Bharti Airtel’s Indus stake buy raises questions on capital allocation: Jefferies

Bharti Airtel Ltd.’s decision to buy a 4.7% stake in Indus Towers Ltd. from Vodafone Group Plc can be “justified financially but raises questions” over its capital allocation, according to Jefferies.

In the past 15 months, the carrier has invested Rs 8,600 crore for raising stake in Indus Towers, including the current transaction, and buying back a 20% stake in DTH businesses, the research house said in a Feb. 27 report. “This is likely to de-rate Bharti Airtel’s multiples.”

The Sunil Mittal-founded telecom company on Friday said it has agreed to buy the stake in Indus Towers from Euro Pacific Securities Ltd., an affiliate of Vodafone Group. The transaction price, it said, is capped at a level below the price for the block of Indus shares sold by Vodafone on Feb. 24.

Assuming a 5% discount to Indus Towers’ current market price, Bharti Airtel, according to Jefferies, will pay Rs 2,600 crore for the 4.7% stake. The transaction will result in Bharti Airtel’s stake in Indus Towers rising from 41.7% to 46.4%. “With Vodafone Plc looking to sell its entire 21% stake in Indus Towers, further investments by Bharti Airtel into Indus Towers is very likely. At 5% discount to CMP, this could lead to an investment of up to Rs 11,600 crore.”

Also, Bharti Airtel, in its statement, had said the deal would be made on a condition that the amount paid shall be inducted by Vodafone as fresh equity in Vodafone Idea Ltd., the India unit. The amount would be simultaneously remitted to Indus Towers to clear Vodafone Idea’s outstanding dues.

While that bodes well for Indus Towers’ near-term cash flows and its dividend payout, it raises questions on Bharti Airtel’s move to deploy capital in Indus Towers at a time 5G auctions are due in a few months and heavy investments still required for network fiberisation, Jefferies said.

The research house cut its target price to Rs 860 from Rs 910 earlier, but maintained its ‘buy’ rating on the carrier citing “strong” growth outlook.

Shares of Bharti Airtel were trading 1.2% down compared with a 0.3% fall in the Nifty 50 around noon on Monday. Of the 33 analysts tracking the company, 30 recommend a ‘buy’, two suggest a ‘hold’ and one has a ‘sell’ call, according to Bloomberg data. The average of the 12-month price targets implies a 28.2% upside. Bloomberg