Bharti Airtel Limited:Results better than expected,Buy the 2024s

2024s cheapest on the curve.

    Bharti’s bonds have performed well over the last month, tightening by 30-40bpvs. average tightening of 10-15bp for the rest of India IG. However, despite thiswe think there is still 15-20bps upside potential for Bharti with a view that itwill remain an IG credit. Over the past few quarters, it is becoming clearer thatRJio’s entrance has affected Bharti a lot less than peers. Further, Bharti hasbeen taking advantage of the intense competition to strengthen its competitiveposition in India with successive acquisitions at distressed prices, the latestbeing Tata Teleservices. At the same time it has also deftly managed itsbalance sheet with asset sales and contained its leverage.

    Considering our view that Bharti remains IG, we compare Bharti to some of thesmaller BBB- names in India like UPL and Adani Ports and see that it stillprovides ~20bp pick up. We also note that the bonds are still trading over50bp wide to Reliance Industries when they traded flat to each other at thetights (2025s). While we don’t think they should trade flat now, given thestrong technicals in the space the spread should be much narrower, in ourview. On the curve, we think the 2024s look the cheapest on a G spread basis;hence, we maintain our Buy on them and maintain Hold on 2023s and 2025s.

    Downside risks include a downgrade to HY or outlook change to negative, pickup in competition again, debt funded acquisitions / mergers, etc while upsiderisk is competitive pressures easing faster than expected.

    Results.

    Q2 revenues were flat qoq at INR218 billion and EBITDA actually increased by2% to INR80 billion. Operating cash flows were lower qoq at INR45 billion dueto lower interest income and working capital outflows (vs inflows last quarter)and capex came in at INR52 billion, resulting in a negative free cash flow ofINR7 billion for the quarter before dividends. The company has increased itscapex plan from INR200 billion to INR250 billion for FY18 in order to accelerateits network rollout in India. Net debt (including spectrum liabilities and financeleases) increased from INR934 billion to INR968 billion, resulting in a slightincrease in net leverage from 2.98x to 3.05x (annualizing quarterly EBITDA).

    Segment wise, India mobile operations were weaker qoq, with revenue andEBITDA declines of 5% each. However, strong performance by the Africanoperations offset this with revenue and EBITDA growing 22% and 24%respectively. As a result, India mobile’s EBITDA contribution has declined tojust 51%, a multi-year low. Within India mobile, subscriber growth was low at0.5% and ARPUs (-6%) continue to decline. Further, the 57% reduction of IUCcharges (currently 4% of consolidated EBITDA) from October will likelycontinue to put pressure on its results in the next quarter. Within Africa,subscribers grew by 2.4% and we have seen some stabilization in ARPUs (+5%qoq).

    Other important events/news.

    Bharti Infratel in its most recent board meeting has decided to exploreincreasing its stake in Indus Towers to majority or even 100%. However, at thesame time, Bharti has also stated that it is considering sale of a majority stakein Infratel to a group of global investors. If this were to go through, it would