your side and ask your question now.

Rohit Kothari — GZ Ventures — Analyst

Hi, Gopal, congratulations on a fantastic set of numbers, just looking into — delving into your financials this quarter, I saw that we generated a free-cash flow close to, INR3,500 crores. Can you — am I wrong to see, even with elevated capex, next year a free cash flow between INR20,000 crores and INR25,000 crores. That is number one, that’s the first question. The second question is, on the 5G pricing, given such elevated capex is happening on 5G, we believed that there would be a INR75 to INR100 premium on the 5G pricing. So could you highlight what are your thoughts on that?

And third is on the home broadband, we are close to 5 million, 5.5 million subscribers and I heard somewhere or some statement that eventual goal is to reach a 20 million homes, and what is the timeframe we should expect that to happen?

Gopal Vittal — Managing Director & Chief Executive Officer

Thank you Rohit, thanks for your comments. I think, on the free cash flow, we are not at liberty to share the forecast for the next year, because what you are asking us is a guidance of the entire business model. I think suffice it to say that, we are comfortable as far as the operating cash flow is concerned to fund all our capex payments, all our capex requirement, even if it is elevated and pulled forward from the following year, in addition to payment of paying down some debt and paying down some of our spectrum dues. So, to that extent, we are in a comfortable position there.

On the capex front — I’m sorry, on the 5G pricing front, look, we’ve seen and assessed what’s happening in other markets and in some markets what operators have scheduled to do is, a price for 5G at a premium, small premium, maybe 10%, 15%, 20%, Ireland has done it, parts of U.S. have done it. Even originally Korea has started with it. And what we find is that the take rate of that is a fraction of a full base of customers. So in other words, the ARPU is illusion, because if you are not getting — if you are getting a smaller numerator of a larger denominator, multiplied by the ARPU we are supposedly getting, we are still not getting revenue. So ultimately then what we need for monetization is the tariff table that it self will go off, that’s the first point.

The second part is, how do you put the capex? You also wanted to be spread out fast, because you don’t want to invest as much in 4G, is that you can displace the traffic that’s coming from 4G onto 5G and over time reform the spectrum bands and then use all of it for 5G. So that’s the reason that we are currently at the same pricing. We don’t know how that will play out and of course we are also right now just building out the network, so we are still in the construction phase and then we take a decision as to what we do in maybe in six months to nine months.

On Homes, I think we did say that the market could potentially be anywhere between 35 million to 40 million, maybe 40 million, 45 million homes and we today are about 5.2 million homes. We are doing a — we continue to accelerate this business and we hope that we garner a significant part of that overall opportunity in home broadband.

Rohit Kothari — GZ Ventures — Analyst

Yes. And just one more question, Gopal, what would be your aspirational target — what should be the timeframe when our net-debt of INR1.7 lakh crores today will touch INR1 lakh crores, so you know INR70,000 crore debt reduction. When do you seek to achieve that time?

Gopal Vittal — Managing Director & Chief Executive Officer

Harjeet, do you want to comment? Again, I don’t want to give any targets and guidance on this. I think just — let me just headline and then I’ll hand it to Harjeet. I think our focus is to make sure that we run a tight, prudential — we maximize our operating leverage and finding different source of revenue and generate more-and-more free cash flow which will ultimately better our debt. The debt that we have, by the way, large part was denying debt, because just DoT debt, government debt, so in a way it’s a least perspective of difference.

Harjeet, do you want to add anything?

Harjeet Singh Kohli — Group Treasurer

Thanks Gopal. Rohit, your question is fairly valid, but the three or four forward-looking variables there, how you project the EBITDA, which of course depends upon the tariff cycle, 5G utilization, etc. The capex, whether to the extend certain capex is brought forward or not, that’s the second variable. And I would say the third variable is really the ability or incentive to pre-pay out some debt, depending upon the interest-rate cycles. So, I won’t be able to comment directly of what could be a timeframe, but keep in mind, when you were looking at FCF for the coming year, probably you did not keep into account the finance lease unwinding portion that has to go out to the tower companies. So, as you look at EBITDA less capex, you should also factor-in the finance lease payments to be done to the Indus Tower and the ADCs and the other tower companies.

Clearly, coming two years, maybe 2.5 years balance, there is a moratorium, some bit of extra cash will be in the system which can be utilized to pay-down the debt. And the last piece is, what happens if something needs to either be changed or re-looked at or not on the dividend policy. We have a very meager conservative policy or philosophy rather of passing-through the dividends that we received from our subsidiaries, Airtel Africa, Indus Towers being dominant and a few others. That should stay of course, but the Board can of course try and re-look at basis the free-cash flow profile, both the sustainability of it, as well also the pool being built-up. So these are the four variables, arguably this FCF is building up and is sustainable, confidence is high. But how these variables play-out and whether it takes 24, 36, 48 months, can’t say today.

Rohit Kothari — GZ Ventures — Analyst

Thank you.

Operator

Thank you very much Mr, Kothari. Due to time constraints, I would now hand over the proceedings to Mr. Gopal Vittal for closing remarks.

Gopal Vittal — Managing Director & Chief Executive Officer

Thank you very much for joining this call and for the engaging discussion. I look-forward to seeing you next quarter.

Soumen Ray — Chief Financial Officer

Thank you all, all the best.

Harjeet Singh Kohli — Group Treasurer

Thank you.

Operator

[Operator Closing Remarks]