Home >Markets >Mark To Market >Bharti Telecom’s decision to retire debt is good for Airtel investors

Let no debt remain outstanding," says the Bible. Bharti Airtel Ltd’s promoters have decided to follow the principle by selling a small slice of their shareholding to retire debt on its books.

Bharti Telecom Ltd, which holds a 38.8% stake in Airtel, sold 152 million shares for about 8,400 crore in a block deal on Tuesday. This was the almost exact amount of debt on the former’s books at the end of March. In November 2017 and May 2019, the debt was taken to fund two stake purchases in the mobile operator.

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Graphic: Satish Kumar/Mint

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The fact that the move comes at a time when Airtel shares are at an all-time high are an added bonus. Airtel shares have risen sharply this month, after it reported a huge jump in average revenue per user (Arpu) and revenue for the March quarter. As mentioned in this column, this resulted in massive market share gains vis-a-vis Reliance Jio Infocomm Ltd, whose Arpu grew marginally.

Even before covid-19 wreaked havoc on companies with debt, rating agencies had begun frowning upon companies where promoter entities were indebted.

This was especially so after companies in certain business groups came under pressure owing to high promoter debt. Given the threat to the rating of operating companies, it serves shareholders well when promoters retire their own debt.

Besides, according to ratings agency Icra Ltd, Bharti Telecom has sizeable dues to pay. “Increased indebtedness with high dependence on short-tenure debt exposes the company to refinancing risks," Icra said in a January note.

“Apart from the existing commercial papers of 975 crore, which are maturing in Q4 FY20, Bharti Telecom has principal repayments of 4,600 crore over the next two quarters exposing it to high refinancing risks."

While Bharti Telecom’s stake will fall to 36% after the block deal, the total promoter holding of the Mittal family and Singtel will still be at 56%, down from 67% in end-2018.

Note that Singtel did not participate in the 25,000 crore rights issue last year, owing to its own debt position. This has led to a drop in its stake in the company.

But with a 56% stake in the firm, promoters are still firmly in the saddle, and the share sale should not unnerve investors.

Airtel shares fell 5.9% on Tuesday, as the deal was done at a discount of about 5% to the previous closing price of the stock. However, large block deals are typically done at a slight discount. “While a stake sale by promoters is usually construed negatively by investors, we believe that this stake sale is mainly to de-lever Bharti Telecom and, hence, not a negative in our view.

We reiterate that Bharti Airtel is the key beneficiary of the rising tariffs and ongoing consolidation in the Indian telecom space," Jefferies India Pvt. Ltd said in a note.

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