Bharti Infratel: Awaiting stronger 3G signals

Stock up 5% in trade on higher dividend expectation, rentals

Expectation of a higher dividend, attractive valuations and growth prospects on the back of an uptick in 3G usage saw the Bharti Infratel stock jump 5% in trade today.  With the Bharti Infratel management clarifying that it will not pursue M&A activities in Africa and aggressive investments in 3G by incumbent operators saw the stock gain 13% over the past month. The recent uptick comes after underperformance over a one year period due to static tenancy ratios which could fall with consolidation and talks of 8% licence fee on tower revenues .

Given the company's stand on Africa acquisition, Goldman Sachs analysts believe that there is a low possibility of any big ticket acquisition, leaving room for Bharti Infratel to return money to shareholders. The research firm estimates that the company is likely to pay a special dividend of Rs 3.5 per share in the March quarter of FY14 taking the total dividend for FY14 to Rs 9 a share. Further, the analysts have increased earnings per share upwards on the back of an expected growth in data traffic. “At current FY14E multiples of 1.9 times its price to book value and return on equity of 7.7%, the risk-reward is balanced with upside potential largely driven by faster 3G deployment and better-than-expected dividend payout,” say Goldman Sachs analysts led by Sachin Salgaonkar.

While regulatory issues and M&A are likely to influence the stock, the key operational parameter would be the company's ability to improve its tenancies which have been stuck in the 1.91 times to 1.93 times range over the last five quarters. Every additional tenant substantially improves profitability as rentals improve with costs increasing only marginally. The major cost for telecom tower companies is power which is a pass through. One of the triggers for the same is the rapid expansion of 3G coverage by operators. Bharti and Idea for example have increased their cell site count from 18,000 at the start of FY12 to 45,000 currently, up 150%. Higher investments in 3G and increased data usage is expected to lead to higher rentals and tenancies improving the company's revenues and operating profits.