Bharti Infratel: Pace of data rollout key

Mixed impact of spectrum trading norms, aggressive expansion by telcos a positive

With the need for towers expected to decline after spectrum trading and sharing, Bharti Infratel’s growth could come under pressure. After last week’s announcement on the trading and sharing norms, the stock lost seven per cent.

Operators, especially smaller ones, with large chunks of unused spectrum and weak cash flows, could part with their spectrum. Top telecom companies will benefit, as trading and sharing will enable them to deploy spectrum efficiently and reduce capital expenditure. This will be a negative for Bharti Infratel.

Some analysts say the impact of spectrum trading will be a mixed bag for Bharti Infratel. Bank of America Merrill Lynch analysts say the company will benefit from the top three telecom companies reconfiguring their network with more spectrum. The downside is that the need for more telecom towers will decline as more spectrum is added to existing holdings. Further, tower companies with exposure to smaller telecom players will be hit.

Aggressive expansion by operators to tap the data market and boost fourth-generation (4G) service could lead to demand for coverage and, therefore, more towers. Analysts say operators seeking to expand their footprint and build a data-ready network, coupled with Reliance Jio’s aggressive plans, could lead to improvement in tenancies for Bharti Infratel. Analysts at Emkay Global say there are multiple triggers for tenancy growth at the company, driven by data-coverage expansion in existing and new regions, the launch of services by Reliance Jio, 4G launches by incumbents and conversion of current loading into full-fledged 3G and 4G sites.

 

While cost-control efforts have come through and are reflected in higher profit margins in FY15, Bharti Infratel’s margin growth is expected to be driven by incremental tenancy growth. Margins for this financial year are expected to be at the FY15 level of 42.9 per cent. On tenancy, against two a year ago, the ratio increased to 2.14 at the end of the June quarter. Increased regulation on call drops is also expected to improve tenancy growth.

 

Despite the announcement of spectrum sharing norms, most research firms have a buy rating on the stock, given the upsides from the data roll-out by operators. At current prices, the stock is trading at 28 times its FY17 estimate.