Airtel's Rs 21k-cr rights issue may open exit door for Voda Idea: Analysts

Bharti Airtel's staggered equity capital raise may also create adequate headroom to prepare for a scenario of plausible exit of Vodafone Idea in the medium term, fear analysts

Shares of Bharti Airtel fired up on the bourses on Tuesday after chairman Sunil Bharti Mittal said on Monday that tariff hike was the only way forward for the telecom industry. This came a day after the Board approved a Rs 21,000-crore rights issue primarily to fund its dues linked to adjusted gross revenue (AGR). 

Indicating a target for a tariff hike, Mittal said the monthly ARPU (average revenue per user) should touch Rs 200 by the end of the current fiscal, projecting a 40 per cent rise from the current Rs 146 a month. Eventually, it should go up to Rs 300 to serve the customers well, he said. 

Reacting to the development, shares of the telecom services provider hit fresh all-time high level of Rs 668 after they surged 7.7 per cent on the BSE in the intra-day trade. In the past two days, they have rallied 12 per cent on the BSE as against a 2.6 per cent gain in the benchmark S&P BSE Sensex. 

Analysts are seeing the company's fundraising plan as a way to support the company's balance sheet to accelerate growth given ample opportunities in 5G technology, Fibre to the home (FTTH) segment, and hyperscalers.

"Management indicated they do not require additional funds for business-as-usual activities. The fund-raising will serve as growth capital for the impending 5G launch, capacity augmentation such as fibre backhaul, investments in FTTH, hyperscalers, etc. Management categorically stated that investment in Indus Towers in not part of

the agenda. Amid possibilities of further industry consolidation, we remain constructive on Bharti's strategy to allocate capital towards capacity creation and growth opportunities that can enhance its market share," noted analysts at Edelweiss Securities.

Here's how brokerages see the fundraising benefitting the company:

CLSA | BUY | TP: Rs 780

Given that Bharti's debt has soared 30 per cent year-on-year due to AGR and spectrum liabilities, the company believes the Rs 21,000-crore rights issue will allow it to leverage this once-in-a-lifetime opportunity. 

"Rights issue is need of the hour and while Bharti promoter's ownership (including SingTel) at 56 per cent is comfortable, promoters will subscribe to full rights entitlement. Sunil Mittal's comments add upside potential to our Bharti forecast for consolidated Ebitda CAGR of 15 per cent over FY21-24CL. The stock valuation is compelling at 7x FY23CL EV/Ebitda," it said in its report.

HSBC | BUY | TP:Rs 700

If we assume the rights issue payment timeline is over three years (25 per cent in FY22, 25 per cent in FY23 and 50 per cent in FY24) and the capital is used only for de-leveraging, it could reduce leverage to 1.77x FY24 Net Debt/EBITDA, compared with 2.14x Net Debt/EBITDA in our base case, and increase EPS by 4 per cent in FY24.

We think Bharti's India mobile ARPU is set to rise as the company migrates subscribers from 2G to 4G, it gains high-value subscribers and benefits from further potential tariff hikes. We expect 4G subscriber penetration to surge to 85 per cent by FY24 (from 57 per cent as at 1QFY22), which would further support ARPU improvement. Thus, we expect consolidated revenue and EBITDA to expand at 8.5 per cent and 10 per cent CAGRs, respectively, over FY21-24.

Emkay Global | BUY | TP: Rs 730

We continue to believe that Bharti Airtel remains well-placed to gain the maximum from tariff hikes given the quality of subscribers and with Vodafone Idea's weakening financial position leading to a strong influx of new subscribers. Given the tariff hike expectations in H2FY22 and strong FCF generation, the underlying balance sheet is well-funded, and the current fund-raising is to enhance investments for 5G spectrum purchase, with the service launch expected in H2FY23.

Motilal Oswal Financial Services | BUY | TP: Rs 720

The Ebitda growth of 40 per cent in Bharti's India Mobile business in the last four years has created a healthy Rs 12,000–15,000 crore free cash flow (FCF)-generating capability, which partly questions the need for a capital raise. However, the Indian Telecom market is evolving rapidly, offering Bharti the opportunity to gain disproportionately. Therefore, it has become important for the company to build a war chest to be prepared for (a) the upcoming 5G and related fiber investments, (b) the Digital foray, and (c) RJio’s fiercely competitive approach.

Sharekhan | BUY | Rs 750

This is the company's fourth fund-raising in the last three years through a successive issuance of rights, QIP, and FCCB. On tariffs, the management indicated that entry-level tariff would increase from Rs 79 to Rs 99 eventually. Further, it reiterated its earlier stance that ARPU should improve to Rs 200 by the end of FY2022 from the Rs 146 currently.

The potential tariff hike in the coming months along with steady 4G subscriber additions, continued increase of postpaid customer base and strong growth potential in non-wireless business is expected to boost the company's Ebitda growth at a 22 per cent CAGR over FY2021-FY2023.

"At CMP, the stock trades at a reasonable valuation of 8x its FY2023E EV/EBITDA. We continue to remain positive on Bharti given its proactive capital raise plan to accelerate growth, revenue market share gains across portfolios, improving free cash flows, continued asset monetisation efforts and strong competitive position. Further, any strategic investment by any global tech company could be a further re-rating trigger," analysts said.

Kotak Securities | BUY | Rs 700

In our view, Bharti's staggered equity capital raise may also create adequate headroom to prepare for a scenario of plausible exit of VIL in the medium term. Bharti may be required to enhance its network capacity to accommodate any potential surge in subscribers, which may occur if the market moves towards a duopoly structure with two private players.

Edelweiss Securities | BUY | TP: Rs 705

At this juncture, we believe the odds of further industry consolidation are high. Given its strong balance sheet and superior network, Bharti has an opportunity to gain market share. So far, its execution has been strong, but RJio seems to be upping the ante with the launch of a low-cost handset in collaboration with Google. Even so, we expect Bharti to offer sufficient value proposition to customers to sustain market share.

ICICI Securities | BUY | Rs 712

Bharti believes digital investment has been slow, but businesses have shaped well such as Wynk, Airtel IQ etc. The company's restructuring plan will put all digital assets in parent entity, and it has committed separate digital revenue disclosure in future. Bharti does not want to divest stake only in digital entity, and any strategic investment will have exposure to all businesses, which we believe could lead to value maximisation for shareholders. 

"It sees net debt to Ebitda at 2x soon supported by asset monetisation and FCF. Bharti expecting ARPU at Rs 200 in FY22 is ambitious, but should provide comfort on revenue and FCF growth. We have cut our Ebitda estimates by 3 per cent for FY22/FY23E on annual report updation," the brokerage said.