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Rights issue to meet accelerated investments…

Event:

* Bharti Airtel (Airtel) announced that its board has approved raising up to | 21,000 crore via rights issue at | 535 per share, with rights entitlement ratio at one equity share for every 14 equity shares held, implying equity dilution of ~7%. Terms of payment: Issue price will be 25% on application and balance in two more additional calls within 36 months

* The promoter & promoter group will collectively subscribe to the full extent of their aggregate rights entitlement along with any unsubscribed portion

Management commentary and outlook.

* Sunil Bharti Mittal, promoter & Chairman, outlined the company’s aspirations as a) ARPU to reach | 200 levels by FY22 end and eventually to | 300, b) lowering of leverage (net debt to EBITDA to 2x vs. 3x currently) and c) healthy return ratios in teens vs. single digit, currently

* The management clarified that fund raise was aimed to meet accelerated investment mainly in mobile business (as it envisages strong market share grab), 5G, fibre backhaul, FTTH and data centre. They also clarified that proceeds will not be utilised for investment in Indus or OneWeb (overall investment in Oneweb India to be limited to US$7-8 million). It outlined towers, fibre assets and real estate as three non-core monetisable assets

* The company expects 5G spectrum auction in early FY23 and rollout from second half with rollout initially in large cities and expansion into smaller markets in later years. Furthermore, 5G device ecosystem has improved with increased proportion of 5G device shipment and reasonable prices

* The promoters stake is likely to be stable as Bharti Telecom is debt free.

What should investors do?

This move of expanding growth war chest (to capture incremental market share and 5G foray) without stretching leverage is positive, in our view. We remain constructive on Airtel ascribing it as one of our top picks. We maintain BUY rating with unchanged DCF based target price of | 720. We also advise subscribing to the rights issue.

Key triggers for future price performance:

* Favourable industry structure of three players (two being strong) or two players, is a strong kicker for eventual hike in tariff as well as superior digital play in the medium to long term driven by growth opportunity from 5G.

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