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Why Bharti Telecom’s decision to retire debt is good news for Airtel investors

“Let no debt remain outstanding,” says the Bible. Bharti Airtel Ltd’s promoters have decided to follow the principle by selling a small slice of their shareholding to retire the debt on their books.

Bharti Telecom Ltd, which holds 38.8% in Airtel, sold 152 million shares for about Rs. 8,500 crore in a block deal on Tuesday. Bharti Telecom had debt worth Rs. 8,500 crore on its books at the end of March which was taken to fund two stake purchases in November 2017 and May 2019.

The fact that the shares were sold at a time when the Airtel stock was at an all-time high is an added bonus. Airtel shares have risen sharply this month, after it reported a huge jump in average revenue per user (Arpu) and revenues for the March quarter. As pointed in this column, this resulted in massive market share gains vis-a-vis Reliance Jio Infocomm Ltd, whose Arpu grew only marginally.

Even before covid-19 had wrecked havoc on companies with debt, rating agencies had begun frowning upon firms where promoter entities were indebted. This was especially so after companies in certain business groups came under pressure due to high promoter debt. Given the threat to the ratings of operating companies, it serves shareholders well when promoters retire their debt.

Besides, according to ratings agency Icra Ltd, Bharti Telecom has sizeable dues coming up for payments.

“Increased indebtedness with high dependence on short tenure debt exposes the company to refinancing risks,” Icra said in a note. “Apart from the existing commercial papers of Rs. 975 crore which are maturing in Q4 FY2020, Bharti Telecom has principal repayments of Rs. 4,600 crore over the next two quarters exposing it to high refinancing risks,” Icra had said in a January note.

While Bharti Telecom’s stake will fall to 36% after the block deal, the total promoter holding of the Mittal family and Singtel will remain at 56%. This is down from 67% in end 2018.

Note that Singtel had not participated in the Rs. 25,000 crore rights issue last year due to its own debt position. This has led to a drop in its stake in the company.

But with a 56% stake in the firm, promoters remain firmly in the saddle, and as such the share sale should not unnerve investors.

Airtel shares fell over 4% on Tuesday as the deal was done at a 5% discount to Monday’s closing price. Large block deals are typically done at a slight discount, though.

“While a stake sale by promoters is usually construed negatively by investors, we believe this stake sale is mainly to de-lever Bharti Telecom and hence not a negative in our view. We reiterate that Bharti Airtel is the key beneficiary of the rising tariffs and ongoing consolidation in the Indian telecom space,” Jefferies India Pvt. Ltd said in a note.


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