Bharti’s decision to acquire 4.7% stake in Indus Towers from Vodafone Plc can be justified financially; however, it raises questions over its capital allocation especially when 5G investments are imminent. In the past 15 months, it has invested Rs 86 bn for raising stake in Indus and DTH businesses and could raise stake in Indus Towers further. This is likely to de-rate Bharti’s multiples. We lower our PT to Rs 860 to factor this in but maintain Buy on strong growth outlook.
Bharti Airtel to acquire 4.7% stake in Indus Towers: While the value of transaction has not been disclosed, Bharti has indicated that the transaction price is capped at a level below the price at which Vodafone Plc sold 2.4% stake in Indus Towers last week (Rs 227/share). Assuming a 5% discount to Indus Tower’s CMP, Bharti will pay Rs 26 bn (not material). The transaction will result in Bharti Airtel’s stake in Indus Towers rising from 41.7% to 46.4%.
Further investment likely: In Dec-20, Bharti acquired a 4.9% stake in Indus Towers. With Vodafone Plc looking to sell its entire 21% stake in Indus Towers, further investments by Bharti Airtel into Indus Towers is very likely, in our view. At 5% discount to CMP, this could lead to an investment of up to Rs 116 bn.
Stake increase in Indus Towers can be financially justified: Bharti has mentioned that stake purchase will be done only if the money is infused by Vodafone Plc into Vodafone Idea (VIL) which in turn will use the proceeds to pay VIL’s outstanding dues to Indus Towers. This bodes well for Indus Towers’ near-term cashflows and its dividend payout. Indus Towers’ attractive 7-9% dividend yield can be used to justify this investment. Furthermore, Bharti’s acquisition price is attractive.
…but raises questions on its capital allocation: Including the current deal, Bharti Airtel has invested Rs 86 bn over the past 15 months for raising stake in Indus Towers and buying back 20% stake in the DTH business. At a time when 5G auctions are due and heavy spends still needed for network fiberisation, Bharti’s move to deploy capital in Indus Towers raises questions around its capital allocation.
Lower PT but maintain Buy: Concerns over capital allocation and in turn adequate deleveraging of balance sheet is likely to de-rate Bharti’s multiples, in our view. We lower our target multiple for Bharti’s India operations from 9.8x to 9.3x (10% discount to 5-yr average) to factor this in and lower our PT to Rs 860 (Rs 910 earlier). However, given our expectation of 16% CAGR in revenues and 20% CAGR in Ebitda over FY22-24, we maintain our Buy recommendation.