AGR proposal a boost for Bharti Airtel

Cash flows to absorb Africa impact amid weak crude oil prices and rupee

The move by the Department of Telecommunications seeking a staggered 20-year payment of dues related to adjusted gross revenues (AGR) is positive for listed telecom players, such as Bharti Airtel and Vodafone Idea. The move would require Airtel and Voda Idea to pay ~1,700 crore and ~4,100 crore, respectively, every year (including interest cost of 8 per cent) over the moratorium period.

Analysts at Motilal Oswal Financial Services say Airtel with an annual free cash flow for FY21 estimated at ~12,600 crore, along with a net debt to operating profit of at 2.6 times (post AGR liability), should help it make the payments. The same will be difficult for

Voda Idea, given the high debt and lower cash flows.

The other trigger for Airtel could be the second round of tariff hikes, proposals to have a minimum tariff floor, and the government’s intent to have a three-player market. Analysts believe that there could a tariff hike upwards of 30 per cent which would push the average revenue per user (ARPU) to levels over ~200. This should boost Airtel’s operating profit by a third.

There are, however, certain headwinds. The major one is the crude oil price crash, followed by a depreciating rupee. Airtel’s Africa operations in countries — such as Nigeria, Congo and Chad — could see some impact as these are oil exporting economies. What will add to the woes is that 28 per cent of its debt is dollardenominated.

Analysts at Emkay Global believe Airtel’s Africa business is in a strong position to absorb any near term impact with a healthy operating profit and lower debt. Africa net debt has halved over the last three years and the company is able to fund its capex from internal cash flows.

The brokerage, thus, has a positive view on the firm, given its strong India business and expected market share gain in India which could absorb any adverse Africa impact. While the stock is down about 18 per cent over the last month, analysts believe there are multiple positives, especially on the Indian telecom front, which should offer long-term value to investors.