Bharti Airtel rating – Buy: Rights proceeds to fund growth, cut debt

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September 04, 2021 3:00 AM

Net debt to Ebitda pegged at 2x in near term; Ebitda for FY22/23e down ~3% due to AR updation; TP up to Rs 712; ‘Buy’ retained

It sees fibre investment to accelerate for strengthening backhaul and support FTTH business.It sees fibre investment to accelerate for strengthening backhaul and support FTTH business.

Sunil Mittal, promoter and chairman, attending investor call to interact with investors is a big confidence booster. Bharti sees huge opportunities, and fresh capital infusion will support company’s balance sheet in investment to accelerate growth. It does not see any capital allocation in non-core business. Capex investment in 5G spectrum (which the company believes will happen early next year), fibre and data centre are its priorities. It does not see any requirement of spectrum after 5G provides long-term FCF visibility. Digital investment has been slow, but is shaping good; monetisation will be only at Bharti Airtel level, which could lead to value maximisation, in our view.

It sees net debt to Ebitda at 2x soon, supported by asset monetisation and FCF. Bharti expecting ARPU at Rs 200 in FY22 is ambitious, but should provide comfort on revenue and FCF growth. We have cut our Ebitda estimates by ~3% for FY22/ FY23e on annual report updation. However, we have increased the TP to Rs 712 (from Rs 675) as per realigned debt and Ind AS-116 impact. Maintain Buy.

Rights proceeds to fund future growth and deleverage: Bharti has announced rights issue of Rs 210 bn. Issue is priced at `535 (10% discount to Friday before last’s closing price) and rights entitlement of 1 share for every 14 shares held on record date. It said the fund will be utilised to grab ‘once in a life time opportunities’ in mobile business (5G and fibre), FTTH (expand homepass) and data centre. Investment in India entity of OneWeb will be limited to $7-8 mn. Additional 5% equity stake in Indus Towers has given Bharti more control over Indus Towers, which is a critical asset for mobile business.

Capex in mobile business to be stable to slightly higher: The company believes 5G auction will happen early next year with rollout starting H2CY22 onwards in large cities and towns. However, excluding spectrum, company does not see much rise in network capex due to completion of 4G capex and modular BTS rollout and investments in core. It sees fibre investment to accelerate for strengthening backhaul and support FTTH business.

Digital investment slow, but progressing well: Bharti believes businesses have shaped well, such as Wynk, Airtel IQ etc. The restructuring plan will put all digital assets in parent entity, and it has committed separate digital revenue disclosure in the future. Bharti does not want to divest stake only in digital entity, and any strategic investment will have exposure to all businesses, which we believe could lead to value maximisation for shareholders.

Sees net debt to Ebitda at 2x: Company remains confident of reaching net debt to Ebitda of 2x in near term helped by healthy FCF generation and asset monetisation. Bharti believes it has three non-assets, which it would like to monetise at right time and value – stake in Indus Towers, fibre assets and real-estate.

ARPU to grow to Rs 200 in FY22: Bharti believes ARPU should rise to Rs 200 (vs Rs 146 in Q1FY22) in FY22 itself. It has already taken tariff intervention in corporate postpaid category and prepaid base pack; however, the most popular prepaid 4G tariff remain unchanged. We note Reliance Jio has recently launched Freedom plan where it has cut data allowance by 45% which is moving towards tariff hike.

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