As 5G capital ramps up, monetization is key for Bharti Airtel

While Bharti Airtel’s capital expenditure bodes well for the long term, the recent rise in capital prices is one of the main concerns for the stock.

Bharti Airtel Ltd management said it will continue to make capital expenditures (capex) for rolling out 5G infrastructure and expanding business operations, especially in rural areas.

In the December quarter (Q3FY23), total investment by telecom operators in their sector increased by 53% YoY, and investment in India, mainly for 5G infrastructure, up 74% YoY annual.

The company’s total capital investment has increased in recent quarters. For example, consolidated investments jumped to around Rs 6,400 crore in the June quarter, from Rs 6,101 crore in Q3FY22. It further increased to around Rs 7,000 crore in the September quarter and Rs 9,313 crore in the last quarter of December. Therefore, for Indian companies, the average capex for the next three years is expected to be around Rs 25,000 crore per annum.

While capital spending bodes well for the long term, the recent rise in capital prices is one of the main concerns for the stock. The stock has fallen 3% since Tuesday’s results, despite reports of strong corporate earnings. “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.

Higher spending on 5G infrastructure could put pressure on returns. “Investors aren’t thrilled with the low return on capital employed,” said the analyst mentioned above. Yields tend to be lower, he added, given the company’s heavy debt on spectrum purchases and now 5G capital expenditures. 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 the invested capital repair that we now expect to decline/flat-line over FY23-25.”

In the Q3 earnings call, Airtel’s management said, “India’s 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 rate hikes to slow in the near term, weighing on 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.”

Admittedly, most analysts are optimistic about Airtel’s future growth. Improved user base, improved operational efficiencies and healthy growth in other business segments are important positives. “Capital expenditures take place shortly after spectrum auctions, so returns tend to be lower,” said Aniket Dani, research director at CRISIL’s Market Intelligence and Analysis division.