With intensifying 5G capex, monetisation is key for Bharti Airtel

In the December quarter (Q3FY23), the telecom company’s overall capex increased across its segment to 53% year-on-year (y-o-y) with the India business capex, which is predominantly for 5G infrastructure, rising by 74% y-o-y.

Overall capex of the company has been rising in the past few quarters. For instance, consolidated capex jumped from Rs6,101 crore in Q3FY22 to about Rs6400 crore in the June quarter. This further rose to about Rs7000 crore in the September quarter and to Rs9,313 crore in the recent December quarter. As such, for the India business, average capital expenditure is expected to be around Rs25,000 crore per year for the next three years.

While capex spending bodes well for long-term outlook, in the near-term, the rise in capex is one of the key concerns for the stock. Despite reporting strong performance across businesses, the stock has fallen by 3% since its results announcement on Tuesday. “Higher capital expenditure on 5G deployment, and lack of monetisation opportunity going ahead is a main overhang for the stock,” said an analyst requesting anonymity.

The higher spending on the 5G infrastructure is likely to put pressure on the return ratios. “Investors aren’t thrilled with the low return on capital employed,” said the analyst mentioned above. The return ratios tend to be lower considering the company has high debt on its books with the spectrum purchase and now with 5G capex, he added. Last month, analysts from J.P. Morgan said in a report, “Higher-than-expected capex, delayed price repair and a lack of 5G monetization should halt the industry wide return on invested capital repair that we now expect to decline/flat-line over FY23-25.”

In the Q3 earnings call, Airtel’s management said, “India return on capital employed is less than 9%. And therefore, we do believe that the average revenue per user (Arpu) needs to go up, an Arpu of Rs300 is critical for a respectable return on capital employed. And that is something that we hope will happen in due course of time.”

Analysts expect slower tariff hikes in the near-term which doesn’t bode well with the investor sentiment for the stock. As per a report from Motilal Oswal Financial Services, “Bharti Airtel’s earnings should soften on slower 4G adds and limited tariff hikes. This plus increased capex intensity toward 5G rollout and rural coverage, should moderate free cash flow generation and the pace of deleveraging.”

To be sure, most analysts are upbeat on Airtel’s growth going forward. Improving subscriber base, better operational efficiency and healthy growth from other business segments are key positives. According to Aniket Dani, Director-Research, CRISIL Market Intelligence and Analytics, “Capex spending happens soon after the spectrum auction and as such return ratios tend to lower.” And since telecom players have been increasing their tariffs for the past two years, the near-term appears stable, he said.