The Bharti Infratel stock has shed 21 per cent in the past three months due to consolidation, benign near-term outlook and decision by newbie Reliance Jio to focus more on owned towers rather than leasing them out from service providers such as Bharti Infratel. The preference for own towers will mean that tenancies for Bharti Infratel will trend down from levels seen last year as well as earlier estimates by analysts. The near-term worry is the tenancy exits brought on by consolidation in the telecom sector, which, according to analysts at JP Morgan, will lead to flattish revenue growth for the company in FY19. Bharti Infratel’s management had said the coming quarters were likely to be soft, given consolidation in the sector. With Aircel scaling down its operations and Telenor and Tata Teleservices merging with Bharti Airtel, about 15,000 towers on Infratel’s network could be at risk as companies plan to rationalise their requirements. Excluding incumbents, Jio, and BSNL, other operators account for 7 per cent of the tenancy base for Bharti Infratel. This, coupled with the merger of Vodafone India and Idea Cellular crystallising within the next few months, implies that the earnings dent from the tenancy rationalisation/exits will likely be more severe than expectations, according to analysts at Nomura. Among a few near-term triggers for the firm will be the acquisition of a majority stake in Indus Towers, including the purchase of a stake from Vodafone and Idea. Currently, Bharti Infratel and Vodafone own 42 per cent each in Indus Towers, while the Aditya Birla group, including Idea’s 11 per cent holds 16 per cent. The Street will await valuations at which the deal goes through. Assuming that the Indus Towers deal is done at similar valuations to that of Infratel of nine times FY18 enterprise value-to-operating profit, the deal value works out to just under Rs 700 billion. Bharti Infratel’s current market capitalisation is Rs 640 billion. Analysts at Nomura said if the deal was concluded at these valuation, it would turn earnings accretive in the second year of acquisition — if 90 per cent of the deal value was funded by debt and the rest by cash. Bharti Infratel is expected to end FY18 with cash and cash equivalent of Rs 67 billion.
This, along with a possibility that Bharti Airtel will give up a controlling stake in the company, will lead to an independent tower entity and consequently, a reduction in valuation discount. The concern is lack of exit penalties for Vodafone and Idea, along the lines of the deal between American Tower and Idea/Vodafone for their standalone towers. This is a more likely scenario, given the worsening wireless sector financials and operators suffering losses every quarter.The price cuts announced last month by Jio and the incumbents mean that the sector’s health has deteriorated. Given that the tower companies account for the single-largest cost for service providers (network costs), there could be more pressure to renegotiate the contracts. Growth uptick for Bharti Infratel, which has an over 20 per cent share of towers and 25 per cent share of tenancies, will come from firms such as Jio and Airtel as they expand their 4G networks and invest in 5G from FY20 and FY21. Given little differentiation in the services and rapid data growth over the past few quarters, analysts said the network quality and speed would become the key differentiator as they seek to improve their revenue market share. Further, shared infrastructure services, including in building solutions for the government’s smart city and digital projects, could be other triggers, as these will help diversify the firm’s revenue base and reduce the volatility brought on by the consolidation. On the whole, the near-term prospects look muted. Given the uncertainty in revenues and the sharp cuts in estimates for FY19 (upwards of 15 per cent), investors should avoid the stock that is trading at 23 times its FY19 earnings estimates.