Bharti Airtel (Bharti) announced that an affiliate of Warburg Pincus will acquire up to a 20 % equity stake in Bharti Telemedia (DTH arm of Bharti) for $350 million. The 20 % stake in Telemedia will include 15 % out of Bharti’s 95% holding in the company, ie, after the deal closure, Bharti will own 80% of Bharti Telemedia. The deal valuation pegs the market cap of the DTH arm at $1.75 billion. We understand that the deal will likely be concluded this month and Bharti will utilise the proceeds to reduce the leverage on its books. Telemedia turned profitable in FY17; the company’s 1HFY18 EBITDA (Rs 680 crore, +13% y-o-y) and EBIT (Rs 190 crore, +18% y-o-y) contributed 4% of Bharti’s consolidated EBITDA/EBIT for 1HFY18. As of FY17, Telemedia had a net debt of R2,250 crore (2% of Bharti’s FY17 consolidated net debt); capex was Rs 860 crore in FY17 and `590 crore in 1HFY18.
Upon the conclusion of this stake sale, without considering any interest saving on account of $262.5 million debt repayment (utilisation of stake sale proceeds), our FY19F/20F consolidated PAT for Bharti would be reduced by 1%. Including potential savings in interest cost, the impact would be negligible. We do not value Bharti’s DTH business separately in our DCF-based TP build-up for Bharti. However, if we were to separate the DTH business cash flows, capex and net debt, and use the same underlying assumptions (WACC, terminal growth rate), the impact on our fair value would be negligible, as the loss from 15% lower PV of cash flows of DTH business is mostly offset by the potential reduction in net debt (utilisation of stake sale proceeds).
We maintain our ‘Buy’ rating on Bharti and 12-month TP of Rs 625, which implies 19% potential upside; the stock trades at 7.3x FY20F EV/EBITDA, which is not expensive relative to some of its regional peers, particularly in the context of a healthy FY18F-20F earnings growth outlook.