Fundraising plan, asset sales will cut Bharti Airtel debt by half: Analysts

While equity dilution is steep, funds will give the company flexibility to ease debt, fund capex and buy spectrum

After the Rs 25,000-crore fundraising plan by Vodafone India, Bharti Airtel, too, is shoring up its cash position to take on Reliance Jio and cut debt. India’s second largest telecom company by subscribers is raising up to Rs 32,000 crore, more than initially estimated, to bring down its debt levels and fund capital expenditure. 

There are twin implications of the move. The first is of course equity dilution given that the fundraising includes Rs 25,000 crore of rights issue and Rs 7,000 crore of perpetual bonds with equity credit. Given the rights issue price of Rs 220, the offer will entail over 1.1 billion rights shares and translate into a post-issue dilution of 22 per cent. 

Given that the offer price is at over 30 per cent discount to Thursday’s closing price, analysts at JM Financial believe there could be a price correction to the tune of 5 per cent in the near term. The discount, according to them, also reflects market uncertainty because of lack of visibility on telecom tariff hikes, geopolitical situation, upcoming general election and competition for public funds by rival Vodafone Idea. Bharti Airtel’s stock price was down over 3.4 per cent on Friday. 

While near-term weakness was expected, the bigger implication would be on its debt. Bharti Airtel has a debt of Rs 1.13 trillion as of December 2018. This is 4.4-4.5 times its annualised operating profit. Given that there are few signs of competitive intensity coming down, bringing down debt is the only option. If the funds are used entirely to bring down debt, then leverage is expected to come down to 3.5 times by the end of FY19. 

The other options for the company to raise resources are the listing of its Africa arm and a stake sale in Bharti Infratel, its telecom tower subsidiary. While the Africa unit’s initial public offer is expected to raise $1.5 billion (Rs 10,500 crore), Airtel’s 53.5 per cent stake in Infratel is expected to fetch it Rs 29,000 crore. If the amount fetched from these two options is also used for debt reduction, net debt will come down below Rs 50,000 crore and net debt to operating profit number to a manageable 1.6 times.

The benefit of reducing debt is lower interest costs. The company's estimated FY19 interest costs are nearly Rs 12,000 crore and it is expected to bring down the number. Once it monetises its assets and raises money from rights issues, interest costs would more than halve to under Rs 5,000 crore over the next couple of fiscals, according to analysts Aliasgar Shakir and Hafeez Patel of Motilal Oswal Securities.

The equity raising is also important in the context of Moody’s Investor Services placing Bharti Airtel’s ratings on review for downgrade in November 2018, citing low levels of profitability and weak cash flow expectations.

In addition to falling interest costs, analysts believe that capital expenditure levels, too, are expected to come down as Bharti Airtel spent about Rs 75,000 crore over the last three years. Capex intensity is estimated to have peaked out and will reduce to Rs 20,000 crore over the next couple of years as compared to FY19 estimates of Rs 31,000 crore. 

The higher-than-expected fundraise will also help the company participate in the 5G spectrum auction without stretching its leverage ratio beyond 3.5 times. Despite the significant dilution, analysts are positive on the company on account of deleveraging and expected uptick in average revenue per user. Analysts at Motilal Oswal say that paybacks from minimum recharge vouchers, a shift of feature phone to smartphones and tariff bottoming should help operating profits even at current pricing.