Investors can subscribe to the rights issue of Bharti Airtel (Airtel) that is open from October 5 to 21. The company is coming out with a 1:14 rights issue to raise ₹21,000 crore. The company plans to utilise around ₹16,000 crore for re/pre-payment of certain liabilities and the rest for general corporate purposes. The issue is priced at ₹535 per share, about 21 per cent discount to its current market price of ₹675.90.

Rights entitlement, i.e. eligibility to subscribe to the rights issue, will be credited latest by October 4 into the demat account of shareholders as on the record date (September 28). While investors can also trade their rights entitlement off market or via exchanges, investors can hold on to their entitlement and subscribe to the rights issue. Subscribers will have to pay 25 per cent of the money at the time of application. Airtel will call for the balance 75 per cent in two different tranches within 36 months.

Once the application process is completed, the rights equity shares will trade in stock exchanges under a separate ISIN versus Bharti Airtel ISIN till the conclusion of final call. Given the current premium of ₹140.90 of Airtel shares over the rights issue price, theoretically the rights shares can trade anywhere between the application money ie. ₹133.75, and application money + Airtel share market price minus 535 (133.75+ 675.90-535). In simple words, some of the premium of the Airtel share price over the rights issue price will be reflected in the value of the rights equity shares. Based on current price of ₹675.90, that would be anywhere between ₹ 133.75 and ₹274.65.

In reality it would, however, depend on demand/supply. This will change based on the price of Airtel at the time of listing of the rights equity shares. Long-term investors can stay invested given Airtel’s robust business prospects.

We had recommended a ‘buy’ on Airtel in the Portfolio edition dated April 11, when the stock was trading at ₹545.35.

Fundamentally strong

Our call was based on the company being a dominant player in the Indian telecom market alongside Jio, positioning it well to capitalise on booming digitisation trends. While recent government initiatives to provide relief to the telecom sector extends a lifeline to Vodafone Idea, it still has not fully resolved the legacy problems (adjusted gross revenue/AGR dues still need to be paid). Hence, till such time Airtel and Jio are likely to continue to gain market share. Airtel also is a beneficiary of government relief in deferring payment of AGR (four year moratorium although interest needs to be paid), with company’s liquidity position getting further bolstered. Its liquidity position was anyways comfortable even without the moratorium. This combined with additional capital from the rights issue puts in good stead to compete on even keel with Jio.

At a consolidated level (including its Africa operations), Airtel is the largest telecom player based out of India. India business accounts for around 70 per cent of revenue and balance international exposure provides for good diversification in growth markets in Africa. In terms of business segments, mobile services accounts for 80 per cent of revenue. Enterprise/business services (enterprise connectivity, submarine cables, data centers etc) and DTH/home broadband etc make up for the balance. As of July 31, Airtel had a good stable and improving 30 per cent of mobile subscribers market share in India, behind Jio’s 37 per cent.

Growth prospects remain good across segments and geographies given relatively lower penetration versus developed market levels offering good potential for growth. This is well supplemented by significant opportunities in a world becoming increasingly digital, boosting demand for personal and enterprise connectivity and allied services. In the current decade which will see a wave of 5G/broadband enabled digital themes like mass deployment of driverless cars and trucks, using drones for delivery, virtual reality, industrial automation, internet of things, SaaS etc, telecom companies will likely be one of the key beneficiaries. This makes Airtel an attractive core holding in portfolio for long term investors.

While some of these are more long term in nature, immediate catalysts could come from rationalisation of tariffs resulting in better ARPUs (average revenue per user).

A day after announcing the rights issue Airtel Chairman, Sunil Mittal made a statement that ‘company was ready for a tariff hike, but cant be done unilaterally.’ ARPU’s have been on decline despite significantly better offerings (4G) by telcos from the time Jio launched in 2016. Recent trends indicate it has bottomed out.

Performance, finances, valuation

The company reported a good Q1 FY21 with revenue of ₹26,853 crore and EBITDA of ₹13,189 crore that were approx. 2 and 4 per cent above consensus. EBITDA margins were strong at 49.1 per cent and a significant improvement over the 43.4 per cent reported in Q1 FY20. Year over year revenue and EBITDA growth at 15 per cent and 30 per cent respectively (11 and 28 per cent for India business), besides reflecting improving business momentum for the company, were also better than the 10 and 21 per cent growth on same metrics reported by Jio Platforms.

At its current price, Airtel trades at around 8.9 times 1 year forward EV/EBITDA (Bloomberg consensus)This is inline with its three year average of 8.75, and can be viewed as reasonable with further scope for rerating given its well-entrenched position and the structural growth prospects/opportunities mentioned above. This is also cheaper than the multiple stake sales in Jio which valued it at around 10.5x FY22 EBITDA (based on multiple analyst estimates). Airtel’s EBITDA CAGR for FY20-22 is expected to be good at around 20 per cent. A stronger balance sheet now versus in the past, with net debt/EBITDA (FY22) below 3 times, which will get further strengthened with the rights issue also supports current multiple.

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