Airtel will start paying out dividends from FY24: report
Premium- India’s No 2 carrier may have an estimated excess cash flow of ₹1.3 trn during the time
Bharti Airtel should start paying dividends at 20% of profits from the next fiscal year, and it may raise it to 65% of profit by FY27, triggering a re-rating of the stock, said UBS analysts. India’s No 2 carrier may have an estimated excess cash flow of ₹1.3 trillion during the time, they added.
The Swiss brokerage house said the telco had a cumulative growth rate of 15%, which is far higher than some of its Asian peers, having similar earnings parameters, which may translate into better dividend yield.
Singtel and Bharti Telecom will need dividends from Airtel to fund their own dividend and interest payouts, they added.
“Assuming all expensive spectrum debt is paid and Indus is privatized, we estimate Bharti Airtel will still have excess cash flow of ₹1.3 trillion cumulative in FY23-27e. We, therefore, believe Bharti is in a position to and is likely to start to pay dividends from FY24 onwards," UBS said.
“We estimate dividend payout of 20% of profits in FY24 increasing to 65% by FY27e, translating to a dividend yield of 0.7% in FY24, and 4.6% by FY27. Laying out a long-term target of the payout ratio, and medium-term gearing target, can be a big driver of a further re-rating of the stock." In three to four years, Airtel has reduced debt significantly and increased earnings before interest, taxes, depreciation, and amortization (EBITDA).
If the company were to factor in complete acquisition of Indus Towers, and early repayment of some of the spectrum dues to the government due to high interest costs, it may still maintain 13% compound annual growth rate in EBITDA during FY23-FY26, making a strong case for dividend payouts.
According to UBS estimates, spectrum dues for the 2012-16 auctions amount to ₹26,600 crore along with 9-10% interest, while the full acquisition of Indus Towers will cost Airtel ₹28,000 crore. The telco has indicated it will increase its stake in Indus to get a controlling stake.
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Singtel’s transfer of 3.3% shares in Airtel to holding company Bharti Telecom may entail roughly ₹12,500 crore of debt to fund the payment.
UBS said if interest rate of 6-8% was taken into account, it will need annual cash flow of ₹800-1100 crore for interest costs.
“Given BTL’s stake of c39% in Bharti Airtel, this will imply a likely need of ₹2,800-3,000 crore of total dividends from Bharti Airtel to ensure BTL is able to pay the required interest," the brokerage said.
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