Singtel's diluted stake in Bharti Airtel could boost associate contributions by 14% over 2020

Bharti Airtel witnessed its revenues decline by nearly $2.57b over FY2016-2018.

The dilution of Singtel’s stake in Bharti Airtel and lower losses of Airtel could help Singtel bounce back stronger over FY2020 and expand its associate contributions by 14% YoY from a projected 30% decline over FY2019, according to a report by DBS Equity Research.

In March, Bharti Airtel proposed a rights issue to raise $4.88b (INR 250b), which is expected to be completed by Q2 2019. Singtel announced that it would invest approximately $711m , representing Singtel’s direct interest of 15% in Bharti Airtel. GIC also stepped in to invest $946.89m (US$700m) to acquire roughly 20% of total rights issue which represents rights attributable to Singtel’s indirect interest in Bharti Airtel.

Assuming full subscription of shares of the rights issue, Singtel’s stake in Bharti Airtel would be diluted by approximately 4.3% to 35.2% from 39.5%, after the surrender of rights to GIC.

Also read: Daily Briefing: Singtel to buy stocks worth US$525m in Bharti Airtel

“We expect Singtel to record a pre-tax loss of $103m from Bharti over FY20F vs. $164m before, along with a higher profit contribution of $166m over FY21F vs. $60m before,” DBS analyst Sachin Mittal noted.

On top of the $4.88b (INR250b) funds to be raised through the rights issue, Bharti Airtel also announced plans to raise $136.69m (INR7b) through a perpetual bond offering. This is in addition to the planned initial public offering (IPO) of Airtel Africa, which is scheduled to take place over June or July 2019.

“We believe the bulk of the proceeds raised through these exercises would be utilised to settle Bharti’s mounting debt and to fund ongoing 4G expansions, with any remainder utilised to pursue attractive M&A opportunities,” Mittal noted. “Assuming Airtel uses approximately 50% of the proceeds from the rights issue to settle its outstanding debt at an average effective interest cost of around 9%, we estimate that Airtel could spare roughly $214.89m (INR11b) in interest expenses per year, representing around 14-15% of Airtel’s net finance costs.”

This could provide Airtel with some relief to par expected losses for FY2020, he added.

According to the report, since telco Reliance Jio’s commercial launch in 2016, industry revenue has dropped over 30% with industry participants now reduced to three major players comprising of Vodafone-Idea, Bharti and Jio. Despite being the largest operator in India by market share, Bharti Airtel witnessed its revenues decline by nearly $2.57b (US$1.9b) over FY2016-2018, with Jio dragging down voice and data tariffs to low levels.

“Bharti Airtel has managed to stabilise the decline in revenues and earnings before interest, tax, depreciation and amortisation (EBITDA) over the recent quarters, and has shifted its focus on building a high-quality subscriber base as opposed to aggressive subscriber acquisition,” Mittal noted, adding that the telco has also expanded its 4G network to compete with Jio.

“Overall, we expect Bharti Airtel’s FY20F/21F EBITDA to see 13 to 20% growth on the back of revenue stabilisation in India and growth in Africa. However, rising depreciation and amortisation arising from the ongoing expansion of Airtel’s 4G network may still lead to continued losses at Airtel over FY2020 before a significant improvement in the bottom line is realised over FY2021,” Mittal said.

Moreover, Singtel’s smaller subsidiaries AIS in Thailand and Globe in the Philippines are expected to record low-to-mid single digit growth in contributions, further supporting Singtel’s associate contributions recovery which has been a driver of Singtel’s share price in the past.

Mittal added that contributions from Telkomsel, Singtel’s largest associate which accounts for around 30% of the telco’s bottom line, are expected to expand 7% over FY 2020. This will add an estimated $80m in Singtel’s pre-tax earnings.