Money magnet! Bharti Airtel shares set to rise by 23% more?

Telecom operator Bharti Airtel was among the best picks of investors for second consecutive trading session, so much, that the company even surged over 10% in just 2 day making many investors rich. At around 1035 hours, share price of Airtel was trading at Rs 338.90 per piece up by Rs 5.20 or 1.56% on Sensex. On Monday, Airtel ended at Rs 333.70 per piece up by Rs 24.95 or 8.08%. However, the stock rose over 9% alone in previous trading session. The reason behind such blockbuster performance in Airtel, can be due to the company’s approval for issuing equity shares of the Company (‘Equity Shares’) by way of a rights issue to the eligible shareholders of the Company as on the record date for an amount aggregating up to Rs 25,000 crore. 

Interestingly, Airtel is now seen as money making magnet ahead, as per CLSA the company is set to see price level of Rs 410 ahead. 

Notably, Airtel’s promoter and promoter group entities are Bharti Telecom, India Continent Investments and Singtel. It was known that Singtel has notified that Bharti Telecom will be renouncing rights worth Rs 50 billion to GIC but it will subscribe to entire rights associated with its direct 15% stake in Bharti Airtel and Singtel total stake in Bharti Airtel will fall from 39.5% to 35.2% post-rights issue.

However, the Mittal family will be increasing their direct stake by 4.4%, even if total ownership will remain at 27%. 

According to CLSA, assuming that all other shareholders subscribe to the rights issue, these announcements could have several implications. They are: 

Firstly, the total promoter group holding in Bharti Airtel will reduce by 4.4ppts to 63% with Bharti Telecom entity getting diluted to sub-50% levels with Singtel’s stake reducing.

Secondly, with Singtel’s effective stake coming down to 35.2%, of which 15% is owned directly, Singtel will own 20.2% stake indirectly through Bharti Telecom since Singtel owns 48.9% of Bharti Telecom. Its 20.2% indirect stake in Bharti implies that Bharti Telecom will, in turn, hold 41.3% stake in Bharti Airtel post rights.

With promoters and group entities along with GIC holding 67% in Bharti Airtel, Singtel’s direct stake remaining at 15%, Bharti Telecom’s stake declining to 41%, and GIC holding 4.4% stake, Indian Continent Investment entity (controlled by Mittal family) will likely have to increase its stake from the current 2% to 6.4%.

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Even though Mittal family may increase its direct stake in Bharti Airtel by 4.4%, its effective ownership of Bharti Airtel will remain at 27.1% since its indirect holding through Bharti Telecom will fall.

Thereby, CLSA says, “we maintain that Bharti Airtel capital raising of Rs320bn (Rs250bn rights plus Rs70bn foreign currency perpetual bonds issue) will: (1) lower loss per share in FY20CL by 44% and boost FY21CL EPS estimates by 42%, (2) lower FY20-21CL net debt by 30%,and (3) lower its net gearing from 3x-3.9x to 2.1-2.8x Ebitda in FY20-21.”

Hence, in CLSA’s view, the capital raising will assuage any concerns around Bharti Airtel’s leverage. With revenues set to turn from 4QFY19, we retain BUY on Bharti Airtel with Rs 410 target. We will revise estimates once all approvals for the capital raising are in place. Retain BUY.

If we take the current price level of Airtel, then the company is set to rise ahead by a whopping 23%. Hence, you can still add  Airtel shares in your kitty.