Airtel's stake sale to get ready for a bigger fight with Jio

Analysts say that the idea behind Bharti Telecom's deleveraging is to fortify the promoter firm when financial conditions are deteriorating for companies across the board

KEY HIGHLIGHTS

• Promoters stake sale in Bharti Airtel aimed at reducing debt and strengthen balance sheet of holding firm Bharti Telecom
• Cash-flow imbalance at Bharti Telecom due to debt servicing obligations was one of the reasons to sell stake
• The recent stake sale is 2.5 times higher than the last year's rights issue price
• Telecom sector is one of the few beneficiaries in the current pandemic

Normally, a partial stake sale by promoters in their company is perceived as negative news. It implies the promoters are not interested in pursuing the business, and would be planning to exit from it at some point. But that was not the case with Bharti Airtel's lead promoter Bharti Telecom which recently sold 2.75 per cent stake (in Airtel) in the secondary market.

Through the stake sale, Bharti Telecom, which is owned by Sunil Mittal-controlled Bharti Enterprises and SingTel, has raised Rs 8,433 crore ($1.15 billion) which will go into retiring debt that it had taken in recent years.

Bharti Telecom's debt is attributable to two events: the Rs 2,500 crore that it had infused in Airtel's rights issue last May. Prior to that, it had purchased 4.6 per cent stake of Indian Continent investors (another promoter company) in November 2017 for Rs 7,700 crore.

ALSO READ: Bharti Telecom sells 2.75% stake in Airtel for Rs 8,433 crore

Analysts say that the idea behind Bharti Telecom's deleveraging is to fortify the promoter firm when financial conditions are deteriorating for companies across the board. As such, the gross debt of Airtel's stands at a staggering Rs 1.48 lakh crore as on March 2020. The other reasons for the stake sale were to benefit from the current bullishness in the telecom sector, and to prepare Bharti Telecom for bigger battles with Mukesh Ambani-run Reliance Jio in the future. In an official statement, Harjeet Kohli, group director at Bharti Enterprises said the stake sale gives Bharti Telecom "an even stronger financial flexibility and capacity to provide any additional shareholder support as may be desired by Bharti Airtel from time to time."

"The debt servicing has become tough in the present scenario. Companies are not taking the debt lightly especially due to the stringent IBC (insolvency and bankruptcy code) rules," says Ankit Singhi, partner at corporate advisory firm Corporate Professionals.

For the uninitiated, Bharti Telecom is the single-largest shareholder in Airtel with 36 per cent stake followed by SingTel's 14.1 per cent stake and Indian Continent Investment at 6.1 per cent. The public shareholding stands at 43.8 per cent. After the recent stake sale, the effective controls of Mittal family and SingTel in Airtel have come down to 24.3 per cent and 31.9 per cent, respectively. Both Mittal family and SingTel have sold almost identical number of shares in the recent round.

ALSO READ: Bharti Airtel share price falls over 5% after promoter stake sale report

Financial services firm Jefferies says Bharti Telecom has Rs 8,500 crore of debt on its balance sheet for which the interest cost was Rs 680 crore in FY20. The inadequate cash flows in the form of dividends from Airtel made it difficult for Bharti Telecom to service this debt. How? For instance, the average dividend per share of Airtel is likely to remain low at around Rs 2 per share. Based on its shareholding, this will expectedly generate Rs 420 crore (pre-tax) for Bharti Telecom which would be roughly Rs 260 crore short of its entire debt servicing obligations. In addition, a large chunk (about Rs 6,800 crore) of the Bharti Telecom's debt was coming up for repayment in the current financial year. Hence, the stake sale made more sense.

The timing of the stake sale has had a huge impact as well. In the Covid pandemic, telecom is a handful of sectors that are defying the overall slump in demand. The higher consumption of telecom services - broadband, enterprise solutions and voice services - has made it the new favourite of the domestic and global investors. "Airtel is the key beneficiary of the rising tariffs and ongoing consolidation in the Indian telecom space," said Jefferies in a May 25 report.

ALSO READ: Bharti Airtel promoter to raise $1 billion to become debt free

In fact, the price at which the Airtel's block deal was conducted (Rs 558 apiece) was 2.5 times higher than the rights issue price (Rs 220 apiece) of last year. Since April, Jio Platforms, the holding company of Reliance Jio, has raised Rs 67,194.75 crore across four deals with marquee investors like Facebook, Silver Lake, Vista Equity Partners and General Atlantic. Bharti Telecom too has proved its mettle with the recent stake sale getting over-subscribed by a mix of investors, including hedge funds, across geographies like India, Asia, Europe and the US.

Besides, Airtel is ramping up its digital assets to compete with Jio's new narrative of positioning itself as a tech and consumer company. The Gurgaon-based telco has recently tied up with Mastercard to develop financial products for farmers and SMEs (small and medium enterprises) which are also on the radar of Ambani to build his 'new commerce' platform.

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