Bharti Airtel: Doubts on Project Leap

Absence of likely timelines and monetisation plan, along with falling data realisation, caps optimism

Despite the September quarter results being in line with analyst estimates, the markets do not appear too enthused with the Bharti Airtel stock, down nine per cent over the past six weeks. The company’s 'Project Leap', a caital expenditure-heavy network transformation programme, launched earlier this week, added to the stock’s downward trend.

Aimed at improving network infrastructure and quality, this is a Rs 60,000-crore capital investment, to stretch from FY16 to FY18. Largely focused on bettering the positioning against competition, particularly in fourth-generation (4G) technology services' network, the plan comes as Reliance Jio's launch is round the corner. While the company was expected to gear up for the new competition, the amount of upward revision in its capex budgets is a concern for the Street.

Compared to the earlier forecasts from the company, Project Leap is 25 per cent higher than the market estimated. It comes when key metrics such as voice and data realisations have been falling for at least two years.

Kotak Institutional Research says in the absence of any outlook on the likely timeline and magnitude of monetisation of these investments, the announced capex is a negative surprise.

Bharti, first to launch a 4G network in India, has shipped about five million handsets with 4G connections in the September quarter. Apart from sale of handsets, the company feels its high-end subscribers (postpaid/premium prepaid) might resist changes due to procedural inconvenience and, hence, are unlikely to heed competitive pricing from new entrants. While the effectiveness of its strategies will play out over the coming quarters, analysts prefer to wait and watch, to see whether the company matches the competition and maintains profitability.

Analysts at JP Morgan believe even if RJio is not able to dent the high-end subscribers’ market share of incumbents (Bharti Airtel and Idea), the decline in data realisations might impact Bharti's operating earnings' margin and capex, starting FY17. Emkay Global Financial Services says the significant step-up in capex will stretch the balance sheet.

Total debt as of end-September was Rs 144,000 crore. With a net debt to equity ratio likely to be between 1.1 to 1.3 times in FY16, debt might not be much of a concern, though the capex will significantly hamper any deleveraging opportunities that might emerge from further sale of the tower business. Moody's, however, expects Bharti Airtel will continue to deleverage, and pegs the net debt to operating earnings ratio at 2.5 in the next 12 months.