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Bharti Telecom, Bharti Airtel's Promoter, Goes Debt-Free After Stake Sale

May 27, 2020 10:25 AM 4 min read

Bharti Telecom Ltd, the promoter company of telecom major Bharti Airtel Ltd, has decided to retire its debt for good.

The promoter today announced the sale of 152m shares (from its stake in Bharti Airtel) for about ₹8,500cr ($1.12bn) in a block deal. As at the end of March, the former held debt roughly worth the same amount.

News of the promoter clearing its debt comes at an opportune time. Bharti Airtel’s stock has been trading at an all-time high on the back of a solid Q4/20 print. The closely watched mobile Average Revenue Per User (ARPU) saw a robust 25% uptick in the March quarter to an industry-leading ₹154, alongside market share gains vis-a-vis Reliance Jio.

While the promoter’s debt reduction has little to do with Bharti Airtel’s financials (leave aside some revived firepower to put in more money in the future, now that it is unencumbered...), let us use this as an excuse to go a bit deeper into Bharti Airtel itself. After all, debt management and maintaining strong fundamentals is as important for the telco as its promoter.

Vital Stats: As of Q4FY20, Airtel’s

  • Total revenues = ₹23,723cr ($3.14bn)
  • Net loss = ₹5,237cr ($694m)
  • Consolidated revenues for FY20 = ₹87,539cr ($11.6bn)
  • Total Debt = ₹1,17,132cr ($15.5bn)
  • Net Debt (excl. leases) = ₹88,251cr ($11.7bn) 

In the Beginning There Was Darkness

The past few years have been wild for Bharti Airtel. Its comfortable position in the telecom hierarchy was threatened in 2016 when Reliance Jio disrupted the entire scene with its record low data packages. The ensuing price war benefited India’s growing smartphone obsession and propelled internet penetration. But it also crippled companies as debt piled on. 

The industry itself consolidated as some companies merged operations or went out of business altogether. So much so that merely three years later, only three private mobile operators remained (Airtel, Jio and Vodafone Idea). Airtel didn’t go bankrupt like some companies - in fact, Telenor India, Tata Docomo and Tata Teleservices merged into Airtel. But its debt piled on relentlessly as it struggled to retain its market share to an expanding Jio.

And then came the Supreme Court’s disastrous adjusted gross revenue (AGR) verdict. That’s when things took a sharper turn south. Airtel’s AGR dues stood at ₹40,000cr ($5.4bn), further stressing its books and limiting its options (its argument that dues as per self-assessment were actually ₹13,000cr ($1,800m) was disregarded by the apex court).

Damage Control Mode

Its market share threatened and payments piling, Airtel went on a capital-raising spree along with a back-to-the-drawing-board focus on ARPU. While there is a long way to go for an industry-wide ARPU uptick, capital raising efforts were not left ignored.

In January, Airtel raised $2bn through a qualified institutional placement (QIP). An additional $1bn was raised through an issue of foreign currency convertible bonds (FCCB), which will mature in 2025.

All in all, Airtel has raised in excess of $11bn in equity capital over the past five years.

Airtel’s efforts have borne fruits. Besides some debt management (net debt currently sits below 3x EBITDA), Airtel has impressed investors with steady subscriber progression and improvement in underlying fundamentals. Has also impressed ratings agencies. S&P Global Ratings, for example, recently removed the company’s negative outlook, saying it had managed to “substantially mitigate” the impact of the AGR verdict.

However, Airtel (and the other two private Indian telcos) find themselves at an interesting time for the industry. After a period of heavy discounting and weak ARPU, the industry now collectively appears to be heading towards lifting ARPU. As per Airtel management’s commentary, an ARPU of ₹200 is where a return on capital can perhaps be expected, a long way from the ₹150 it currently sits at. 

Furthermore, with 4G and 5G CapEx looming large and AGR dues in the offing, there is certainly some balance sheet pressure to be expected. Then there is the aftermath of COVID-19 that is yet to fully show up in the results. The pandemic has the ability to derail the upward trajectory of ARPU along with a quite plausible uptick in customer churn -  a double whammy of sorts! 

There are perhaps more questions around Airtel and Indian telcos than a clear path to sustainable growth in profitability and free cash flow. 

The Corporate Capital Collating Craze

Deleveraging has become quite a theme in recent times, and in that context it comes as no surprise that more and more companies are looking to lower their debt burden in general. Remember what Reliance Industries has been up to? It’s been raising capital through various ways and means. This includes stake sales to Facebook, Silver Lake Partners, KKR etc. And a massive Rights Issue (FYI, we covered this in a previous issue of our Deep Dives Newsletter).

There also seems to be increased focus on reducing promoter stakes and debt. Ratings agencies have always frowned upon firms where promoters were indebted; this perception will only intensify now due to the COVID-19 crisis, as businesses confront bleak outlooks and fragile demand. 

With the stake sale this week, Bharti Telecom’s stake will fall to 36% from 38.8%. And the total promoter holding of the Mittal family and Singtel will remain 56.23% - but it was 67% in 2018. Recently, besides Bharti Telecom, Kotak Mahindra Bank promoter Uday Kotak has announced intentions to sell about 57m shares to public investors, a holding valued at about ₹6,600cr ($875m).


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