Bharti Infratel

Pricing factors in high growth

Contingent on easing of regulatory hurdles and faster acceptance of 3G and 4G services

CM RATING

45/100

Bharti Infratel's main business is to acquire, build, own and operate towers and related infrastructure and to provide access of its towers to wireless telecommunications service providers on a shared basis under long-term contracts. The company has 34,220 own towers in 11 telecom circles and 42% equity interest in Indus, which has about 1,10,561 towers in 15 telecom circles. Thus, on a consolidated basis the company operated in 22 telecom circles, with economic interest in 80,656 towers, in India end September 2012, making it one of the largest tower infrastructure providers in India.

Bharti Airtel holds 86.1% stake in Bharti Infratel. Post IPO, the stake of the parent, which accounts for about 63% of the consolidated revenue, will come down to 79%. Bharti Airtel is not offloading any stake through the current offer for sale.

Substantial growth in the Indian wireless industry during 2005-2010 was a result of higher penetration in urban areas, which was at 163% by the fiscal ended March 2012 (FY 2012). Rural penetration was around 38%. So the incremental growth in the telecom industry is expected from these semi urban and rural areas. Expansion of services by service providers in these markets will provide significant opportunity to tower companies. Bharti Infratel's portfolio is configured to host multiple service providers and will benefit from the increase in penetration of voice and date services as it has significant presence in the B and the C category of telecom circles.

Indus, a joint venture (JV) between Bharti Airtel (42% equity stake), Vodafone (42% stake) and Idea (16% equity stake), is strong in A category telecom circles The tenancies in the tower business in the A category circles are expected to be driven by increasing 3G capacities and 4G coverage and some 2G coverage expansion in select areas.

Bharti Infratel is entering the capital market to mop up about Rs 3508.80 crore by issuing around 14,62,34,112 equity share of face value of Rs 10 each in the price range of Rs 210 to Rs 240 per share. The proceeds will be used for installation of 4,813 new towers, upgradation and replacement of existing towers, various green initiatives at tower sites, and other general corporate purposes. Proceeds can also be used for future inorganic growth opportunities.

Along with the fresh issue, there is offer for sale of 4,26,65,888 equity shares by Compassvale, GS Strategic, Anadale, Nomura, and Fabrikant HK Trading.

Strengths

• 3G and 4G spectrums operate on higher frequency band and would require additional towers to ensure seamless services. A quick rollout of these services will lead to substantial increase in data traffic and require more base stations, bolstering the demand for towers. This will also lead to better economies of scale and, hence, incremental revenue on insignificant capital expenditure for tower companies.

• Bharti Infratel has long-term contracts with service providers, encouraging co-locations and use of its tower infrastructure. End September 2012, 27817 of the company's co-locations and 32,128 of Indus co-locations were from wireless telecom service providers other than Bharti Airtel and JV partners of Indus.

• Large-scale operations, first-mover advantage and pool sharing arrangement among the top three telecom operators, Bharti Airtel, Vodafone and Idea Cellular, have resulted in better-than-industry tenancy ratio for Bharti Infratel.

• Bharti Infratel has a right of first refusal for all Bharti Airtel's new towers and co-location requirements. Epansion of Bharti Airtel's networks in Bharti Infratel's circle of operations will lead to additional demand for Bharti Infratel towers.

• There is possibility of incremental potential revenue streams by areas such as renting out space for placement of advertising and antenna systems. Also, there exists the possibility of offering transmission backhaul through optical fiber connectivity and microwave connectivity at towers in future, subject to favorable regulatory changes.

Weaknesses

• Government policies and technological developments have a significant bearing on the tower business. Regulatory changes and the resultant uncertainty pose a risk to telecom players, resulting in delays in network rollout plans.

• How fast the telecom service providers launch their 3G and 4G network services and other telecommunication technologies are a big concern for tower companies. If the subscriber base for new services does not grow at a rapid pace, demand for services of Bharti Infratel and Indus will be affected. For example, wireless telecom service providers' rollout of 3G services has yet to result in significant increase in demand for new towers as these service providers have upgraded their existing active infrastructure to provide 3G services instead of requesting the rollout of additional towers.

• Indus has a right of first refusal for development of new towers and co-locations of Bharti Airtel, Vodafone and Idea Cellular within its circle of operations. However, the right will expire after December 2012. The top five customers including Bharti Airtel, Vodafone and Idea Cellular accounted for about 92% revenue of Indus end March 201. Loss suffered by these customers, reduction in demand for new towers or additional co-locations from any of these customers will have a material adverse effect on the financials of Indus.

• The tower infrastructure business is a capital-intensive and requires high operating leverage. Any delay in rollout or expansion by service providers will result in lower leverage and asset turnover, leading to lower return on capital employed.

Consolidated net sales was up 11% to Rs 9452.06 crore, OPM 60 basis points to 37.4% and t OP by 13% to Rs 3128.81 crore in FY 2012 over FY 2011. The other income spurted 23% and interest costs was down 6%, with depreciation up 6%. Finally, PAT rose 36% to Rs 750.73 crore. EPS on post-IPO equity of Rs 1888.64 stands at Rs 4 for FY 2012.

Net sales stood at Rs 4971.95 crore and PAT Rs 460.46 crore in the six months ended September 2012. EPS on an annualized basis on post issue equity of Rs 1888.64 crore stands at Rs 4.9.

The shares are being offered in a price band of Rs 210 to Rs 240 per equity share of Rs 10 face value. The P/E at the lower band works out to 43 times and at the upper band it is 49 times. There is a discount of Rs 10 per equity share for retail investors.

Pre-IPO, the book value stands at Rs 82.1, which is discounted 2.6 to 2.9 times by the offer price band. Due to higher offer price, post-IPO book value works out to Rs 94, which is discounted 2.2 to 2.6 times by the offer price band.

The pricing factors in high growth in future, which is contingent on easing of regulatory hurdles in telecom sector and faster acceptance of 3G and 4G services. After several years of uncertainty and antagonism, the regulatory environment for the telecom sector is showing some signs of improving. However, the future trend will remain unpredictable as there are many unresolved issues and regulations are still evolving. Till now acceptance of 3G services has been below expectation and the 4G rollout far behind expectation. Improvement in economic environment, which can boost discretionary spend, is key to pick up in these high-end services.