scorecardresearchBharti Airtel's FCF can surprise positively by FY25, says ICICI Securities; here are 5 reasons why

Bharti Airtel's FCF can surprise positively by FY25, says ICICI Securities; here are 5 reasons why

Updated: 19 Apr 2023, 08:23 AM IST
Analysing data from FY10, the brokerage pointed out that since then it has not been able to generate healthy FCF.
The heavy lifting on most investments is behind except for the 5G network rollout.

The heavy lifting on most investments is behind except for the 5G network rollout.

Ahead of the March quarter results for telecom major Bharti Airtel, a report by domestic brokerage house ICICI Securities stated that the biggest disappointment for Bharti “we have heard from investors is lack of free cash flow (FCF) generation in the past”, which has capped shareholder value creation.

As per the brokerage, the key reasons for Bharti’s lack of FCF generation include competitive intensity, costs of building a spectrum portfolio, leapfrogging in technology adoption, regulatory payouts and Africa acquisition. The heavy lifting on most investments is behind except for the 5G network rollout.

"Thus, we have come a long way, and are close to crossing the line from where Bharti can possibly generate the cashflow equivalent to 10 percent of its current market capitalisation, and this, we believe, is just two years away," predicted ICICI Securities.

It has retained its BUY rating on Bharti Airtel with a target price of 960, indicating an upside of 26 percent.

Analysing data from FY10, the brokerage pointed out that since then it has not been able to generate healthy FCF. It has barely registered any FCF after interest payments, which has capped value creation for shareholders through dividends, buybacks, or simple net-debt-reduction, which boosts equity value, the brokerage highlighted.

Let's understand what went wrong with FCF and where the company is currently:

The brokerage has listed 5 aspects of what went wrong for Bharti Airtel since FY10, however, it also observed that the situation has undergone massive repair in each of the five aspects, which provides huge comfort.

Rise in competitive intensity

What went wrong: As per the brokerage, India’s telecom industry had seen unreasonable competitive intensity, which is the prime factor for low cash flow from operations.

"The number of players in the industry went up to 14-15 per circle leading to massive price erosion. Reliance Jio (RJio) foray completely shook up the industry forcing it to restructure, though it also helped consolidate. Nonetheless, despite investment across technologies, ARPUs (average revenue per user) have remained lower than anticipated. Notably, Bharti’s ARPU in FY10 was 240 (including contribution from Interconnection Usage Charge {IUC}) compared to FY23 ARPU estimated at 190, which implies hardly any growth," informed the brokerage.

Where we are at: However, the brokerage noted that the sector now consolidated into three private players, wherein one player faces a risk to its ‘going concern’ status. India has also started taking large tariff interventions supporting revenue growth. Bharti’s ARPU (adjusted for IUC) has seen a CAGR of 15 percent over FY20-FY23E and now ICICI Securities expects an ARPU CAGR of 9-10 percent at least over the next two years as well.

Investment to augment spectrum portfolio

What went wrong: Indian government allocated spectrum through the administrative process till CY08 for small licence fees. Therefore, spectrum cost was negligible for telcos in the 2G era. While cost was negligible, spectrum availability was unpredictable and use cases were restricted.

India then moved to spectrum allocation via auctions, but the spectrum prices were most expensive globally, and legacy telcos also ended up paying huge spectrum payments to renew administratively-allocated spectrum, informed the brokerage.

Bharti has invested 1.6 lakh crore for spectrum purchases since FY10, it added.

Where we are at: As per the brokerage, now Bharti Airtel has built a very large spectrum portfolio across technologies. These spectrums should take care of the 5G rollout and, in the worst case, the company may be forced to buy some sub-GHz spectrum (ICICI Sec assigns a low probability to it). The next big spectrum payout may only be in CY30 when its 2100MHz and 2300MHz band spectrum comes for renewal, it mentioned.

Adjusted Gross Revenue (AGR) dues and penalties

What went wrong: In October 2019, telcos lost their AGR definition case against the government. This resulted in the creation of huge AGR dues and penalties. Bharti has amassed payment of 42,000 crore towards AGR dues, it informed.

Where we are at: But now, the only large dispute pending with the government is about one-time-spectrum-charges, which is a positive for all telecom firms.

Technology transition

What went wrong: India was a laggard in technology adoption earlier. India’s 3G spectrum auction was conducted in CY10 while the global 3G rollout started in CY02/CY03. First, 4G-LTE was launched in CY10, but it became popular in CY13, meanwhile, India launched commercial 4G services in CY16, stated the brokerage.

Where we are at: But now India has leaped from a laggard in this aspect to an early adopter, noted ICICI Securities. India is among the countries that are rolling out 5G fastest (5G spectrum auctions took place in CY22), it informed. ICICI Securities estimates 4G and 5G to coexist for the next 8-10 years before India adopts 6G as the mainstream technology.

The leveraged buyout of Zain Africa

What went wrong: Bharti bought Zain’s Africa operation in CY10 for an enterprise value of $10.7 billion. It was a leveraged buyout. Two aspects impacted Bharti from the Africa acquisition: 1) significant under-performance (the asset was under-invested, and Bharti misread the market and implemented India-based learning in Africa which didn’t work), and 2) significant depreciation, explained ICICI Securities.

Where we are at: But now, it stated that Airtel Africa has smartly turned around in the past few years. Its EBITDA has grown over 2.5 times to $2.5 billion in FY23E since FY18. Despite significantly increasing dividend payout, its net debt stands at only $1.6 billion, ICICI Securities added.


Overall, the brokerage is pretty optimistic on Bharti’s FCF generation.

Its confidence in FCF generation emanates from the following factors:

1) India, at worst, will remain a 3- private-player market for the foreseeable future limiting competitive intensity.

2) Telcos will keep playing with tariffs, but it expects ARPUs to grow at least 10 percent for the next few years as operators focus on FCF generation vs market share in prepaid 4G/5G segments. Bharti has taken unprecedented tariff hikes in its base voice plans in the past two years moving from 75 to 155 (for 28 days).

3) Network capex is likely to peak in FY24, and progressively reduce as the 5G coverage layer reaches 75 percent of the population.

4) Spectrum investment to be limited; large spectrum renewal expected only in CY30.

The brokerage estimates suggest FCF generation (after interest cost) of 40,000 crore for Bharti in FY25E, which is 10 percent of its current market capitalisation. Bharti has set a good precedent of paying dividends in its two related companies – Indus Towers (erstwhile Bharti Infratel), and Airtel Africa.

"We remain hopeful of Bharti generously rewarding shareholders from FY25," it said.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.


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First Published: 19 Apr 2023, 08:23 AM IST

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