Airtel, Jio to see robust FCF generation by FY27, helped by lower capex, strong Ebitda growth

Bharti Airtel and Reliance Jio’s free cash flows (FCF) are estimated to grow to around $5.4 billion and $4.6 billion respectively by FY27 from around $3.9 billion and $1.5 billion in FY23, driven by falling capex intensity and strong earnings from operations over the next four years, say analysts.

Airtel/Jio’s annual capex intensity or `capex-to-sales ratio’ is slated to decline to around 20% by FY27 from around the 25%/35% levels now as their peak 5G spends are set to dip from FY25 onwards. Vodafone Idea’s FCF, in turn, is estimated to remain positive but much smaller in magnitude (around $0.6 billion) due to its much slower estimated operating income growth vs its financially-stronger rivals through FY24-27.

“Airtel India’s capex-to-sales ratio has declined from 40% in FY18 to 25% in FY23, and we estimate the telco’s FCF to grow to $5.4 billion by FY27 (versus $2.8 billion in FY22), driven by healthy CFO (cash flows from operating activities) and declining capex intensity,” Macquarie Research said in a note.

The global brokerage said it also estimates Jio’s capex intensity to fall from 35% in FY23 to 20% by FY27 as its market share has stabilised and its capex peak is past, which in turn would drive a turnaround in the telecom market leader’s FCF profile. Jio’s FCF is estimated to grow more than three-fold from $1.5 billion in FY23 to $4.6 billion by FY27.

By contrast, Vi’s annual capex intensity is estimated at a modest 15% by FY27 as its absolute capex is much lower and likely to stay that way amid continuing uncertainty around its external fundraise.

At Airtel’s fiscal fourth quarter earnings call last month, managing director Gopal Vittal had said that the Sunil Mittal-led telco’s India capex would see a reduction from FY25 onwards as its 4G rollout is virtually over and its ongoing rural and 5G urban expansions too would be behind by then.

Analysts said Airtel had been disciplined in capital allocation, which had resulted in strong FCF generation and a steady drop in leverage, which would help create strong shareholder value in the next few years.

Jefferies does not expect Vi to match Bharti and Jio’s continuing network investments, which would drive customer and revenue share gains for India’s top two telcos, especially after they roll out 5G services nationally.

Despite the anticipated fall in Airtel and Jio’s capex intensity from FY25 onwards, their absolute annual capex spends are estimated to stay sharply higher at $4.7 billion and $4 billion respectively compared to Vi’s modest $0.9 billion by FY27.

Macquarie estimates Airtel (consolidated) and Jio’s annual Ebitda (earnings before interest, tax, depreciation & amortisation) to grow to $13.8 billion and $10.4 billion respectively by FY27 from $8.8 billion and $6 billion in FY23. By contrast, it estimates Vi’s annual Ebitda growth to be sluggish, creeping up from $2.1 billion (FY23) to $2.6 billion (FY27), especially as the loss-making telco has still not finalised its 5G rollout plans.

Going forward, Sanford C. Bernstein foresees further telecom sector consolidation by FY26 amid Vi’s continuing market share losses. It estimates Jio and Airtel’s revenue market share (RMS) to grow further to 47% and 40% respectively and Vi’s shrinking to 13% by FY26.

Jio, Airtel and Vi’s revenue shares stood at 41%, 36% and 16.4% respectively in the quarter ended March, FY23, according to latest telco financial data collated by the telecom regulator.