The management of Bharti Airtel Ltd has said that it continues to spend capital expenditure (capex) on 5G infrastructure deployment and expansion of business operations, especially in rural areas.
In the December quarter (Q3FY23), the telecom company’s total capex across its segments grew by 53% year-on-year (yoy) with India business capex, mainly for 5G infrastructure, up 74% yoy is increasing.
The company’s overall capital expenditure has been rising over the past few quarters. For example, consolidated capex increased from Rs 6,101 crore in Q3 FY22 to around Rs 6400 crore in the June quarter. This increased to around Rs 7000 crore in the September quarter and Rs 9,313 crore in the most recent December quarter. Thus, for India businesses, the average capital expenditure for the next three years is expected to be around Rs 25,000 crore per annum.
While capex spending is good for long term outlook, increase in capex in near term is one of the major concerns for the stock. The stock has declined 3% since the results were announced on Tuesday, despite the businesses reporting a strong performance. An analyst requesting anonymity said, “High capital expenditure on 5G deployment, and lack of monetization opportunity, is a main headwind for the stock.”
Higher spending on 5G infrastructure is likely to put pressure on the return ratio. “Investors are not thrilled with the low return on capital employed,” said the analyst cited above. Last month, JP Morgan analysts said in a report, “Higher-than-expected capex, pricing delays and lack of 5G monetization should prevent industry-wide return on invested capital repair what we now see as declining/flat-line.” FY23-25.”
In the third quarter earnings call, Airtel’s management said, “India’s return on invested capital is less than 9%. And hence, we believe that the Average Revenue Per User (Arpu) needs to go up, an Arpu of Rs 300 is critical for a respectable return on capital employed. And that’s something we hope will happen in the times to come.”
Analysts expect a slow hike in tariffs in the near future, which doesn’t favor investor sentiment for the stock. According to a report by Motilal Oswal Financial Services, “Bharti Airtel’s earnings should soften on slow 4G add and limited tariff hike. This plus increased capex intensity towards 5G rollout and rural coverage, free cash flow generation and deleveraging.” The pace should be moderated.
To be sure, most analysts are bullish on Airtel’s growth. Improvement in customer base, improved operating efficiencies and healthy growth from other business segments are key positives. According to Aniket Dani, Director-Research, CRISIL Market Intelligence & Analytics, “The capex spend happens immediately after the spectrum auction and thus the return ratio is lower.” And since telecom players have been raising their tariffs for the past two years, the near term appears stable, he said.
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