Bharti Airtel Rating- buy; Equity overhang risk looms

Bharti Airtel Rating: buy; Equity overhang risk looms

Singtel’s 3.3% stake sale to Bharti Telecom (BTL) will drive a 1.7% increase in shareholding of the Mittal Family to 25.5%, which we view positively. However, it will increase BTL’s debt, which will need higher dividends from Bharti for servicing interest and will eventually lead to BTL selling stake in Bharti Airtel to repay the debt. While this may be an overhang in the medium term, we maintain Buy with revised PT of Rs 855 given its strong growth outlook.

Singtel’s stake sale in Bharti…: Singtel’s decision to sell 3.3% direct stake has been driven by its aim to monetise and unlock value and to fund capex for 5G and other growth initiatives. While Singtel’s shareholding in Bharti Airtel will fall to 29.7%, it will remain its largest shareholder.

Transaction may need Bharti to pay out more: BTL will likely raise debt to acquire the 3.3% stake from Singtel. As per the terms, the stake is worth Rs 129 bn/$1.6 bn. In addition to this, BTL has to pay Rs 57 bn for the residual portion of Bharti’s rights issue in the next two years. At 8%, BTL will have to pay interest of Rs 17.6 bn on this debt (including its Rs 34-bn debt as of Dec-21). This will require Bharti Airtel to pay dividend of Rs 7.5/share which is higher than what it has paid out over the past decade and is unlikely as it heads into a 5G capex cycle.

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Potential supply risks in 1-2 years: Even if dividend payouts are raised by Bharti Airtel, BTL may still not be able to repay the outstanding debt of Rs 220 bn. While BTL may refinance the debt, it may have to sell its stake in Bharti Airtel to pare this debt eventually. BTL has done so in the past when it sold 2.75% stake in Bharti Airtel in May-20 to repay the debt it had taken for Bharti’s rights issue. The stock fell 6% on the same day and was under pressure over the next few months. At CMP, BTL will have to sell 5% stake in Bharti Airtel to repay its entire debt.

Maintain Buy: We raise our capex estimate for FY23 by 25% to Rs 350 bn for rapid 5G rollouts. While we keep our revenue/Ebitda estimates unchanged, we lower our PAT estimates by 1-9% due to higher capex. Over FY22-25, we expect Bharti to deliver 17% revenue CAGR and 22% Ebitda CAGR led by 10% tariff hikes each year over FY23-25. Despite supply risks, we believe strong growth keeps risk-reward attractive. Maintain Buy with revised PT of Rs 855/share.