Buy Bharti Airtel Ltd for the Target Rs.2,355 by Motilal Oswal Financial Services Ltd
Assessing Bharti’s ~INR1.5t cash deployment options
* Bharti Airtel’s (Bharti) stock price corrected ~6% (lost ~INR700b in market cap) following the announcement of its NBFC foray, with an overall outlay of INR200b (70% by Bharti) as the focus shifts to the company’s capital allocation plans.
* Bharti’s Chairman hosted an investor call to address key investor concerns around capital allocation, promoter stake sales, succession planning, plans for group subsidiaries, and factors behind the company’s NBFC foray.
* In our view, the Chairman’s key message to investors was to invest in the company for its potential growth opportunities, keeping in mind the group’s long history of judicious capital allocation, rather than solely for dividend payments.
* As noted in the past, capital allocation remains the key driver of Bharti’s longterm stock price performance. In this note, we evaluate the potential deployment options for ~IN1.5t FCF generation over FY26-28, along with the upcoming rights issue.
* Post the recent correction, Bharti’s India business now trades at an implied valuation of ~10x FY28 EBITDA, on our estimates. We reiterate our BUY rating on Bharti with an unchanged SoTP-based TP of INR2,355 (bull case: INR2,875; bear case: INR1,810).
Bharti could potentially generate ~INR1.3t+ FCF over FY26-28
* Driven by tariff repair in the Indian wireless industry and moderation in capex intensity, Bharti’s FCF generation has significantly improved from ~INR11b in FY21 to ~INR389b by FY25.
* FCF generation further increased to ~INR460b in 9MFY26, driven largely by continued growth in the India business and improving FCF generation in Airtel Africa (AAF).
* The strong FCF generation has enabled Bharti to prepay deferred spectrum liabilities worth ~INR730b over FY22-25. As of Dec’25, non-GoI, non-lease net debt for the India business stands at a modest ~IN82b (excluding Indus Towers’ net cash).
* Going forward, Bharti will potentially recommence repayments on AGR dues (INR84b annually over FY26-31, starting Mar’26) and the 2022 spectrum auction (~INR45b annually from Aug’26).
* An expected tariff hike (15% from Jul’26), range-bound normal-course capex in the core business, and improved FCF generation at Indus and AAF should enable Bharti to generate ~INR1.3t+ FCF over FY26-28, after spectrum and AGR repayments.
* Along with ~INR1.3t FCF generation over FY26-28, Bharti will also raise ~INR157b from upcoming calls on the 2021 rights issue, creating a cash pool of ~INR1.5t, cumulatively to be deployed over FY26-28.
Assessing Bharti’s cash deployment options for ~INR1.5t over FY26-28
* AAF stake purchase: Bharti’s Chairman indicated that the company should rightfully own the ~16% stake currently owned by Bharti’s promoter group in AAF. On CMP, this could entail a commitment of ~INR256b. While the stake purchase would be at a significant premium (vs. promoters’ purchase price), we believe AAF remains one of the fastest-growing segments for Bharti and could potentially see a further re-rating, given the under-penetration across its footprint and modest valuations.
* Data center investments: Bharti has publicly stated its goal of reaching 1GW data center capacity (vs. ~130MW currently) over the next 4-5 years. Assuming ~INR0.6b capex per MW, we arrive at a cumulative investment of ~INR535b in data centers over the next 5 years, translating into ~INR214b over FY26-28. We note that data center investments have a long gestation period, with timelines also influenced by land acquisition, which could delay actual capital deployment.
* NBFC foray: Out of ~INR200b overall commitment to Airtel Money (70% stake with Bharti), the NBFC arm, we build in ~INR50b cumulative investments in FY27 and FY28, of which Bharti’s share would be ~INR35b.
* Dividends: Based on our estimates, Bharti’s dividend payments could reach ~INR481b, translating into a cumulative ~INR89/share over FY27 and FY28.
* Debt repayment: We also assume the repayment of the remaining ~INR82b non-GoI, non-lease net debt over FY26-28, enabling the India business to turn net cash.
* Potential 600MHz spectrum acquisition: While Bharti has publicly maintained its stance of not requiring sub-GHz spectrum (700 MHz band), we believe that, with the recent ~17% cut in 600MHz spectrum reserve price proposed by TRAI, along with a four-year moratorium, Bharti could bid for 10MHz of pan-India 600MHz spectrum. This would entail an overall outlay of ~INR327b, but a modest upfront payment of ~INR16b.
* International telco acquisition: After these investments, Bharti would still have ~INR390b remaining, which it could utilize for a potential international acquisition or other forays. We believe such an investment could be the most concerning for investors.
* Further, we note that Bharti’s leverage ratio at ~1x is on the lower side for an asset-heavy business, and the company could lever up to pursue other business opportunities, if required.
Valuation and view
* As noted in the past, capital allocation remains the key driver for Bharti’s longterm stock price performance, and these concerns have resurfaced following the company’s recent announcement of its NBFC foray.
* We believe the promoters’ past track record on capital allocation (except, perhaps, for overpaying for the Zain (now AAF) acquisition) has been stellar. With the Chairman recently explaining the rationale behind certain decisions, we believe capital allocation concerns are overdone.
* Further, following the recent correction, Bharti’s India business now trades at an implied valuation of ~10x FY28 EBITDA, based on our estimates, which we find attractive given its growth profile and immaterial impact of geopolitical or AIled disruptions on the company’s portfolio.
* We continue to like Bharti’s superior execution on its premiumization agenda. Further, with likely stable capex trends and a potential tariff hike, Bharti could deliver ~INR1.3t+ FCF in FY26-28, with the company potentially turning net cash (ex-leases) by FY28.
* We model a CAGR of 13%/15% in Bharti’s consolidated revenue/EBITDA over FY26-28E, driven by: 1) benefits of the ~15% tariff hike in India Wireless from July’26, 2) continued acceleration in Home Broadband net adds, and 3) strong double-digit CC growth in Africa.
* We reiterate our BUY rating on Bharti with an unchanged SoTP-based TP of INR2,355. An impending tariff hike, the upcoming JPL IPO, and a favorable resolution of the AGR matter remain key near-term triggers, while the long-term risk-reward remains attractive (bull case: INR2,875; bear case: INR1,810).
* We have recently upgraded Bharti’s subsidiary Bharti Hexacom to BUY, as it provides a pure-play exposure to the company’s fast-growing India Wireless and Home Broadband businesses, with limited risk of capital misallocation, albeit at a slight valuation premium. We believe investors concerned about Bharti’s capital allocation can gain exposure to its growth through BHL (TP: INR2,000).
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