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Focus likely to intensify on capital allocation plans

* Driven by tariff repair in the India wireless segment, Bharti’s FCF generation improved significantly over the past few years (9MFY25: INR292b). Bharti’s main priority for cash deployment so far has been prepaying high-cost debt.

* With a complete flow-through of tariff hikes and a moderation in capex intensity, Bharti is likely to generate significant FCF (~INR1.3t over FY25-27E).

* With high-cost debt largely repaid and leverage under control, we believe capital allocation remains the key monitorable and would likely be the biggest driver for Bharti’s stock price performance over the medium term.

* Our FY25-27 estimates are broadly unchanged as we build in FY24-27 CAGR of ~15%/19% in Bharti’s consolidated revenue/EBITDA. We reiterate our BUY rating on Bharti with a revised TP of INR1,985 (earlier INR1,990).

Annual FCF generation likely to top INR500b by FY27

* Bharti’s FCF generation (after lease and interest) improved to INR292b in 9MFY25 (from INR213b in FY24), driven by tariff repair-led improvement in operating cashflows and a reduction in capex with the completion of the first phase of 5G rollouts.

* The improved FCF generation has been used to prepay the high-cost spectrum debt (9.3-10% interest rate).

* Bharti has prepaid ~INR200b spectrum debt in 9MFY25 and ~INR670b since FY22, clearing all the spectrum liabilities pertaining to 2012, 2014, 2015 and 2016 spectrum auctions.

* With a full flow-through of the Jul’24 tariff hike, a likely additional tariff hike of ~15%, a moderation in capex, and Indus consolidation, we expect Bharti’s FCF (after interest and leases, but before spectrum repayments) to improve to INR570b by FY27 and ~INR500b after regulatory dues payout.

High-cost debt largely paid up; leverage in comfortable zone

* Bharti’s ~INR944b dues to the GoI mainly pertains to AGR dues (under moratorium until Mar’26 at 8% interest rate) and 2022 spectrum (at ~7.2% interest rate, paid till Aug’26 except for Hexacom circles).

* Given the benign interest rate for the remaining GoI dues (~7.2-8.65%) and telcos still hopeful of some relief on AGR dues, we do not expect Bharti to prepay further spectrum or AGR dues.

* Bharti’s overall net debt, excluding DPL and lease liabilities, stood at a modest INR392b (vs. annualized EBITDAaL of INR1.04t). Given robust FCF generation, we expect Bharti’s non-GoI debt to be largely repaid by FY27.

Capital allocation would be the key monitorable for Bharti

* With leverage under control, India wireless capex moderating, and no immediate requirement for additional spectrum on the horizon, the deployment of Bharti’s rising FCF is likely to become the most important monitorable for potential stock price performance in the medium term.

* Bharti’s management indicated that deleveraging, increasing shareholder returns through higher dividends, and bolt-on acquisitions to boost capabilities in Enterprise business remain the key priorities for capital deployment.

Dividend payout to increase meaningfully to service promoter-level debt

* Bharti Telecom (BTL, a 51:49 JV between Bharti Enterprises and Singtel) has purchased stake worth ~INR381b from Bharti Airtel’s promoters and through rights issue over the last few years to raise its stake to 40.5%.

* As the dividend from Bharti is the only source of revenue for BTL, the debt on BTL’s balance sheet has increased to ~INR380b, largely due to Bharti’s stake purchases. The debt-to-equity ratio for BTL has spiked to 5.4x as of Dec’24.

* As per our estimates, Bharti’s FY25 dividend payout would have to increase to at least INR14/share (vs. INR8/share) for BTL to service its interest payments.

* BTL has to either repay or refinance ~INR215b dues over Sep’25 to Feb’26.

* Further, BTL has to contribute ~INR58 toward pending calls on the rights issue and might have to purchase an additional stake from promoters as 1) Singtel looks to equalize its direct stake with Bharti, and 2) promoters are keen to consolidate their holdings in Bharti under BTL

* Given the need for servicing its existing debt and potentially funding additional stake purchases, we believe that increasing the dividend payout is likely to become the biggest priority for Bharti over the next few years.

* However, Bharti’s recent stake increase in Airtel Africa, the Indian promoter’s continued stake sales in Bharti, and discussions for a potential merger of Airtel DTH with Tata Play have raised some concerns about capital allocation priorities.

AAF stake purchase driven by potential value-unlocking triggers

* Bharti has recently purchased a ~4.45% stake in Airtel Africa (AAF) for a total consideration of ~INR23.6b.

* While investors would prefer Airtel to pay out higher dividends or invest the cashflows in Indian operations, we do not see the investment made to increase the stake in AAF as a capital misallocation.

* AAF has been delivering robust double-digit constant currency (cc) growth for the past several years, and we remain positive on AAF, given the long runway for data and mobile money growth in Africa.

* Despite robust growth, AAF trades at subdued ~3.8x FY27E EBITDA. We believe a sharp tariff hike in Nigeria and an impending IPO of Mobile Money (Jul’25) could be key near-term value-unlocking triggers for AAF, which would benefit Bharti’s shareholders as well.

* Moreover, Bharti will likely be able to recoup the investments in the AAF stake purchase through upcoming inflows from Indus Tower. As such, we do not expect any significant impact on Bharti’s FY25 dividends due to the AAF stake purchase.

Airtel DTH – Potential Tata Play merger to boost Airtel’s convergence play

* Bharti recently confirmed that the company is in bilateral discussions with the Tata Group to explore a potential transaction to combine Tata Play and Airtel DTH.

* Given structural headwinds, we believe a potential merger between Airtel DTH and Tata Play is unlikely to create any significant value for Airtel’s DTH operations on a standalone basis.

* However, the deal would provide Airtel with access to additional ~19m highpaying homes, which the company can tap to offer its converged offerings under Airtel Black

Valuation and view

* Our FY25-27 estimates are broadly unchanged. We build in FY24-27 CAGR of ~15%/19% in consolidated revenue/EBITDA, driven by more frequent tariff hikes in India wireless business (~12.5% ARPU CAGR), acceleration in Homes broadband services, and robust double-digit growth in Africa.

* We continue to like Bharti’s superior execution on the premiumization agenda. With a moderation in capex intensity, Bharti is likely to generate significant FCF (~INR1.3t over FY25-27E), which should lead to significant deleveraging and improvement in shareholder returns.

* We believe capital allocation remains the key monitorable and would likely be the biggest driver for Bharti’s stock price performance over the medium term.

* We reiterate BUY on Bharti with our SoTP-based TP of INR1,985. We value India wireless and homes business on DCF (implies ~13x FY27 EV/EBITDA), DTH/Enterprise at 4.5x/10x Mar’27E EBITDA and BHARTI’s stake in Indus Towers and Airtel Africa at a 25% discount to our TP/CMP..

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