Given that Bharti’s standalone net debt/Ebitda was at 3.7x in FY21, a debt capital raise maybe less likely.
Bharti’s capital raising announcement has come as a surprise to us as there is no immediate need to raise capital, in our view. A capital raise to enhance capacity in anticipation of large market share shifts from VIL could be seen positively, however any stake bought in Indus Towers may be seen negatively. While the potential capital raise will be a near-term overhang on the stock, with market share shifts set to accelerate, we maintain BUY with Rs685 PT.
Bharti’s capital raising announcement… Bharti Airtel has notified the exchange that its board is considering capital raising plans through equity, equity-linked and/or debt instruments on 29th August, two days before its AGM. The quantum of the capital raise or the timing is not clear at present. Given that Bharti’s standalone net debt/Ebitda was at 3.7x in FY21, a debt capital raise maybe less likely.
…comes as a surprise: This comes as a surprise given that (1) there are no near term chunky repayments coming up (2) its unlikely that Bharti would be looking to prepay its spectrum liabilities to the govt., (3) there is no visibility of 5G auctions taking place, (4) India as well as Africa operations are FCF positive and (5) in the post results call three weeks back, management had expressed that they are comfortable with current leverage levels.
Thinking through the positives… As highlighted in our note (link), Bharti is benefiting more from Vodafone Idea’s market share losses. If Bharti is looking to raise capital to either create capacity in anticipation of large subscriber additions from VIL, or to create buffers that can be used to acquire part of VIL’s spectrum at distressed valuations, then this capital raising will be seen as a positive.
…and the negatives: Over the past year, Bharti Airtel has invested Rs 60 bn in acquiring 20% stake in DTH business from Warburg Pincus (link) and 5% stake in Indus Towers from Providence Partners et al. (link) Any potential increase in stake in Indus Towers funded through a capital raise will be seen negatively, given its muted growth prospects (link).
Potential stock supply to be a near-term overhang: In our view, potential equity capital raise may be an overhang on Bharti’s stock price. This is evident from Bharti’s 6% stock fall and 30% underperformance vs. Nifty in the two months following 2.8% stake sale by promoters in May-20. However, with market share shifts set to accelerate, we maintain our positive view on the stock and see any related pullbacks as a buying opportunity. Retain BUY with Rs 685 PT.