Bharti Infratel ready to ride 3G waves

Performance largely in line with expectations, major upsides hinge on faster rollout of towers to cater to 3G and data growth

The country's largest listed telecom tower operator, Bharti Infratel, posted September quarter results mostly in line with analyst expectations. While its revenues and earnings before interest, taxes, depreciation and amortisation (Ebitda) were in line with estimates and, in fact, slightly better, net profit was a disappointment. The net profit and reports the government could levy a licence fee of eight per cent of gross revenue (of telecom tower operators) saw the stock fall 2.6 per cent to Rs 153.80 on the NSE after results. The management, however, indicated the move was unlikely as it would mean double taxation for telecom infrastructure companies who were service providers to the telecom companies. The key worry for the Street is the way the company would use its surplus cash, face competitive pressures, given the recent deal of Reliance Jio and Reliance Communications on the sharing of infrastructure and lower tenancies as smaller operators had wound up operations.

The management indicated the company was looking at increasing its dividend if there were no attractive opportunities for acquisitions in the telecom space. The company would continue to look at both organic and inorganic ways to improve its presence. Akhil Gupta, managing director, however, ruled out using the surplus cash to make acquisitions in Africa and indicated the focus would be on India and Indian subcontinent.

Given the 3G and data potential in India, prospects of companies like Infratel remain good. However, the latter's growth is dependent on the pace of expansion of telcos.

Four of six analysts polled by Bloomberg (in October) have a buy rating on the stock, while one is neutral and another underperform; their average target price is Rs 173. Viju K George of JP Morgan, with an overweight recommendation after the results, has a target price of Rs 190.

Eyeing 3G take-off
The management indicated the sector was stabilising both on the regulatory and operational fronts. While lower reserve prices for spectrum would lead to lower costs, auctions at the start of 2014 would end the uncertainty regarding the availability of spectrum. “The positives on the industry front with realised rates moving up brings financial stability with lower sales and distribution costs improving profitability. Higher 3G growth would ensure a speedy rollout. Given this situation, operators will be more confident in making future rollouts on account of voice and data”, said Gupta. While the voice volumes are under pressure, with saturation, specially at the urban cities, the company is hoping higher 3G and data usage would spur the need for more towers. Analysts say with 3G subscriber base growing at over 50 per cent year-on-year, the company would benefit on account of additional revenues from loading of 3G equipment on existing sites and fresh rollouts. The company is hoping telcos will rollout additional towers to tap the additional 3G demand as well as utilise the spectrum allocated at the auctions.

Revenue growth, profits a tad lower
While revenues in the quarter were up five per cent year-on-year, they inched up on a sequential basis 2.3 per cent to Rs 2,684 crore on the back of an increase in tenancy ratio and number of towers. Revenue per operator metric was down 0.2 per cent sequentially and two per cent year-on-year. Energy and other reimbursements were up 10 per cent year-on-year and 4.4 per cent on a sequential basis. Total revenues are a combination of rental income and energy reimbursements roughly in the 60:40 ratio. Higher revenue growth and lower other expenses helped the company improve its Ebitda and margins. Rental expenses, down on a year-on-year basis, were up sequentially, pulling down the Ebitda growth compared to the June quarter. Though power and fuel costs were higher on a sequential and a year-ago comparable basis, these are pass-throughs to the telecom operator. While there was a beat on the estimates on the revenue and Ebitda fronts, on the net profit front, lower other income, higher interest costs and taxes saw it come below expectations, said an analyst at a domestic brokerage.