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How does Bharti's stake sale affect the stock? - Views on News from Equitymaster

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How does Bharti's stake sale affect the stock?
May 4, 2013

Last week the country's incumbent and largest telecom company, Bharti Airtel announced a sale of stake. The company has agreed to sell a 5% stake to Qatar Foundation. The deal is valued at US$ 1.26 bn or approximately Rs 67.96 bn. The company will issue 199.87 m new shares for this. Therefore the deal values each new share at approximately Rs 340 per share. This is a premium of around 7% over the closing price of Rs 317.7 on Mar 03, 2013. The company plans to use the proceeds of this issue to pay off part of its outstanding debt. Post the deal the stake of the promoters would come down from the current level of 68.6% to 65.1%.

Bharti has seen its bottom-line come under pressure due to its huge interest burden. It must be recalled that the company had taken on debt to fund the acquisition of the African operations. Debt was also taken to fund the 3G license and spectrum as well. As a result, Bharti's debt equity ratio has gone up from 0.2 times in March 2010 to 1.5 times in March 2013. Even compared to the previous financial year, the debt to equity ratio deteriorated from 1.36 times to what it is at present. This resulted in an increased interest burden as interest costs increased by almost 15% YoY. Therefore the deal bodes well for the company as it will be able to use the proceeds to lower its debt burden. Consequently interest costs are expected to go down post the pay off.

How does it affect our estimates?

The stake sale will lead to an equity dilution to the extent of 5%. It must be recalled that we value the company on an EV/EBITDA basis. The issue of new shares will lead to an increase in market capitalization. However it would also lead to reduction in debt to some extent. Therefore the change in numerator or EV (Enterprise Value) will not be very material. On the other hand our estimates for the denominator (EBITDA) remain unchanged given the regulatory and operational risks that the company faces. Hence we maintain our view as well as target price for the company. We currently have a 'Hold' view on the company with a target price of Rs 520 per share. As we have written before, despite the attractive valuations, we would not recommend investors to buy more of the stock at current levels, due to regulatory risks to the sector.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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