Bharti Infratel: Investments by telcos to drive gains in FY15

Growth in free cash flows to continue as higher tenancies will drive profits and not new towers

The tide has turned for the telecom sector in India, as growth and profitability has accelerated in recent times. Tower companies are reaping benefits of a turnaround in the sector as operators have started investing in networks to boost data penetration.

Bharti Infratel, a leading tower and infrastructure player, reported robust numbers for the fourth quarter. The company’s consolidated revenues for the March quarter grew four per cent to Rs 2,790 crore compared to the corresponding quarter last year, while consolidated Ebitda grew 16 per cent year-on-year to Rs 1,160 crore. For the full year, revenues grew five per cent to Rs 10,800 crore and Ebitda by 16 per cent to Rs 4,400 crore.

But the real number to track is the tower sharing factor and operating free cash flow (operating profit minus capital expenditure). The company’s tower sharing factor has moved up to two at the end of March from 1.91 a year ago. On a consolidated basis, the average sharing factor stood at 1.96. What this implies is that for incremental capex, the company's profitability is increasing as more companies use the same infrastructure and location.

Analysts say the growth in profitability will not be driven by a higher number of towers added but higher tenancies. In this context, Bharti Infratel stands to gain from the deal it has signed with Reliance Jio.

A detailed report on Bharti Infratel by Nomura, says: “R-Jio’s recent press releases indicate a lot of focus on the data segment including digital services; this coupled with its higher frequency bandwidth (1,800 Mhz and 2,300 MHz) should see a high number of base stations being rolled out. For the bulk of these, we expect R-Jio to lease towers to enter the market sooner.”

With tower sharing factor improving and capital expenditure on new towers remaining stable, the company’s operating income and free cash flows are expected to steadily increase. Consolidated free cash flows increased during the March quarter increased by 12 per cent to Rs 539 crore. For the full financial year, Bharti Infratel's free cash flows jumped 48 per cent year-on-year to Rs 2,600 crore.

Bharti Infratel has spent Rs 1,500  crore on capital expenditure and in FY15 it will be Rs 2,000 crore. Analysts estimates a 20-23 per cent free cash flow compounded annual growth rate over FY13-16. The company’s free cash flow yield is also highest amongst global tower companies.