Bharti Airtel’s re-rating hinges on decent tariff hikes, capex control
The chairman assured investors that the money will be used to fund new growth avenues and data centres
After a significant equity dilution over the past two years, Bharti Airtel’s unexpected announcement of another fundraising did seem a bit too soon. After all, the telecom company has a sufficient cash buffer as well as significant lines of credit available for growth and contingency.
But chairman Sunil Mittal assured investors in a conference call that fundraising through the rights issue was to fund new growth avenues and data centres among other initiatives. That was a shot in the arm for the stock, which closed up 5% on Monday.
Note that Bharti’s fundraise of ₹21,000 crore through a rights issue will come with a 7% equity dilution, but it will also strengthen the company’s balance sheet and reduce its debt-to-equity ratios. Analysts see the debt-to-Ebitda shrinking from levels of about 3.95 times in FY21.
“While its balance sheet position is comfortable, it is not as strong as RJio’s (Reliance Jio)—its main competitor. Hence, we believe Bharti is readying for the impending 5G spectrum auction and accelerated capex, if required. At this juncture, we will watch capital allocation closely and any expenditure on increasing capacity will be viewed positively,” said analysts at Edelweiss Securities in a client note.
Indeed, Bharti seems to be preparing well to invest in new segments. The company expects a 5G roll-out to happen sometime in the second half of FY23. Investments in fibre roll-out and other capital spending such as in hyper scalers and data centres would be necessary. However, some part of its capex towards new technology will be granular and, hence, is not expected to stress cash flows in the near future.
Bharti’s free cash-flow generation over the past year has also picked up, thanks to judicious capex.
Its subscriber addition in June in urban centres shows market share improvement.
Besides, Bharti also increased postpaid tariffs and increased entry-level prepaid recharge. Mittal also said that tariffs should increase further.
Indeed, analysts expect average revenue per user (Arpu) to rise to about ₹170-190 in a year from the current ₹146.
“We see a high probability of a tariff increase in the next 12 months. This, coupled with market share gains, should result in strong Ebitda growth and deleveraging. Airtel Africa’s free cash flows have increased more than 4 times in 2 years to $647 million, which we expect to increase to $1.1 billion by FY24,” said analysts at IIFL Securities in a client note.
Flush with funds, Bharti may be poised for growth. But a further re-rating will hinge on Mittal’s ability to raise tariffs and be picky on capex.
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