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Is Bharti Airtel throwing good money after bad with Infratel investment?

Since revenues for Infratel from Vodafone Idea are at some degree of risk, Airtel’s latest investment of around  ₹2,900 crore could well be marked down considerably. (Mint)Premium
Since revenues for Infratel from Vodafone Idea are at some degree of risk, Airtel’s latest investment of around 2,900 crore could well be marked down considerably. (Mint)

Airtel’s investment, despite this bleak backdrop, suggests it expects Vodafone Idea, which makes up for 40% of Infratel's revenues, to survive, even if with a much lower market share.

India’s telecom story has been one of unexpected twists and turns for a while. Bharti Airtel Ltd’s recent move to increase its ownership in Bharti Infratel Ltd was something hardly anyone had foreseen. The last anyone heard was that Airtel was looking to sell-down its Infratel stake and improve its own liquidity.

What explains the unusual move? Infratel, a tower infrastructure company, gets at least 40% of its revenue from the troubled Vodafone Idea Ltd, said analysts. Since the revenues are at some degree of risk, Airtel’s recent investment of around 2,900 crore could well be marked down considerably, not to mention its existing investment, which is valued at around 22,000 crore.

Also Read: Inside India’s Quest to Fix Its Payments Puzzle

It’s important to note that Airtel’s investment is somewhat hedged. “Infratel’s merger with Indus Towers includes a special dividend payout clause, which coupled with the recurring annual divided, could mean a dividend inflow of around 450 crore on the 4.9% stake Airtel has purchased within the next year," said an analyst of a domestic brokerage, requesting anonymity.

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“Besides, even in the worst-case scenario, if Vodafone Idea goes bankrupt, we still expect Infratel shares to be valued at 160 apiece, and Airtel’s investment may be marked down by around 750 crore, vis-à-vis its purchase price," he added. Adjusted for the dividend, therefore, only about a tenth of the investment is at risk, goes the theory.

If Vodafone Idea survives with, say, a 20% revenue market share, Airtel’s entire 41.7% stake in the company will be valued higher. And, who knows, it may find a buyer for its stake at much higher valuations. The telco’s vote of confidence has already led to a 10% jump in Infratel’s share price in the past two trading sessions.

If Vodafone Idea’s reported fundraising comes through, its chances of survival will improve, and so will Infratel’s share price. In any case, there are no major debt repayments due for the next 12 months. Analysts said FY23 will pose the first big test for Vodafone Idea’s debt repayments, and that the reported $2 billion fundraise led by Oaktree Capital is necessary to survive.

The other big factor for Vodafone Idea’s survival is an increase in tariffs to levels where operations start generating cash. While the company has been saying it is willing to take the lead with tariff hikes, all it did was raise tariffs in a small sub-segment within the lesser used postpaid segment. Besides, it has done so only in UP East circle, which isn’t exactly a big postpaid market. In short, the outlook on tariff hikes looks bleak, and Vodafone Idea’s market share losses are expected to continue.

Airtel’s investment, despite this bleak backdrop, suggests it expects Vodafone Idea to survive, even if with a much lower market share. Of course, not everyone is convinced—Vodafone Idea shares have been flat over the past two trading sessions.

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