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Buy Bharti Airtel Ltd For Target Rs.730

Re-fueling for next leg of accelerated growth

* Bharti Airtel’s board yesterday approved a fundraise of up to Rs210bn through a callable rights issue at Rs535/share, implying a 7% equity dilution. The promoter group will fully subscribe to their rights entitlement and also to the unsubscribed portion of the issue.

* Mr. Sunil Bharti Mittal highlighted that issue proceeds would be utilized for balance sheet deleveraging, growth capex across business segments and impending 5G spectrum auctions. He also allayed investor concerns about capital allocation and promoter stake.

* Management aims to achieve a net debt/EBITDA of 2x and healthy mid-teens return ratios in the near term. Directionally, ARPU should move to Rs200 by end of FY22 and eventually to Rs300 to maintain a healthy industry structure.

* We believe that Bharti is augmenting investments to gain the maximum from VIL’s expected subscriber losses and keep its balance sheet well-funded for the impending 5G spectrum auctions and service roll-out. We retain Buy with a SOTP-based TP of Rs730.

Details of rights issue:

The company announced fundraise of up to Rs210bn via a rights issue at a price of Rs535/share. Terms of payment of Issue Price: 25% on application and the balance in two more additional calls as may be decided by the Board/ Committee of the Board from time to time, based on the company’s requirements within an overall time-horizon of 36 months.

Rights Entitlement Ratio: 1 equity share for every 14 equity shares held by eligible shareholders as on the record date. The promoter and promoter group will collectively subscribe to the full extent of their aggregate rights entitlement. In addition, they will subscribe to the unsubscribed portion of the issue. We await further timeline details of the issue to incorporate that into our estimates.

Our view:

We believe that management articulated its near-and long-term strategy well, with strong visibility on revenue growth across businesses, and expectations of healthy return ratios in the near term. However, it did not quantify the potential increase in capex spends to support the high growth rates. Apart from that, it addressed concerns about investments in Indus Tower, Airtel’s investment in OneWeb and debt-free balance sheet at the promoter level (Bharti Telecom).

We continue to believe that Bharti Airtel remains well-placed to gain the maximum from tariff hikes given the quality of subscribers and with VIL’s weakening financial position leading to a strong influx of new subscribers. Given the tariff hike expectations in H2FY22 and strong FCF generation, the underlying balance sheet is well-funded, and the current fund-raising is to enhance investments for 5G spectrum purchase, with the service launch expected in H2FY23. Key risks: 1) adverse regulatory regime; 2) delay in tariff hikes; 3) currency depreciation in the African market; 4) market share losses in the mobile business; and 5) significantly higher than-anticipated 5G capex.

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