RJio shadowover telcos’ tower gains

While debt reduction will help Bharti Airtel and Idea Cellular, some gains are offset by cash losses and higher rental outgo

For the incumbent operators (Bharti Airtel, Vodafone and Idea) facing intense competition from Reliance Jio (RJio), cutting of debt and investing in expansion of fourth-generation technology (4G) capability simultaneously have become imperative. Reports suggest Bharti Infratel will buy out the stake of its partners in Indus for about $5 billion and given Idea’s 11.15 per cent stake (13,706 towers), the deal could fetch the latter company about $1.2 bn or ~8,000 crore. Coupled with valuations of another $500 million for standalone towers (9,984 of these), the total Idea could get after sale of all its towers will be about $1.7 bn or ~11,000 crore.

Idea’s debt was ~53,925 crore at the end of June, with net debt to operating profit nearly 7.19 times. The sale of stake in tower assets would help it. While debt reduction would be substantial at 19 per cent, the fall in operating profit so far has been even faster. In fact, operating profits are expected to see further pressure in coming quarters. Moreover, Idea also needs to invest in capex which given the lack of cash profits for the last three quarters would entail taking more debt. After a profit of ~91 crore in the September 2016 quarter, Idea has totted up net loss to tune of ~1,500 crore (combined) over the last three quarters. Net loss in the September 2017 quarter is expected to be nearly ~1,200 crore with operating profit falling by nearly half to an estimated ~1,400 crore from ~2,838 crore a year ago. So, raising of funds through stake sale in tower assets should provide some relief. Rohit Chordia, analyst at Kotak Institutional Equities, says Idea’s standalone net debt to operating earnings on a quarter’s annualised base is likely to cross 10 times. “The company might need to accelerate its efforts on tower monetisation or have to live with constraints on capex in a phase where it would do well to step up capex spends,” he adds.

For Bharti Airtel, which has so far sold 14 per cent stake in Bharti Infratel in two tranches since the start of the year, bringing stake down in its subsidiary to 57.96 per cent from 71.96 per cent, the total consideration has been about ~9,000 crore. Given its gross debt of over ~1 lakh crore and pressure on operations, reduction in debt would be small. If it were to sell its remaining stake in Infratel, it would (given the current market capitalisation of Bharti Infratel) fetch it a sizable ~40,000 crore.

Overall, while the tower monetisation moves are positive for Bharti Airtel and Idea Cellular in terms of reducing the annual interest outgo, the gains will be partly offset by the higher outgo from rentals (independent towers) and lack of dividends they get now as owners. Meanwhile, Bharti Airtel continues to consolidate its position, the latest acquisition being the mobile services business of the Tatas. For Idea, the key trigger would be an early merger with Vodafone. While the combined debt of the consolidated entity (Idea+Vodafone) would be about ~1 lakh crore, it will have the benefit of size (400 million subscribers) and synergy gains.