From FY24, Airtel will begin paying dividends

According to UBS analysts, Bharti Airtel should begin paying dividends at 20% of profits from the upcoming fiscal year and may increase them to 65% of profits by FY27, leading to a re-rating of the company. According to them, the No. 2 airline in India might have 1.3 trillion in extra cash flow at that time.

According to the Swiss brokerage firm, the telco had cumulative growth at a rate of 15%, which is significantly greater than some of its Asian competitors with comparable earnings metrics and could result in a higher dividend yield.

To pay for their own dividend and interest payouts, Singtel and Bharti Telecom will need dividends from Airtel, they added.

It is projected Bharti Airtel will still have an excess cash flow of $1.3 trillion cumulative in FY23-27e, assuming all high-cost spectrum debt is serviced and Indus is privatised. Therefore, we think Bharti is ready to resume paying dividends and is expected to do so starting in FY24, according to a source.

It is also predicted that 20% of earnings will be paid out in dividends in FY24, rising to 65% by FY27e, for a dividend yield of 0.7% in FY24 and 4.6% in FY27. A significant factor in a further re-rating of the stock is laying out long- and medium-term payout ratio targets. Airtel has dramatically decreased debt over the past three to four years and boosted earnings before interest, taxes, depreciation, and amortisation (EBITDA).

The company may still maintain a 13% compound annual growth rate in EBITDA during FY23-FY26, making a compelling case for dividend payments even if it were to take into account the full acquisition of Indus Towers and mid-instalments of some of the spectrum payments to the government due to high-interest expenses.

The full acquisition of Indus Towers will cost Airtel 28,000 crore, according to UBS estimates, while spectrum dues for the 2012–16 auctions total 26,600 crores plus 9–10% interest. In order to acquire a controlling position in Indus, the telecom has said it will raise its current holding.

According to UBS, it would require yearly cash flow of between 800 and 1100 crores to cover interest payments at an interest rate of 6–8%.

Given BTL’s 39% ownership of Bharti Airtel, the brokerage estimated that the company would need to pay 2,800–3,000 crore in total dividends from Bharti Airtel in order for BTL to be able to cover the required interest.