Rate hikes, lower costs to boost Bharti's cash flows

Analysts say the company's net debt-to-Ebitda ratio would fall from about 2.8 for FY13 to 0.8 in FY16

Through the past week, Bharti Airtel rose three per cent. This followed a series of upgrades by analysts, owing to the improving mobile rates environment. The company’s plans to raise low-cost debt and sell a part of its direct-to-home (DTH) business are considered positives. The poor response to the recent spectrum auction, the management’s comment on a fall in capital expenditure this financial year and improving realisations indicate flows would improve.

In a report released today, Rohit Chordia and Shyam M of Kotak Institutional Equities say recent moves to bridge the gap between headline and realised rates by eliminating discounted minutes is a move towards pricing minutes at levels that can sustain the business. The analysts believe incumbents would be able to raise rates to absorb the impact of regulatory pay-outs, which could be lower than anticipated earlier. Most analysts are positive about Bharti and Idea and have a 'buy' call on these stocks. At the current price, Bharti Airtel is trading at 24 times its FY14 earnings estimates of Rs 13.4, with a target price of Rs 380-400.

Rising rates, realisations
Across circles, rates have been rising through the past six months. Vinay Jaising and Vanessa A D'Souza of Morgan Stanley believe incumbents such as Bharti and Idea have raised promotional rates 20-30 per cent in a staggered manner across the country. Analysts say rates have increased from 1-1.2 paise a second to 1.2-1.5 paise a second. Unlike the rate increases a couple of years ago (when only large players had raised rates), this time, smaller companies, too, are raising rates to focus on profitability. Rahul Singh and Saurav Anand of Standard Chartered Research say, "The key difference from the mid-2011 hikes is those were primarily led by incumbents."

For the leading companies in this segment, the rise in rates would lead to a rise in revenues, as well as higher realisations per minute. Analysts believe in the next five quarters, this would also lead to an overall increase of seven per cent in average revenue per minute (ARPM). With the share of data usage/non-voice in revenue pie increasing, expect blended ARPMs to pick up, too.

Lowering costs
Bharti is also taking steps to lower its cost of funds and bring down its Rs 61,000-crore debt accumulated due to the Zain acquisition and 3G-related investments. Recently, the company raised debt of $1 billion to cut its cost of funds and refinance existing debt. The company is also considering selling stake in the DTH business. If 25 per cent stake is sold, the company would garner Rs 1,400-1,500 crore, given the $1 billion valuation for a 7.9 million subscriber base.

The Tanzanian government is in talks with Bharti Airtel to buy out the latter's 35 per cent stake in state-run Tanzania Telecommuni-cations Corp (TTC), which owns and operates a fixed line network. Bharti Airtel's core telecom operations in that country are under Bharti Airtel Tanzania. It acquired the TTC stake as part of its Zain acquisition. Lower costs, both on the operational and regulatory fronts, are likely to help the company tackle the large debt. Morgan Stanley analysts estimate the ratio of the company's net debt to earnings before interest, tax, depreciation and amortisation to fall from an estimated 2.8 in 2012-13 to 0.8 in 2015-16.