Bharti Airtel Ltd. (BHARTIARTL) Q4 FY22 Earnings Concall Transcript

Bharti Airtel Ltd. (NSE: BHARTIARTL) Q4 FY22 Earnings Concall dated May 18, 2022

Corporate Participants:

Gopal Vittal — Managing Director & Chief Executive Officer

Soumen Ray — Chief Financial Officer

Harjeet Kohli — Group Director – Strategy and Business Development 

Analysts:

Manish Adukia — Goldman Sachs — Analyst

Kunal Vora — BNP Paribas — Analyst

Sanjesh Jain — ICICI Securities — Analyst

Pranav Kshatriya — Edelweiss Financial Services — Analyst

Aliasgar Shakir — Motilal Oswal Financial Securities — Analyst

Vivekanand Subbaraman — Ambit Capital — Analyst 

Presentation:

Operator

Good afternoon, ladies and gentlemen. I’m Rajeta, the moderator for this Webinar. Welcome to the Bharti Airtel Limited Fourth Quarter ended March 31st, 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 risks that we face. Post the management opening remarks, we will open for an interactive Q&A session. Interested Participants may click on Raise Hand Option on Zoom application to join the Q&A queue. The participants may click this option during the management opening remarks itself to ensure they [Phonetic ] find a place in the queue. Upon announcement of name, participant 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, Rajeta. Good afternoon, ladies and gentlemen, thank you for joining this webinar to discuss Bharti Airtel results for the quarter and year ended 31st, March 2022. Also present with me on this webinar are Soumen Ray, Harjeet Kohli, and Arpan Goyal.

As you are aware, TRAI recently announced the long awaited recommendations for reserve prices for the next spectrum auction. The industry had hoped for a massive reduction in spectrum reserve prices. While there has been a reduction, it has not been adequate and is in that sense quite disappointing. We will not comment on our strategy and approach since it’s dependent on the final reserve price finalized by the government.

I now want to turn to our performance for the quarter. Overall, this has been another quarter of solid execution for Airtel. We’ve seen consistent growth across the portfolio. Our consolidated revenues for the quarter grew sequentially by 5.5% to hit INR31,500 crores and our EBITDA margins improved over the last quarter by 88 basis points to get to a just a shade under 51%.

Let me now briefly touch on each of our businesses. In our broadband business, we continued to see strong sequential revenue growth, driven by continued strong customer additions. Our roll out is gathering pace and we clocked 1.85 million new home passes this quarter. Our innovation through the digital local cable operator partnership model has now enabled us to be present in 847 cities, an addition of 175 cities this — in this quarter. We believe that this category will grow to over 40 million homes by 2025, and we are well poised to gain a very significant share of this growth.

The DTH business continued to see headwinds. While the category sees — while the category continues to see a significant long-term opportunity for upgradation from cable, it’s also classic case of an industry that has been brought to its knees, due to excessive regulation.

Let me explain. The new tariff order brought about by TRAI a few years ago mandated every minuscule aspect of pricing in an industry, which was managed until then very simply through forbearance. This created a mind-boggling amount of complexity for the DTH players and even more importantly for the customer with no benefit to any stakeholder.

The second aspect of skewed regulation is to do with the very same content being made available for free. This is what happens on free-to-air channels and there might be very good content in many cases here with just windowing or it’s being available — being made available on the same screen through a broadband pipe at unregulated prices. This is what happens on OTT platforms. As a result, the DTH industry has been crippled. We are glad to see that TRAI has just come out with the new consultation paper on tariffs, and we hope that at the end of this consultation, regulations will be lightened, so that we can focus on what we do best, keep things simple and serve customers.

Let me turn to Airtel business. This is a jewel in our portfolio and has been consistently delivering growth. We had another quarter of double-digit growth. Net of voice, which is declining, this business is growing all other segments, either in high teens or even faster. Our portfolio here comprises of connectivity, CPaaS, IoT, cyber security, cloud and data centers. We continue to outperform our peers in each of the segments and expand market share.

As I’ve mentioned before, our entire go-to-market organization has been retooled, so as to enable them to go both wide, which is to expand our presence in accounts, where our market share is low or to go deep, which is really to accelerate penetration of those parts of our portfolio, where our customers have still not chosen us, but we are already present. We’ve also enhanced our capacities on SEA-ME-WE-6 and two [Phonetic] Africa by 100 TBps in order to future proof our capacities. This is on the submarine cable side.

Now, few comments on the Mobile segment. During the quarter, we witnessed a healthy flow-through of prepaid tariff hikes implemented at the end of November 2021. Despite a quarter with two fewer days, the revenue grew sequentially strongly by 9.5%. Our ARPU as a consequence is now INR178. This is a strong move towards our first goal post of INR200, and our eventual target of INR300 ARPU.

The industry has seen relatively lower net additions in this quarter due to two reasons. First, some SIM consolidation at the lower end. This is on the feature phone segment. Second, some moderation on 4G net adds, primarily due to shortages in semiconductors and rising cost of these chipsets. As a result, several OEMs have placed greater emphasis on prioritizing higher priced smartphones. Despite these trends, we’ve been able to add just over 5 million 4G customers and crossed the 200 million milestone.

On postpaid, we added 2 lakhs customers further strengthening the segment and getting to decisive leadership. With less than 4% penetration of postpaid in India, and a reduction in postpaid to prepaid price ratios, we believe that postpaid is a very promising opportunity for us going forward.

In sum, quarter four was another quarter of consistent performance and gives us great confidence in the execution capability of our very simple strategy, win quality customers by delivering the best experience for them, do this by leveraging digital technologies and tools, while being ruthlessly focused on eliminating waste.

At this point, I also thought it may be a good idea to step back and look at the year that has gone by and give you three reasons, as to why we feel very confident about the future.

The first reason for our confidence is our execution. Despite tremendous competitive intensity and turbulence caused by the peak waves of COVID, our execution has been strong. During the year, we added INR13,440 crores to the top line and just under INR8,150 crores of EBITDA to our India business alone. Beyond these numbers, what was even more satisfying is that we grew competitively. Every part of our business, mobility, broadband, DTH and Airtel business, grew market share to reach lifetime highs.

We let the tariff increases, where we sense the time was right. We challenged ourselves to find a way to expand the reach of our home broadband presence after COVID and cracked an extremely innovative partnership with thousands of local cable operators using our digital progress. We strengthened our portfolio in Airtel business through innovations in CPaaS and Airtel Secure.

We continue to invest over INR20,400 crores into capex across our network, data centers, submarine cable capacities and digital. Finally, we strengthened our partnerships. With Hughes Airtel JV, the investment into level for SD-WAN, which is a software-defined wide area networks, Aqilliz for blockchain, Oracle for data centers and Google as a strategic equity partner.

The second reason for my confidence is our future proof business model. As I’ve mentioned, Airtel at its core has a three-layered business model. The first layer is our digital infrastructure; the second layer is our digital experience; and the third layer is our digital services. Each layer gives us the right to win and thrive.

Let me elaborate briefly and give you a few things we’ve done this year towards each of these layers. Our digital infrastructure layer is where we’ve invested over $46 billion to drive much of India’s economic and digital activity. I want to call out two major developments here. We are fully ready for 5G. Our core network, our radio network and even our transport network is fully future proofed.

In our transport network, the power of our home broadband business is now enabling us to connect more and more towers directly on fiber, which will make our network ready to deal with massive increases in capacity. Our sub-gigahertz footprint across the country now gives us deep indoor coverage. Our expansion of our mobile coverage footprint now allows us to provide broadband connectivity across 795,000 villages and towns in India.

Even more quietly, we’ve spent the last five years, bringing our data together, our entire data into one massive data platform that stores over 100 petabytes of data. This is equal to storing every single movie made in the world in HD. This platform allows us to process 2 trillion events daily, which is equivalent to all the searches done globally on the largest search platform of the world. Even more powerfully, this entire platform talks [Phonetic] to a very thin Customer 360 platform, which can respond in milliseconds to any request or offer to be served to a customer.

Our digital experience layer is the one that sits above this infrastructure layer. Here I want to talk about two milestones. Our first milestone is embedding our omnichannel experience approach. Today, a customer can search by be onboarded, experience our services and refer our services in any channel, be it offline or online. In sum whether it’s online or offline for every step of the customer journey, we have created the intelligence and tools to meet the customer, where he or she wants.

It is this sort of thinking and technology that has allowed us to launch Airtel Black, a flexible and powerful convergence platform that sits on top of our billing systems and allows the customer to buy multiple services from Airtel, regardless of whether we offer these services ourselves or in conjunction with our partners. It’s the same obsession with experience that has allowed our in-house engineers to develop our own self optimizing network, which improves the experience for our customers on the fly, by managing a myriad number of parameters, while also using AI and ML to moderate the use of power and energy on a tower.

The second milestone in our digital experience layer was the retooling of the organization. We’ve made two fundamental changes. The first change is to bring the whole fragmented channel organization under one channel leadership team. Today, we have only two channels in the consumer business, mass retail channel and the direct to customer channel. Both these channels serve all our businesses. This change has given our teams bigger roles and simplified our interface with customers. As an added bonus, it has saved us costs.

The second change is to bring the whole delivery organization together. So regardless of whether it is broadband, DTH or any other consumer business, there is one team that goes to the customers’ home and delivers it. To make this happen, there is tremendous digital capability needed. This is where Airtel Work comes in.

Airtel Work is our platform for any transaction of work across every part of Airtel. Almost 70,000 of our people and associates are on this platform, and it’s become a way of life within Airtel. Now that the organization is in one place, we are driving productivity, so that our engineer on the ground can increase the number of jobs per day, while being relentlessly focused on improving experience.

The layer that sits on top of our digital experience is our digital services layer. Our digital infrastructure around our data backed by the digital capabilities to deliver an omnichannel experience, gives us the right to build and grow digital services.

Let me give you a few milestones around our digital services. Our Payments Bank is now developing serious scale. It has a user base of 129 million, a monthly transacting user base now of 36.7 million, as of last quarter, a GMV of over INR133,000 crores, and is the only profitable fintech player in India in this space. What is more exciting — even more exciting is that we have 200 million 4G users, most of whom are engaged on one or the other of our own digital assets. The opportunity to convert them into our bank is very exciting.

The second milestone is the launch of Airtel Digital. We have several growth businesses that operate in large categories here. Airtel Ads is our adtech platform that rides on our digital assets. Airtel IQ is our SaaS platform that rides on our underlying digital infrastructure. The Airtel marketplace that comprises of content, loans, insurance and credit cards, again rides on our digital assets and our payments capabilities, then there is our data center business. Across these businesses of data centers, Airtel Digital and Payments Bank, we are well over INR3,000 crores of annualized revenue and growing.

The third and final reason for my confidence is our fiscal prudence and governance. Let me give you some texture here. We are ruthlessly focused on eliminating waste. In the last four years, we have stripped out $1.2 billion of waste in our business, making the business leaner and swifter. We do this through applying rigor, leveraging tools and technology and sensible win-win negotiations with our partners.

To give you one example of rigor, we track the profit contribution in every one of our 237,500 network towers. We know exactly what the problem is, is it that we need more customers in that area in that site, or is it that we need a lower cost structure on that site. This allows us to be targeted in terms of interventions, go-to-market network improvements or simply a leaner site with a lower cost structure.

Our fiscal prudence has made us opt for a moratorium on government payments, yet, we prepaid high cost spectrum debt of over INR24,000 crores. We have raised almost $18 billion of funding to strengthen our balance sheet over the last two years. As a result, our leverage has improved substantially from 2.95 to 2.51 [Phonetic] this year. Our operating free cash flow is more than adequate to cover all our capex needs. And with improved tariffs, the operating leverage of our business model will release even more cash.

Our disclosures are industry leading. We have the most stringent definition of what constitutes a customer. A customer in our definition has to give us some revenue on a rolling 30-day basis. Given that most prepaid plans have a validity of 2 day — 28 days, that effectively leaves only two days to recharge between the time the pack expires and the time our definition kicks in. Our segment reporting gives you the true picture of each of our categories in terms of customers, revenue, and ARPU.

Finally, our ESG agenda has been put on a massive priority. There is a Board appointed committee in addition to which I lead a management council that works on driving our ESG initiatives. To give you one example, we were able to eliminate 3 million liters of diesel from our tower operations by using AI and ML technologies through switching off power based on our projections of traffic, and this is where the self optimizing network of Airtel comes in. This tool by the way was built by our own engineers and saves us cost, while reducing our carbon footprint. Another example is Nxtra data centers, where we are fulfilling 34% of our energy requirements from renewable energy, and we’ll get to 50% very soon.

In sum, the quarter gone by has been satisfying. We’ve made steady progress across all parts of our portfolio. Our execution has been strong, and our performance has been both consistent and competitive. Even more importantly, we have a business model that is poised well to tap into the growth opportunities in India. Our governance track record has been flawless.

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] The first question comes from Mr. Manish Adukia. Mr. Adukia, you may please unmute your side, introduce yourself and ask your question now.

Manish Adukia — Goldman Sachs — Analyst

Yes. Hi. Good afternoon. This is Manish Adukia from Goldman Sachs. Thank you so much for taking my question. Couple of questions from my end. First, Gopal, wanted to get your thoughts on what you mentioned in your opening remarks around semiconductor shortages and just upgrade to smartphones generally slowing down. So can you just maybe provide us some more color on what you’re seeing there?

Of course, data suggests that smartphone shipments have not been growing over the last couple of quarters, while ASPs have been rising. In such a scenario, do you expect generally slowing 2G to 4G upgrades for the industry? Do you think this is structural, just an aberration? And how do you think about this over the next few quarters in terms of your own and for the industry level 2G to 4G upgrades. How should we think about that shaping up?

And the second question is for your wireless business again, where capex over the last couple of quarters has seen a decline and FCF has been seeing some pretty strong growth. So is the reduction in capex likely to sustain? And if you can provide some qualitative comments around how one should think about free cash flow for the India business or the wireless business over the next couple of years?

Gopal Vittal — Managing Director & Chief Executive Officer

Thank you, Manish. I think on the semiconductor shortage, yes, there have been semiconductor shortages and rising chipset prices, and some of the OEMs have put greater focus on higher priced smartphones. So the entry-level smartphone, which use to start at about INR6,000 to INR7,000 is now a little over — it’s almost INR10,000. And that has led to some softness in upgradation from 2G to 4G across the industry. I believe this is a temporary phenomenon.

And the reason is that people tend to get used to a new normal. And I think the initial shock is likely to wear off in the next few months. That said, there are obviously headwinds in terms of inflation on commodity prices and energy prices and so on and so forth, and all of that obviously take a toll on consumers’ wallets. Let’s see how this plays out.

The fact is that consumers understand the value that a smartphone plays in their lives. They see this as a big right of passage. And this is one of the few aspirational categories, where upgradation is a big deal. So even if you go back in time, there used to be a segment of smartphones between INR4,500 to INR5,500, but most users would actually go straight to about INR7,000 to INR8,000 to buy better quality smartphones. So when people upgrade, they will upgrade to a good device. Therefore, I think this will be temporary. But yes, there is some softness that we are seeing overall in shipments.

On the wireless capex, I think if you look at aggregate company capex, we are broadly trending to about INR20,000 crores to INR21,000 crores, last year that’s what we did. We don’t expect any significant change or any material change from that number, that’s what we’ve maintained. While we don’t give guidance, broadly we see that in the same area.

Where is this capex going? A significant part of our capex is going on transport infrastructure into data centers, in broadband. Of course, there will continue to be radio capex, but the contribution of some of these other areas is now beginning to change within the Company. As we get into a 5G cycle at some stage and depending on the pace of roll out, you will see a little bit more elevated radio capex, but a lot of the transport infrastructure we’ve been creating for the last four years.

Manish Adukia — Goldman Sachs — Analyst

Thank you, Gopal. Just a couple of follow-up questions on what you mentioned. So on the first response, when you talked about generally inflationary impact in the economy, in a couple of months ago at the Analyst Day, you mentioned that while, of course, smartphone prices are moving up, you generally don’t expect that to have any impact on tariffs, and of course, you’ve taken one round of tariff increase late last year, that’s flown through. But does that still hold true, where you think that any potential future price action by Bharti Airtel is unlikely to be meaningfully impacted by, let’s say, the current inflationary environment in the economy?

And the second follow-up question on the second response of yours, on 5G in particular, again based on your visibility in terms of what you’re seeing in device ecosystem, in terms of just generally evolving or developing use cases, do you think there is like enough and more use case over an 18-month period, where 5G will, let’s say [Phonetic] be required to be rolled out on a pan-India level? Or do you still think based on your conversations globally with operators that it’s still, let’s say, maybe like two years, three years away from standpoint of India [Phonetic].

Gopal Vittal — Managing Director & Chief Executive Officer

Yeah. I think on the tariffs front, we are in an essential service. And if you look at what’s happened, there are actually three — there are three trends that are taking place simultaneously. One is a serious explosion at the top end of the market, which is around homes, the 50 million high value homes, whether it’s postpaid, it’s broadband, convergence, that part is really growing rapidly, and I think that is unlikely to change. And you see this in multiple categories, where the top end of the categories are growing quite rapidly.

In our case, the middle segment, which is the 550 million odd smartphones that you see in India, that’s very, very resilient. We have not seen any SIM consolidation. We continue to see usage grow. We continue to see that vibrant. And don’t forget, the ARPUs that we have here are really very modest. We have the lowest tariffs anywhere in the world. And my view is that at the right point in time moving up tariffs will be very easily absorbed here.

Then there is a third segment, which is at the lower end, which is the feature phone user, which broadly gives us an ARPU of about INR100. There, like I said, we’ve seen some SIM consolidation in the feature phone segment, but the bigger pain is more around the rising smartphone prices, which is actually inhibiting some growth in upgradation that we were earlier seeing. That I feel is a temporary phenomenon because we’ve seen this in many — I mean, I’ve seen this in multiple categories. Once you get a price increase or an inflationary impact, the new normal settles in and people tend to get used to that new normal before they actually come back to their old behavior. So that’s how we see.

The second question on 5G, I do believe that the use cases on 5G are very few and far between. This is true globally. The only use case seems to be the consumer use case, which is really increased capacities at the lower cost of production. But to my mind that’s still very small because if you look at the total 5G devices in India, as a contribution to the overall smartphone devices, it’s less than 4%, and while shipments are growing at about 12% to 13% of these devices. If you project this forward into March 2023, they will [Phonetic] probably be 5.5% to 6%. It will really be in March 2024, where it will get to about 14%, 15%, 16%.

So I do feel that when you look at some of the other use cases whether it the B2B use cases, whether it’s private networks, it’s things like robotic surgery or driverless cars or augmented reality or metaverse, this is still some time away, and we haven’t seen these any part of the world getting any scale whatsoever. So I would expect a more moderated roll out of 5G in the coming year and perhaps more accelerated roll out in subsequent years. If you take a three year to four year view, yes, 5G will go in most parts of Urban India. But if you take the immediate view of ’22 and ’23, I would imagine that this must be — this will be a moderate roll out.

Manish Adukia — Goldman Sachs — Analyst

Thank you, Gopal for taking my questions and all the best.

Operator

Thank you very much, Mr. Adukia. The next question comes from Mr. Kunal Vora. Mr. Vora, you may please unmute your side, introduce yourself and ask your question now. Mr. Vora, you may please unmute your side, introduce yourself.

Kunal Vora — BNP Paribas — Analyst

Yes. Sorry. Okay. So this is Kunal Vora, from BNP Paribas. My first question is on tariffs. How are you thinking about interval between two tariff hike. So I mean, instead of voluntary [Phonetic] tariff hike, we believe that industry can get to a annual tariff revision, which could also increase the revenue growth visibility for the sector? And how should we be thinking about industry growth excluding the tariff hikes?

Gopal Vittal — Managing Director & Chief Executive Officer

Well, I mean that in a sense would give us — would give sort of guidance in terms of our overall revenue growth would look like. I think you’ll have to model it for yourself. My own sense is that we should start seeing some tariff increases during the course of this year. While I can’t commit that, I do believe that the tariffs at the levels they are, are still very, very low. And I think we’ve been consistent in saying that the first quarter [Phonetic] call is to be, to get to INR200, which would require at least one round of tariff increase because the gap between, where we are and INR200 is about INR22.

And even though you may have seen some ARPU increases with the natural upgradation and growth of postpaid that we see in our business that’s not going to be adequate to cover that bridge in the shorter term. So I think one round of tariff increase will take us into the INR200 area. And then getting to INR300 will be over a period of time. So that’s really how we see it.

Kunal Vora — BNP Paribas — Analyst

And excluding the tariff hike, how do you see the industry growth rate?

Gopal Vittal — Managing Director & Chief Executive Officer

Well, I think let’s see how this plays out because it all depends on multiple factors, one is the upgradation from feature phones to smartphones. That is one source of ARPU increase. You can do the math in terms of what the industry has delivered in the last two quarters to three quarters, maybe four quarters and recent trends as well.

The second factor is the growth of postpaid. If you look at postpaid today, the ratio between — the ARPU ratio between postpaid and prepaid at the time when postpaid was growing as an industry at about 8% used to be 2:1. And then later when prepaid pricing collapsed, this ratio became 3:1 and postpaid growth slowed down to zero. So there was no growth at all. There is no conversion from prepaid to postpaid. But today, the ratio is at 1.7, so we do expect to see some growth in postpaid. Again, you see an ARPU upside when you move from prepaid to postpaid almost 1.5x ARPU upside.

Then the third source of growth is really the home segment, where of course, there is broadband in itself, which is growing rapidly, there is converged offerings, which bring broadband, postpaid or DTH or a combination of two or more services, that again, we see a significant upside, and we also see a lowering of churn.

The other aspect of growth is really bringing more families onto the postpaid platform. So at the moment you bring more families, again, we see a significant lowering of churn, even though the ARPU is the same, so you’ll start seeing a revenue upside. And then, of course, there is the B2B side, which is a separate business and is growing quite nicely, and there is a tailwind there, which we hope to continue to exploit.

Kunal Vora — BNP Paribas — Analyst

Sure. My second question is on the site addition. This quarter you added about 7,000 sites, while in case of Indus Towers, you only see about 700 site addition. Can you help us understand the divergence? Are you using some other tower company? And also if you can help us understand how we should be looking at network costs, which is down marginally quarter-on-quarter this quarter considering that there is a tower contract renewal, how should we look at it going forward?

Gopal Vittal — Managing Director & Chief Executive Officer

Well, if you look at the historical trends, firstly, while we have a significant stake in Indus, we work with all the tower companies, I think that’s one thing that I must underscore. That said Indus does get a disproportionate share of the new towers that we put up and that number varies between 50% and 60% depending on the quarter. I haven’t seen any inconsistency in that even in the recent quarter. So I’m not able to fully understand the number that you’re referring to.

There is — there are various types of sites. There are full macro sites, there are also ultra lean sites, which are in urban areas, where the cost, the operating cost of that site is less than INR30,000 a month versus the macro, which is more like INR70,000 to INR80,000 a month. I don’t know whether Indus has reported the ultra lean sites in their mix. But if I look at all of those ultra lean and macro sites, the market shares that we’ve added don’t seem to vary significantly over prior periods. That’s — that’s on the first point.

The second question was on network opex, where we are running a strong program on War on Waste, where we are working with the tower company to drive down energy costs, as well as rental cost at every tower. We made some traction. We’re also using our own AI enabled tools to bring down the energy consumption, predicting patterns of traffic and actually switching off some power in the site and that has saved us some money.

But the fact is that what we’re seeing in recent weeks is a serious headwind in terms of rising energy prices. We’re also continuing to deploy and that’s a headwind that we will need to deal with. We will continue to drive a strong War on Waste program working with the tower company. But this is one of the headwinds that we are currently confronting.

Kunal Vora — BNP Paribas — Analyst

But should we see some impact because of the tower contract renewal, which you will sign?

Gopal Vittal — Managing Director & Chief Executive Officer

Well, I think we’ve agreed a broad framework on the tower contract renewal, but we haven’t get inked the deal. So I think there is still some conversations going on and some, some issues to sort of iron out. So it’s a bit premature for us to comment on that. Over these next few weeks, by the end of this quarter, I think we should definitely have that done. So next time, we will be able to give you a better a better sense of where we’re.

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. Sanjesh Jain. Mr. Jain, you may please unmute your side, introduce yourself and ask your question now.

Sanjesh Jain — ICICI Securities — Analyst

Yeah. Good afternoon, everyone. I’m Sanjesh Jain from ICICI Securities. I’m Sanjesh Jain from ICICI Securities. Few question from my side. First on the enterprise side of the business, a solid performance at 12%, 13% kind of Y-o-Y growth despite a declining voice, and as Gopal mentioned, high teens to higher than 20% growth in few category. But Gopal, can you help us understand what are — what is driving such a strong growth, how much of it is because of underlying industry growth and how much it is coming because we are taking market share? And what is that we are doing so right to drive such a phenomenal growth in a service, which has been traditionally growing at 5% to 6%? So that’s on the enterprise part of the piece. I have few questions on the financial. I will come after this.

Gopal Vittal — Managing Director & Chief Executive Officer

Sanjesh, thank you for that question. I think our B2B business, as I mentioned, is a real jewel in our portfolio. And I think the team there has done a really awesome job. I would say that if you look at this market, it’s a very large market. We were, you know, till about a few years ago, we used to look at this market and we used to see this market at about maybe INR35,000 odd crores, which is really a connectivity. But you add another INR35,000 crores, because there is a much larger market out there, which comprises of CPaaS, data centers, cyber security, cloud and so on.

I think that we have now got a very strong portfolio. So we’ve got — on the CPaaS side, I think we’re making very strong gains. We’re growing this very strongly at well over the teens. We are seeing solid performance in our data center side. We are also — on connectivity and itself, there is another — there is a big opportunity because our market shares have been in the ballpark of 30%. So we’ve been growing market share consistently there.

And I think one of the things that we’ve learned in this business is that, this is a business, where customers value relationships and trust. Obviously, you got to be competitive on pricing that goes without saying. But once you acquire a customer, and once you have a relationship with a customer, that measure of trust is a real moat because it’s very, very painful for a customer to switch out from you on to somebody else, and it’s painful for various reasons. It’s painful because it disrupts the business, but it’s also painful because then you got to set up a whole set of new relationships.

And I think the channel reconfiguration that we’ve done, which is divvying up the market or divvying up the go-to-market system between what we call hunting, which is going wide and expanding the number of accounts and going deep, where we’re actually driving more and more services, more and more products into a account has been a very good story for us.

The second thing we’ve done on the go-to-market is on the SMB segment. We have actually insourced what was earlier being distributed through channels. So we had a channel operation, we would give channel commissions. We’ve actually done away with the channel, and we’ve taken the field force into our own Company. And that is improving the quality of the sales work, the quality of the go-to-market work. And at the same time, we have greater control on things like productivity and training and tools.

And the last thing that we’ve done is use our digital model to open up leads. This is actually a new incremental growth to our business, almost 13% to 14% of leads now on — in the SME side are coming directly through the digital model. So I think I would say, it’s for a combination of all of these reasons that the business has been doing well. The fact is that this is one business that we’ve been growing share consistently.

Sanjesh Jain — ICICI Securities — Analyst

Are we worried that the competition and one of the large competitor in the mobile, now is aggressively talking about expanding their footprint in the enterprise side roughly. Do you think that could be a headwind in the near-term for us?

Gopal Vittal — Managing Director & Chief Executive Officer

No, I think the market is very large. The market is very large, and we have a massive opportunity to grow. I mean, I must say that my discussion is always with the B2B teams are that we are not satisfied with where we are. So while the performance has been good, I think we can do much more given this large size of this market and given the very, very tiny market shares we have in some of these new adjacent categories that we’ve entered into.

Let’s take cloud, for example, very large market. We are almost — I mean, we are very, very small. We’ve got a combination of the reselling of the public cloud, we’ve got the private cloud, where we have our own data centers, and we have an edge cloud. For example, we won a big deal with one of the largest content players in India, where we had actually built for them our own content delivery network at the edge, and that is actually moving up the value chain beyond connectivity. So these are the kind of things that we are looking at on the cloud area in order to add shares. So I would — I mean obviously our market is competitive. We see that every day. But the fact is that this is an exciting market because it’s such a large market and it has got so much promise.

Sanjesh Jain — ICICI Securities — Analyst

Got it. Gopal, one question on the non-business front. There is again a news in the market that one of the promoter are looking to sell the stake. What is the philosophy of nature of the promoter? And how are they committed or what is their communication with the management on how do they look at the company and sticking with it for a longer period of time?

Gopal Vittal — Managing Director & Chief Executive Officer

No. Firstly, I think, I must say that our — both the significant shareholders that we have, have stood behind the Company and through thick and thin. I mean the worst times that this Company has seen, the promoters have stood behind us, look at the amount of funding that’s been put into the Company. The reason that our balance sheet today is healthy is because of the tremendous commitment that our significant shareholders have had in the Company. I think the specific question on what you are asking about is the shareholder matter, I think, I’m not placed to answer that question. I think we best direct it to the shareholders.

Sanjesh Jain — ICICI Securities — Analyst

Fair enough. But do you think there is a probability or are there any discussion of promoters looking to monetize…

Gopal Vittal — Managing Director & Chief Executive Officer

No, no. Like I said, I think this question is best directed to them, because it’s not…

Sanjesh Jain — ICICI Securities — Analyst

Got it, Gopal. I got the point. Few questions on the numbers, not on the business. One on the finance cost, I thought we had done a tremendous job on finance cost, and finance cost has only declined by INR300 crores quarter-on-quarter. We have done a large amount of refinancing. We have BG coming back. Is that all the benefit built into the finance costs or what should be a steady state number once all the finance costs is there? So that’s the first one.

Second on the exceptional gain and what it is flowing to the minority shareholders. I couldn’t understand why the significant portion of the exceptional gain is accrued to the minority shareholder, while the shareholding is very small. Can you help us understand these two things? That’s it from my side. Thank you.

Gopal Vittal — Managing Director & Chief Executive Officer

Soumen, yeah.

Soumen Ray — Chief Financial Officer

Yeah. So I will go with the exceptional items. So there were certain exceptional items, which had minority interest and some did not have minority interest. So Sanjesh, to put it in a very small, in a nutshell, which can help put the perspective, if you look at extraordinary item, net of min tax [Phonetic] on a consol level, that number is about INR147 crores [Phonetic]. India & South Asia is INR60 crores, and the balance is Africa. So you should look at it that way. But overall, it is about INR150 odd crores. About INR68 crores, INR70 crores of gain in India and South Asia put together. Africa is another INR80 crores. So that is as far as the extraordinary items are concerned.

Harjeet, would you like to take the finance cost one?

Harjeet Kohli — Group Director – Strategy and Business Development

Yeah. Sure. Thanks, Soumen. Sanjesh, I think finance cost, your observation is right. Gopal mentioned in his opening commentary that over INR24,000 crores of DoT debt has been paid. And if you go back and see last 12 months flows, cash flows from the business itself have served some repayment, some equity proceeds had come in and some debt refinancing at a much cheaper rate has also happened.

So there is a significant benefit on that INR24,000 crores, which is certainly — some residual portion of that needs to flow back to. There is at least about INR100 crores of annual guarantee commission, which you noted very well, which will also get slowly coming back to the overall P&L. So between all of these initiatives, our assessment is an annualized — on an annualized basis, what do you see is INR300 crores into four is roughly INR1,200 crores, little over that, maybe INR1,600 crores, INR1,700 crores is the benefit of initiatives taken. You will start seeing that as the quarters go by.

Sanjesh Jain — ICICI Securities — Analyst

Fair enough. Harjeet, just one follow-up. Now we are generating close to INR7,000 crores plus kind of a free cash flow, adjusting for the working capital, which is Q4 is more of a seasonal one. But I think we are hitting a INR7,000 crores of free cash flow after all the liabilities, which is annualized close to INR28,000 crores, INR30,000 crores. So that kind of a debt reduction on a net debt basis, adjusted for the dividend pay out, that’s a possible thing from ’23 [Phonetic], right?

Harjeet Kohli — Group Director – Strategy and Business Development

Subject to no other, you know, unknowns coming in the picture, of course, one of the things, which you should expect to happen in the next few months is the 5G auctions.

Sanjesh Jain — ICICI Securities — Analyst

Yeah, yeah, obviously adjusted for the 5G auctions.

Harjeet Kohli — Group Director – Strategy and Business Development

Some of all of those and by the way 5G also you recall that it is a partly paid rights instrument plus hopefully with approvals coming through, Google proceeds should also come in. So there is a more or less mitigated situation there, subject to how the overall outlays are. But your broad directional output on the free cash flows, net of any non-routines is fairly, fairly correct, Sanjesh.

Sanjesh Jain — ICICI Securities — Analyst

Great. Thank you. Thank you. Thank you for answering all my questions patiently and best of luck to all.

Operator

Thank you very much, Mr. Jain. The next question comes from Mr. Pranav Kshatriya. Mr. Kshatriya, you may please unmute your side, introduce yourself and ask your question now.

Pranav Kshatriya — Edelweiss Financial Services — Analyst

Yeah. Thanks for the opportunity. I have couple of questions. Firstly, Gopal, you talked about 15% [Phonetic] odd of the handset being a 5G handset in next two years. What we have seen is that the chip shortages have sort of persisted for a fairly long period of time and also the 5G ecosystem as you articulated has not really seen any meaningful traction. So do you think that, that may warrant further tapering down of the 5G roll out and 5G roll out happening a little more staggered way, is that a real possibility? And how do you, as a management seize the 5G timeline? You want to get the 5G ecosystem and be an enabler for it or you will wait for the ecosystem to develop? So that’s my first question.

Secondly, there is a good increase in number of cities catered for the home broadband segment, and you had highlighted that this is largely because you’re tying up with the cable operator. Should we see this leading to a fairly strong growth in the capex for this segment, because I guess the home pass addition will be pretty fast? And can you highlight, if there is any color on the churn because you are adding subscriber quite fast. How is the churn in this segment? These are my two questions. Thank you.

Gopal Vittal — Managing Director & Chief Executive Officer

Thank you. So I think that, firstly, like I did mention that the ecosystem of 5G will change the way data is consumed and a whole bunch of applications will be built on 5G technology over the years. Will that happen tomorrow morning? No, it won’t. It will take time and it’s not happening anywhere else in the world as well. So this is going to change the world, but it will take time.

The beauty of our business is that we are in a modular business. We know in every one of our 240,000 towers, we know the number of devices that are there, we know the price of those devices, we know how many devices are smartphones and how many are feature phones. We also know how many smartphones of over certain price point, let’s assume, the 5G price today, the average selling price, the lowest 5G price is about INR15,000 to INR16,000 and most 5G phones are in the ballpark of INR25,000 to INR30,000. If you cut this devices by number of devices that are more than INR15,000 on a given site maybe 5G or 4G, the first sets of devices that will switch to 5G, so we know all of that.

The second thing that we know is that if we want to light up a site, you can do it in 90 days because all you need to do is to order equipment and hang the radios on the site. The 5G networks are ready, the core networks are ready, the transport networks are ready and you just need to hire — you put on those radios that are of that particular band that you will potentially be auctioned and bought by any operator. You just need to put that on to the site. So I would say that this is going to be a modular roll out. And is this going to be an aggressive roll out in the short term? The economics don’t suggest that it can be, simply because the ecosystem is still very nascent. So I think it’s a game that we are going to wait and watch and see how it plays out.

Now coming to your home broadband point, if you look at the roll out that we’re doing and excluded the cable operator partnership, our capex will be much higher than where we are. The fact is that the capex has — while it has increased, it’s not as elevated, as it ought to have been because we have found a very, very economical way to actually roll out using the cable operator, as a last mile provider of access.

The second thing that we have done is that the access even at our own cities, which is our top 100 cities, where we roll out our own network, we have fine tuned the cost of capex and the cost of roll out quite substantially over the last couple of years. In the larger scheme of things, this is a very, very important business for us, and it will never be deprived of capex. Our current objective is to roll out rapidly and pickup as many customers as we can because it is a market that is poised for acceleration.

The churn in this category is very, very low. So once you get a customer, that customer doesn’t leave you, and the reason is quite simple. They leave you only if you make a mistake. Your experience is lousy or your pricing is totally off-kilter, then yes, they will leave you because remember for anybody in the home to have a person come into the home, rewire the home, put another piece of cable, connect up your routers there, is a very painful exercise. And so we have seen that the churn here is very, very low. And therefore, I feel that this is a business that is — has the tailwinds. And like I said, we will not hold it back in any way and form to not be able to exploit the growth opportunity that is presented.

Pranav Kshatriya — Edelweiss Financial Services — Analyst

Just a small follow-up if I can. So you said that this business will not be deprived of capital. But does that mean that, you know, from directionally we should see the capex for this business going up because at least…

Gopal Vittal — Managing Director & Chief Executive Officer

We are investing everything we need to already and we’ve been doing that for the last few quarters.

Pranav Kshatriya — Edelweiss Financial Services — Analyst

Sure. And the churn question is specifically, I understand that churn in this business is low, but has there — has been any higher churn because the overall additions are fairly high. So does that sometimes, you know, basically drive incremental customer, who does not want to service and that’s why the churn gets — has it trended upwards or downwards, any color on that?

Gopal Vittal — Managing Director & Chief Executive Officer

It’s not trended upwards or downwards. It’s rock steady and very, very low, sub 1%.

Pranav Kshatriya — Edelweiss Financial Services — Analyst

Great. Thank you so much. That’s it from my side.

Operator

Thank you very much, Mr. Kshatriya. The next question comes from Mr. Aliasgar Shakir. Mr. Shakir, you may please unmute your side, introduce yourself and ask your question now.

Aliasgar Shakir — Motilal Oswal Financial Securities — Analyst

Yeah. Thanks for the opportunity. This is Aliasgar Shakir form Motilal Oswal. Couple of questions. First on the tariff. So after two rounds of tariff hike, how do you see the possibility of moving from unlimited plans to usage-based plans? I mean, how is the industry intent? Should we expect Bharti to take the lead, I mean, similar to the last couple of tariff hikes? I mean, I’m coming from the point of view that this would allow us to see a more linear ARPU improvement along with volume growth instead of taking this yearly tariff hikes? Yeah, that’s my first question.

Second question is on your 4G improvements. So we now have almost two-thirds of our total subscribers has 4G, something about 200 million as customers. Can you just share some color in terms of the opportunity out of 32 crore customers, how much more can we add here? Is that also a factor that has led to moderation in our monthly 4G adds, if you can just share some color there? Thank you.

Gopal Vittal — Managing Director & Chief Executive Officer

So I think, to your first question, I wish that we moved away from these unlimited plans to more simpler and a more logical price architecture, the way it is in most other countries. Unfortunately, everything is not in our own hands. We are in a competitive market. And so we have to see what the outlook is of different players, how they have historically behaved, what is their business model, how are they likely to behave and make some educated moves, which will not backfire needlessly. So I think this is something that I wish were to happen.

But at this point in time, this is not the way the industry is, and I’m not sure whether we will get there. In postpaid, for example, that’s exactly how it operate, because that’s a segment that we can dictate the terms. But in prepaid, given the competitive nature of the market, we are unable to do it unilaterally.

On the — on your second question, I think it’s related broadly to the same point that I was making, which is on the upgrade from the feature phone to the smartphones. See the current users already are having the feature phone and he is giving us whatever ARPU that he is giving us. But the upside of the 2x jump that you see in ARPU is only if they move from a feature phone to a smartphone and that comes back to all the issues that I described on semiconductor shortages, smartphone prices, and of course, the natural cycle of upgradation.

I mean, it’s — if you’ve got 100 million customers, they are not going to all upgrade tomorrow morning, but there will be a cycle of upgradation that happens on every month or every quarter’s basis based on the natural flow of the curve from leading edge customers all the way through to what is called laggards, which is the S-curve of the adoption that happens in every category. So that’s going to happen over a period of time. At this point in time, there is a headwind or there is some increase in smartphone prices, but like I said, I think that’s temporary because people will make their adjustments over a period of months.

Aliasgar Shakir — Motilal Oswal Financial Securities — Analyst

Got it. This is very helpful. Thank you.

Operator

Thank you very much, Mr. Shakir. The next question comes from Mr. Vivekanand Subbaraman [Phonetic]. Mr. Subbaraman, you may please unmute your side, introduce yourself and ask your question now.

Vivekanand Subbaraman — Ambit Capital — Analyst

Hi. Thank you very much for the opportunity. I have a couple of questions. So, first of all, Gopal, congrats on your reappointment. I just wanted to ask a few, the big picture goals that you will pursue over the next five years across businesses. We are seeing that your capex is increasingly directed towards non-mobile businesses. So how should one think about your priorities and the growth trajectory that Airtel will achieve? That’s one.

Secondly, can you please give us some color on the B2B business, the size and growth of the non-voice segments, particularly I’m interested in the contribution that CPaaS, cloud are making to current revenues of B2B and how is traditional connectivity doing, how big is it as a percentage of the total B2B pie? Thank you.

Gopal Vittal — Managing Director & Chief Executive Officer

So I think, in the — if you look at the next five years, while we don’t like to sort of give any forecasts and targets, I would simply say that the contribution of the non-mobility side to the overall portfolio has to get larger and larger. I think our B2B business must become a force to reckon with, our broadband business has to become very large. And then of course, using tools like convergence, we should get very, very low churn at the top end of the 50 [Phonetic] million pool that there is an industry.

Our digital businesses must come of age. Today between Nxtra, Airtel Digital and Payments Bank, we have an annualized run rate of close to a little over INR3,000 crores. These are all growing rapidly, and these should become very, very substantial over the next five years because that’s where a lot of our emphasis will be.

And thirdly, our ARPUs on mobility should be close to INR300 crores. In fact, it should be around that level in the next five years. So I think that’s really how I would see this business over the next few years.

I think on the B2B side, while we haven’t given you a breakdown of different parts, I think it’s a good input for us to think about as to what additional disclosures we may want to give over time. I’ll have a separate conversation with the team and we will come back on any changes we wish to make.

I would — suffice it to say that CPaaS is substantial now, and CPaaS is in two parts. One is just value-added messaging, but also there is IQ, which is a SaaS play that sits on top of this. CPaaS is growing at, not teens, but very strong growth. We are a very strong player in the market, and this is a major area of focus. It’s also a profitable business.

Our non-connectivity led businesses all the other businesses are also growing faster than our connectivity business because that part of the market is also growing faster.

In our connectivity business, we are growing much faster than the market and adding market share. The only drag on the business is on voice. And our global business, which is also led out of data and data centers, which again, most of the decision makers of the data center — companies that are looking for data center needs, particularly the hyperscalers and some of the global players are all sitting in the United States, largely. So that’s another very meaningful business and has done very well.

So I would say if you take the B2B business, there is a global component, there is a domestic enterprise component and there is a small and medium business component. That’s the way that we typically cut up the business. And then there are these products that I’ve talked about, all of which outside connectivity are growing much faster and close to between 20% and 50% depending on the segment that you’re looking at. And connectivity in itself is growing fast because we have been able to add share, but then that market is growing much slower, as you know, voice is the drag.

Vivekanand Subbaraman — Ambit Capital — Analyst

Yeah. Gopal, thanks a lot for the crystal ball gazing. Just one small follow-up. So currently, if I look at the split of capital employed, 85% of the India capital employed is in wireless. Would this change significantly at the end of this five year period, given the capex trajectory that we’ve been seeing in the last few years, which has been directed more towards the non-mobile side?

Gopal Vittal — Managing Director & Chief Executive Officer

I wouldn’t — I would not agree with you, because you have loaded all the transport capex on to mobility. And that’s the way we put it out because that’s the way the factory is operating. But actually the transport infrastructure is created for the entire business. It’s created for our B2B business above all, and then of course it’s priced out to the B2B side. It’s also created for the mobility business. The same fiber backbone is also created for the home broadband business. So fiber and transport and transport infrastructure is a substantial part of our overall capex.

Radio is an expensive part because of the distributed nature of the country we had. Broadband, our cost per home pass, we’ve been able to drive now and that business is getting everything that it needs for putting in [Phonetic] capex. We are also putting substantial moneys behind data centers, that capex has now got elevated over the last few years because that’s a market that’s on fire. So that’s a part that’s also getting significant capex. And our digital businesses don’t need capex. It’s largely a talent game, which is riding on our infrastructure.

Vivekanand Subbaraman — Ambit Capital — Analyst

Great. Thank you very much and all the best.

Operator

Thank you very much, Mr. Subbaraman. In the interest of time, I will now hand over the proceedings to Mr. Gopal Vittal for closing remarks.

Gopal Vittal — Managing Director & Chief Executive Officer

Well, I think, firstly, thank you for all your questions. I think it’s been a good discussion and we’ve touched on various issues. As I mentioned, we are overall very excited about the positioning and where we are placed as a Company across the entire portfolio and the track record that we’ve had. I look forward to engaging with you in the next — in the coming months. Thank you very much.

Operator

[Operator Closing Remarks]