Whalesbook
ICICI Securities forecasts that Bharti Airtel and Reliance Jio will almost double their capital returns by 2028. This significant improvement is attributed to their network expenditure now falling below depreciation levels, a shift that will unlock better cash flow generation after years of heavy infrastructure investment. The report highlights that both telecom giants are entering a "value creation zone," marked by increasing Return on Capital Employed (RoCE) and robust free cash flows.
Bharti Airtel's RoCE is expected to rise from 14.2% in FY25 to 28.4% by FY28, while Jio Platforms' RoCE is projected to climb from 14.3% to 21.4% in the same period. Reliance Jio is also anticipated to reach an estimated valuation of $148 billion by September 2027, with its free cash flow projected to triple to Rs 558 billion by FY28, ahead of its potential IPO in the first half of 2026.
The turning point comes as capital expenditure (capex) is set to fall below depreciation and amortization (D&A) for Bharti Airtel starting FY26, meaning free cash flow generation may surpass net profit. This trend, alongside sustainable pricing and the transition to 5G services, which command higher tariffs (17-30% more than 4G), supports improved financial health. Both companies are also diversifying into high-margin areas like fixed broadband and enterprise digital services, further boosting growth.
Historically, FY12-20 was termed "capital destruction" due to high spectrum costs and competition. FY21-25 was "value protection" with substantial investments. The current phase, FY26-28, is identified as the "value creation" era, where these investments are expected to yield significant profits.
Impact: This news is highly positive for the Indian telecom sector, suggesting strong financial performance, debt reduction, and potentially higher shareholder returns from Bharti Airtel and Reliance Industries Limited. It indicates a maturation of the market with profitable growth ahead. Rating: 9/10.
Difficult Terms:
- Capital Returns: The total amount of money a company returns to its shareholders, including dividends and share buybacks.
- Network Expenditure: Costs incurred by telecom companies to build, maintain, and upgrade their telecommunications networks (e.g., towers, fiber optics).
- Depreciation: An accounting method of allocating the cost of a tangible asset over its useful life. It represents the wear and tear or obsolescence of assets like network equipment.
- Cash Flows: The net amount of cash and cash-equivalents being transferred into and out of a company. Positive cash flow means more cash is coming in than going out.
- Return on Capital Employed (RoCE): A profitability ratio that measures how efficiently a company is using its capital to generate profits.
- Free Cash Flow (FCF): The cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. It's the cash available to repay creditors, owners, and for expansion.
- Initial Public Offering (IPO): The process by which a private company first sells its shares to the public, becoming a publicly traded company.
- EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization. A measure of a firm's operating performance.
- Capex (Capital Expenditure): Money spent by a company to acquire, upgrade, and maintain physical assets like property, buildings, or equipment.
- Spectrum Auctions: Government auctions where telecom operators bid to acquire licenses to use specific radio frequency bands for providing wireless services.
- 5G Services: The fifth generation of mobile network technology, offering faster speeds, lower latency, and greater capacity than previous generations.
- Tariffs: The rates charged by service providers for their services, like mobile data or voice calls.