Bharti Airtel: Thanks for competition

The current valuation norm for tower businesses bodes well and presents an opportunity to reduce debt.

While analysts rework and rerate both Reliance Communication (RCom) and GTL Infrastructure after the path-breaking deal, the management at Bharti Airtel must be elated. The valuations of the deal are likely to be the benchmark for Bharti Airtel to reduce its increased debt burden and regain some of the lost ground in the market.

The RCom deal happened at a valuation of around Rs 61 lakh per tower. Based on the earlier-concluded deals, this was seen to be at a premium of 25-30 per cent to the benchmark of around Rs 45-50 lakh per tower. The premium, say analysts, is due to the fact that 3G and broadband wireless will see tenancy ratios rise, thereby, bring in more revenues. Considering this, the tower business of Bharti Airtel, through its subsidiary Bharti Infratel that has around 30,568 towers and owns 42 per cent in Indus Towers, which has around 102,938 towers, has suddenly become extremely attractive.

With Bharti Infratel’s tenancy ratio, which has been rising for the past four quarters, at around 1.68 times, and that of Indus Towers at 1.72 times, the valuation of Rs 60 lakh per tower is easily attainable. Moreover, it is better than 1.52 times of the combined GTL Infra tenancy ratio. Hence, Bharti Infratel’s towers could be valued at Rs 18,300 crore and the 42 per cent stake in the 102,938 towers of Indus might be valued at Rs 26,000 crore. Overall, Bharti Infratel will be valued at around Rs 44,000 crore.

If Bharti Airtel decides to retain around 51 per cent stake and divest the rest, it could net around Rs 20,000 crore, and then it has cash of around Rs 8,000 crore from operations. This could reduce the debt burden by around Rs 28,000 crore. Also, the net debt to earnings before interest, tax, depreciation and amortisation (Ebitda) can be reduced from the current 2.6 times (considering Zain acquisition and 3G payouts) to less than 1.4 times, thereby easing valuation pressures.