Stake sale in Infratel is positive for Airtel

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The decision to sell a significant stake in subsidiary Bharti Infratel coupled with other decisions such as merging its operations in Bangladesh is expected to help Bharti Airtel bring down its debt further and prepare for the data battle ahead with Reliance Jio. While it has not indicated the size of the stake it is planning to sell in Bharti Infratel where it holds 71.96%, were it to sell 40% as is being speculated by the street, then it would mean giving up controlling stake to the new owners. However, it would also mean an inflow of about Rs 27,000 crore ($4 billion). Analysts at Bank of America Merrill Lynch say that if the size and value of the stake sale are true, it is a positive for Airtel as it will reduce its gearing materially and give it the flexibility to be more aggressive to compete with Jio.

Given the management's inclination that a majority of such proceeds would be used for debt reduction, a 40% stake sale would reduce its net debt of Rs 81,480 crore by 33%. Analysts say, Airtel's net debt-to-equity could thus fall from 1.3 times to below one time, and its FY18 net debt/ EBITDA from 2.2 times to 1.6 times. If the debt of Africa business is repaid then it would, according to analysts, reduce fluctuation in Africa earnings given that debt is unhedged while making the equity value of the African asset turn positive.

In fact, analysts at J P Morgan believe that the tower stake sale deal (especially if it means Bharti's stake falls below 51%) will be positive both for Airtel and Infratel. This is because there is a significant holding company discount to the tune of 50% that the Street applies to Airtel's stake in Infratel. This could come down significantly boosting Airtel's stock price and also be positive for Infratel as the conflict of interest (owner and client) will not apply.

The key for Airtel would to withstand competition, maintain market share and grow its business profitably. The recent trends are encouraging. Its voice revenue growth at 4% in the September quarter has caught up with that of Idea after lagging behind for nearly 15 quarters, while its data revenue growth is higher than the smaller peer for four quarters now. Analysts at Goldman Sachs believe that year-to-date subscriber addition for Airtel is higher than all the other GSM operators combined, barring Reliance Jio, given its superior network footprint.

The slowing pace of data revenue growth and free offer from Jio, however, will have a negative impact on Airtel, especially if Jio extends the offer. While Airtel remains a pick for most brokerages, the near-term ride would be rather bumpy due to competition from Jio.

Given the management's inclination that a majority of such proceeds would be used for debt reduction, a 40% stake sale would reduce its net debt of Rs 81,480 crore by 33%. Analysts say, Airtel's net debt-to-equity could thus fall from 1.3 times to below one time, and its FY18 net debt/ EBITDA from 2.2 times to 1.6 times. If the debt of Africa business is repaid then it would, according to analysts, reduce fluctuation in Africa earnings given that debt is unhedged while making the equity value of the African asset turn positive.

In fact, analysts at J P Morgan believe that the tower stake sale deal (especially if it means Bharti's stake falls below 51%) will be positive both for Airtel and Infratel. This is because there is a significant holding company discount to the tune of 50% that the Street applies to Airtel's stake in Infratel. This could come down significantly boosting Airtel's stock price and also be positive for Infratel as the conflict of interest (owner and client) will not apply.

The key for Airtel would to withstand competition, maintain market share and grow its business profitably. The recent trends are encouraging. Its voice revenue growth at 4% in the September quarter has caught up with that of Idea after lagging behind for nearly 15 quarters, while its data revenue growth is higher than the smaller peer for four quarters now. Analysts at Goldman Sachs believe that year-to-date subscriber addition for Airtel is higher than all the other GSM operators combined, barring Reliance Jio, given its superior network footprint.

The slowing pace of data revenue growth and free offer from Jio, however, will have a negative impact on Airtel, especially if Jio extends the offer. While Airtel remains a pick for most brokerages, the near-term ride would be rather bumpy due to competition from Jio.


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