Bharti Airtel remains on a strong footing

A Motilal Oswal report

Bharti Airtel operates in 18 countries across South Asia and Africa.

SC verdict gives a breather: The long-drawn AGR liability court battle seems to have reached some conclusion as the Supreme Court (SC) gave its verdict on timelines. It allowed for a 10-year repayment period for the AGR liability (@8% MCLR), with 10% of total dues to be paid upfront on 31st March’21 and the rest in annual payments from March’22. Positively, for Bharti/RJio, the AGR liability of partly acquired/shared spectrum of Aircel (INR124b) / RCOM (INR252b) is to be decided by NCLT and therefore restricts the liability. However, the fully acquired spectrum of Videocon (INR14b) would fall on Airtel. Further, as per Bharti’s counsel, the option of review and curative petitions is available with the telcos for two purposes: a) the elimination of SUC-related AGR liability (reducing the amount by ~40%) – as the case was only related to license fee and payment timelines. We see limited grounds for this.

Bharti well placed financially to meet the dues: It is unclear whether the upfront amount is part of the payments that have already been made or whether it is incremental; we assume it is incremental given that the SC is aware of existing payments. Bharti/VIL would have to pay INR45b/INR58b by March’21 (10% upfront payment) and INR34b/INR66b annually (assuming an 8% discount rate) from March’22 for 10 years. We expect Bharti to be able to manage the payment with FCF post-interest of >INR100b/INR200b in FY21/FY22, with no tariff hike built-in and net debt of INR1,095b in FY21, including the AGR liability (net debt to EBITDA of 2.8x on pre-Ind-AS 116). VIL, on the other hand, with pre-Ind-AS 116 EBITDA of INR68b in FY21 and net debt of INR1.5t (including the AGR liability), is in a precarious situation. However, with payments from Vodafone PLC, Bharti Infratel, and existing OCF, it could manage the current fiscal, but would require a sizeable price hike and capital infusion (board meeting on 4th Sep).

Price hike imminent: With this verdict, balance sheets of both VIL and Bharti would weaken. Hence, noise for a tariff hike would certainly grow as VIL would require a massive ~INR110 cumulative ARPU increase in FY22/FY23 to manage its operations sustainably. We believe that with the Smartphone market largely settled and prevailing low ARPUs, there is a strong case for price hike. However, given the challenging economic environment, we see limited possibility on an immediate basis.

Valuation & view: In FY21/FY22, Bharti’s EBITDA (pre-Ind-AS 116) of INR385b/INR467b and FCF post interest of INR112b/INR210b should certainly put it in a comfortable position to repay its annual AGR payment of INR34b. With a positive FCF, its net debt of INR1,095b in FY21, including the AGR liability (net debt to EBITDA on pre-Ind-AS 116 of 2.8x), should reduce going forward. Furthermore, Bharti has the best hedged position. In order to survive, if VIL triggers a price hike or if the market turns duopoly, Bharti would benefit significantly in both cases, with a potential EBITDA increase of >100–120b. Maintain Buy, with TP of INR700.

Financials and Valuations

Balance Sheet

Ratios

Cash Flow Statement

Motilal Oswal