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Bharti Airtel’s equity issuance to support deleveraging, fund 5G CapEx

Bharti Airtel Ltd’s (Bharti, BBB-/Negative) planned USD2.8 billion equity issuance will improve its FFO net leverage to around 2.0x (end-March 2021: 2.1x) and provide funds to strengthen its market position, says Fitch Ratings. Bharti will raise equity in three tranches, a quarter of the proceeds to be received upfront and the balance in two instalments within three years.

Bharti’s management remains committed to an investment-grade rating. The company raised about USD9 billion in the financial year ended March 2020 (FY20) and FY21 via equity issuance, selling a stake in subsidiary Airtel Africa Plc and the sale-and-leaseback of towers in Africa. Management aspires to achieve a debt/EBITDA ratio of around 2.0x in the long term.

Fitch forecast Bharti’s capex to increase to about USD5 billion in FY22 (FY21: USD4.6 billion), of which USD1.5 billion is likely to be paid upfront to acquire 5G spectrum assets. We believe that the company will also seek to strengthen its fibre infrastructure – connecting towers with fibre and backhaul infrastructure to prepare its network to launch 5G services in 2022-2023. We believe that capex on 5G infrastructure during 2022-2023 will replace 4G investments, as 4G coverage is largely complete.

Bharti revenue and EBITDA grew by 15% and 30%, respectively, yoy in 1QFY22. We forecast the industry’s monthly average revenue per user (ARPU) to rise by 15%-20% to INR175 (USD2.4) in the next 12 months (1QFY22: INR146), on headline tariff increases and increasing migration of 2G users to higher-priced 4G plans. Bharti increased the minimum amount that a prepaid user must pay to keep a number active to INR79 (USD1) from INR49. Management believes that industry-blended ARPU needs to increase to around INR200 in the next 12 months and to INR300 in the medium term.

Bharti has paid about USD2.4 billion of the total of USD6.4 billion owed to India’s Department of Telecommunications in a dispute over the amount of adjusted gross revenue (AGR) dues. We have factored in USD4 billion for AGR dues remaining in our leverage calculation, despite the Supreme Court allowing the balance to be paid over 10 years from March 2022.

We expect wireless market leader Reliance Jio, a subsidiary of Reliance Industries Ltd (BBB/Negative), and Bharti to increase their combined revenue market share among private telcos to 80%-82% (June 2021: 77%-78%), at the expense of third-placed Vodafone Idea, which we believe may lose 50 million-70 million subscribers in the next 12 months. Vodafone Idea has lost about 180 million subscribers in the last three years, with 255 million at end-June 2021. Vodafone Idea is struggling, and needs to raise new funds to pay for capex, AGR dues and repay maturing debt.

We expect Bharti’s main shareholders, Bharti Telecom and Singapore Telecommunications Limited (Singtel, A/Stable), will collectively subscribe to their full entitlement in Bharti’s rights issue. Singtel has yet to announce its exact subscription. However, we estimate Singtel’s equity participation over a three-year period to be about USD400 million, based on its 14% direct stake in Bharti. Fitch believes these investments underscore the strategic importance of the Indian telecoms business to Singtel.

A disciplined financial policy remains a key driver for our Stable Outlook on Singtel’s ratings because rating headroom is low. Singtel is undergoing a strategic reset to sharpen its focus on profitable growth and active capital allocation, which includes the impending sale of its Australian towers. We believe deleveraging hinges on meaningful improvement in the EBITDA of its Singapore and Australian operations over the next 18 months. Singtel’s revenue and EBITDA grew by 7.5% and 11%, respectively, yoy in 1QFY22, driven by the Australian operations and information and communications technology business.
CT Bureau

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