Bharti Infratel: Valuations factor in gains

Given its tower assets, it is the best-placed to take advantage of higher capex by operators on data rollout

Bharti Infratel's stock has gained recently on the back of plans by operators, including Reliance Jio, to tap the data market, which will lead to rise in telecom capex.

Analysts expect tenancies to improve, as operators in response to the launch of Reliance Jio service accelerate their data network rollouts. Reliance Jio, according to Bank of America Merrill Lynch analysts, will need about 70,000 towers for the launch, which will have to be enhanced to 100,000 at the end of the first year and 125,000 at the end of the second year of operations. Bharti Infratel, according to analysts, is best-positioned to tap the growing need for augmented and new telecom infrastructure, as it is the dominant operator with 40 per cent of tower assets in India and has the incumbent (top 3) operators as its clients. While currently RJio has about 70 per cent of the tower base from own/Rcom's infrastructure, whether it will go for the lease, or own tower model, and to what extent will decide the incremental revenues for Bharti infratel.

While upside from enhanced tower infrastructure from other players would benefit the company, analysts believe lower tenancies from RJio due to conflict of interest (Bharti Airtel is Infratel's promoter) could limit tenancy growth.

According to analysts at Jefferies, long-term contracts with operators will translate to steady revenue visibility, while margins will improve due to increase in tenancy ratios as well as higher proportion of 3G infrastructure. The average contract life of the long term contracts are 6.2 years with rental escalation clause of 2.5 per cent per annum. Tenancy ratios of the company have increased from 1.87 at the start of CY12 to 2.11 at the end of March 2015. Given that Bharti and Idea are increasing their 3G sites over the last few quarters at a pace of over 20 per cent year-on-year and the need for data ready networks across operators, analysts expect tenancies for Infratel to increase from the current levels to 2.58 in FY18. Higher tenancies disproportionately impact margins with tenancy of one fetching margins of 16.8 while at a ratio of three margins shoot up to 47 per cent. For example, the rise in tenancies between CY12 and March FY15 boosted margins by 800 basis points to 46 per cent. Given the expected increase in tenancies, margins will increase for Bharti Infratel.

While analysts are bullish on the prospects of the company, the run-up in prices (23 per cent since the start of May) means most of the uptick is already reflecting in the stock. The stock, according to Jefferies, is trading at 4.8 times its one year forward book value and 4 times its asset replacement value. Of the 33 analysts tracking the stock, about 55 per cent have a buy with the rest split equally on hold and sell ratings. Given the 12-month target price of Rs 410 and the current stock price at Rs 457, there is little to gain from exposure to the stock now. The stock corrected nearly four per cent in trading, as brokerages cut ratings to hold and reduce due to the valuations. Investors should await a meaningful correction before considering.