Rs 320-bn raise would allow Bharti to be self-sufficient without a rise in ARPU; cash burn is likely to come down; ‘Buy’ retained.
Bharti Airtel’s (BHARTI’s) board has approved an Rs 320-bn fund raise, which includes a rights issue of Rs 250 bn and perpetual bonds with equity credit of Rs 70 bn (foreign denominated). Issue price of Rs 220/share implies an issuance of 1,134 m rights shares, which would result in 22% post equity dilution. The fund raise is likely to bring down net debt/Ebitda sharply to 3.5x (FY19), as against the current estimate of 4.5x. Additionally, the plans of Africa IPO and Bharti Infratel stake sale will help raise Rs 400 bn, reducing net debt to Rs 475 bn (net debt to Ebitda of 1.6x) by FY21.
Moreover, we believe that capex intensity has peaked out, which should reduce its annual cash burn from Rs 169 bn in FY19 to positive FCF of ~Rs 43 bn in FY21, restricting the increase in net debt. In our view, despite the steep dilution, the fund raising plan is a welcome positive which will allow BHARTI to be self-sufficient and manage operations without any ARPU increase. Maintain Buy with a target price of Rs 380.
Rs 320-bn fund raising – Rs 250-bn rights issue and Rs 70-bn perpetual bonds
BHARTI’s board has approved Rs 320-bn fund raise via an Rs 250-bn rights issue and Rs 70 bn (foreign denominated) perpetual bonds with equity credit. The Rs 250-bn rights issue will be raised in the ratio of 19:67 at a price of Rs 220/share (which is a steep 30% discount to CMP). Since the rights issue is at a discount, the dilution in earnings should result in a correction of stock price from Rs 318 now to Rs 296 over the record date. FY19 net debt stands at Rs 1,148 bn, with net debt/Ebitda of ~4.5x. However, post the Rs 250-bn fund raise, FY19 net debt/Ebitda would come down to 3.5x with net debt of Rs 898 bn.
Africa IPO and stake sale in Bharti Infratel on the cards
Bharti Africa IPO ($1.5 bn or Rs 105 bn) and the 53.5% Bharti Infratel stake sale (Rs 290 bn) could help raise Rs 400 bn. This could further reduce net debt to Rs 475 bn (FY21e) with net debt/Ebitda of 1.6x.
Cash burn could come down
BHARTI has incurred cumulative capex of ~Rs 750 bn over the last three years. We believe that capex intensity has peaked out now (expect capex of Rs 210 bn for FY20/21 v/s Rs 305 bn for FY19). Consequently, lower cash burn in FY20/21 and reducing interest cost due to lower debt should turn FCF positive to ~Rs 43 bn by FY21 (v/s cash burn of Rs 169 bn FY19e).
Turning self-sufficient; remain positive
At CMP, the stock is valued at 7.9x EV/Ebitda on FY21e. Although there is a steep dilution of 22%, it is a welcome positive. Current leverage (4.5x) is precarious, in our view. Therefore, this proactive measure, along with potential monetisation of Africa business and Bharti Infratel, would allow BHARTI to remain self-sufficient, even without an ARPU increase. Operationally, paybacks from minimum recharge vouchers, shift of feature phone to smartphones and tariff bottoming out should contain Ebitda even at current pricing. ARPU turnaround could be about 4-6 quarters away when network/service gap in the market is reduced, which may compel RJio to take price increase.