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Bharti Airtel Stock Unlikely To Dial In Gains Despite Reduction In Debt

The Bharti Airtel stock has been rising over the last couple of months, gaining 15 percent on deleveraging initiatives, a strong March quarter performance, and expectations of a pricing uptick in the next two quarters.

The firm’s moves to pare debt has been a major factor. After raising Rs 25,000 crore from its rights issue, it announced that it will raise up to Rs 6,000 crore by listing its Africa subsidiary.

This should help reduce current net debt levels of Rs 1.1 trillion and net debt-to-Ebidta of 4.2 times. Analysts at SBICAP Securities expect net debt to stabilize at Rs 85,500 crore, after the Africa IPO, and net debt-to-ebidta at 3.1 times in the current financial year.

A falling capex trend is also expected to help. While Airtel did not give any capex number for FY20, it has indicated that expenditure will trend down from peak levels of FY19, when it spent over Rs 28,000 crore.

Most brokerages believe that capex will come down to Rs 20,000-24,000 crore for FY20, given the current portfolio of mobile sites and spectrum. However, the extent and pace of 5G rollout will also have a bearing on spends.

SBICAP analysts estimate that even for a selective 5G rollout, each operator will need to invest an incremental $5 billion (Rs 35,000 crore), spread over three years, without much offset from any revenue stream. In addition to the 5G capex overhang, the key worry for the Street is the continued pricing pressure in the market.

While the firm reported a sequential improvement of 4 percent in India revenues — led by an 18.6 percent rise in average revenue per user (ARPU) to Rs 123 — analysts believe there is still time before the pricing situation improves.

Even for Bharti Airtel, the gains have come from introduction of minimum recharge vouchers and the March quarter performance will be difficult to repeat given that customers will be on a higher ARPU base.

Analysts at ICICI Securities estimate that it will need an increase of Rs 20 in ARPU levels for free cash flow breakeven in the India business. This is unlikely at the moment, and any more disruptive measures by RJio will only worsen the situation. Subscriber losses and muted revenue uptick from 4G upgrades are other risks for the operator.―Business Standard

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