Does Bharti Airtel’s rights issue discount open an entry window for new investors?

Bharti Airtel Ltd, the country’s second-largest telecom operator, has set the pricing for its upcoming rights issue that aims to raise as much as Rs 21,000 crore ($2.85 billion).

The company said it is offering shares to its investors at a price of Rs 535 a share, a 26% discount to the market price of the stock on Thursday.

Rights issues are essentially a tool for publicly listed companies to raise funds by issuing fresh shares to existing shareholders at a discount. By agreeing to pick up the shares entitled to them, an existing investor can bring down the cost of ownership of shares.

At the same time, the company gets to raise equity capital in a manner that gives an option to the promoters to avoid stake dilution.

Bharti Airtel’s rights issue

Bharti Airtel has fixed September 28 as the record date for determining shareholders who would be eligible for subscribing to the rights issue. The right issue opens on October 5 and will end on October 21.

The rights issue announcement, originally made on August 29, has seen the company’s share price rise over 20% since its board decided on the fundraising plan.

The company is offering one share for every 14 shares held by an investor as on the record date. This means a person holding 140 shares as on September 28 will be entitled to buy 10 shares of Bharti Airtel at Rs 535 apiece.

As a result, if a person buys 140 shares of the company today at the current market price, spending around Rs 1.03 lakh (before accounting for fees and taxes), she/he would be able to bring down the average cost of purchase from around Rs 738 to Rs 692, or about 6% lower.

Stock triggers

The company’s stock price has risen partly due to the right issue announcement but there have been a set of other positive triggers.

Telecom stocks at large got a booster call last week with a favourable move by the Indian government that approved a relief package for the cash-strapped sector, which included a four-year moratorium on adjusted gross revenue (AGR) dues.

Bharti Airtel’s stock also got a boost from a positive outlook by rating agencies earlier this month. Moody's affirmed Bharti Airtel’s Ba1 corporate family rating (CFR) and senior unsecured rating and changed the outlook to ‘stable’ from ‘negative’, citing better profitability at its Indian mobile business and staggered payment to clear AGR dues.

S&P also maintained Bharti Airtel's credit rating of ‘BBB-’, and upgraded the outlook to stable from negative, indicating the company’s better financial status and ability to pay back debt.

Some brokerage houses, including ICICI Securities, Motilal Oswal and Emkay, had previously pegged their price targets in the Rs 700-740 a share, which has already been breached.

Last week, global research firm CLSA had retained a buy call and raised the price target to Rs 825 per share. CLSA based its decision on a jump in data usage and rising average revenue per user (ARPU) that it expects to move even higher as inactive subscribers at key competitor Reliance Jio and reduced tariff discounts by the bigger peer has lowered the risk of disruption.

At this price target, an investor entering the stock now may still get to see a 20% upside after factoring in the rights issue discount.