Bharti Airtel Ltd.'s proposed purchase of an additional 5% stake in its Africa entity could raise concerns over capital allocation, according to Goldman Sachs.
Investors would prefer Airtel to invest in its India business, while looking at acquisitions in business-to-business and fintech sector, or consolidating stake in assets such as data centres, the brokerage said in a note released on Tuesday.
In the past week, the company's board approved raising its stockholding in subsidiary Airtel Africa by 5% in one or more tranches through its step-down subsidiary—Airtel Africa Mauritius Ltd.
Airtel Africa Mauritius presently holds a 57.29% stake in Airtel Africa. Also, the said acquisition will take place through cash consideration.
Goldman Sachs also predicts that the operations of Airtel India will generate $14 billion in free cash flow over the fiscal years 2026 to 2028. Additionally, 50% of this amount to be given out as dividends, the report said.
"At current share price, Bharti's 5% additional stake purchase in Airtel Africa would amount to US$320 million, which is 0.3% of Bharti's current market cap, and 2% of next three year's cumulative," the brokerage said.
"We see limited risks to Bharti meeting our payout expectations. In a hypothetical scenario if Bharti were to buy the entire outstanding stake in Airtel Africa, that would amount to US$2.5 bn, or 2% of Bharti's current market cap," it further added.
Airtel Africa has shown strong revenue growth of around 20% year-over-year in recent quarters, along with good free cash flow generation, Goldman Sachs said.
However, due to currency exchange effects, growth in rupee terms has been significantly lower, the report said.
Airtel Africa's earnings before interest, depreciation and amortisation, in rupee terms, has grown at an estimated compounded annual growth rate of 12% from fiscal 2019 to fiscal 2025, compared to 26% for Airtel's India business during the same period.
However, the share of Africa business in Airtel's overall Ebitda has dropped from 32% in fiscal 2019 to an estimated 18% in fiscal 2025.
Shares of Airtel on Tuesday closed 2.55% higher at Rs 1,641.6 apiece on the BSE, compared to 0.2% rise in the benchmark Sensex.
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