Bharti Infratel: Q4, cash use positives

Pace of data rollout is key monitorable

Driven by higher rentals, Bharti Infratel reported better-than-expected results for the March quarter. Revenues both for the consolidated (including Indus Towers) as well as standal-one entity were up six-seven per cent largely due to over nine per cent improvement in rentals. With existing 2G anchor tenants loading 3G and 4G equipment on existing towers, there is an increase in loading sites leading to a two per cent increase in rentals year-on-year (y-o-y). Tenancy growth, however, moderated, especially at the consolidated level, at seven per cent, down 200 basis points y-o-y. Tenancy ratio grew eight basis points to 2.19 times. Tenancy additions declined for the second consecutive quarter. This could be a worrying factor for the company as slower-than-expected tenancy growth could impact margin growth over the medium term, according to analysts at Goldman Sachs.

While revenues at Rs 3,162 crore were broadly in line with expectations, the operating and net profit came above estimates. While operating profit at Rs 1,425 crore (up 6.6 per cent) was ahead of estimates due to leverage benefits, margins — 45.1 per cent — were higher on energy savings. Core margins (excluding energy reimbursement) came in at 66 per cent, up 60 basis points y-o-y. Strong operating level performance, with higher ‘other income’, led to a 19 per cent increase in net profit at Rs 661 crore.

Given the Rs 7,200 crore of net cash and high cash generation, the company announced a share buyback (Rs 2,000 crore) and a dividend of Rs 3 per share. The Street had been expecting such a measure as the company generates much more cash than it requires and in the absence of any acquisition, the cash was generating low returns.

The company, which has a tenancy ratio target of 2.5 over the next five years, would be banking on the rapid rollout of 3G and 4G installation by operators to achieve the same. Tenancy ratio for Bharti Infratel, which two years ago (March 2014 quarter), was 1.90, has increased to 2.11 on a stand-alone basis, and 2.19 on a consolidated basis, which includes Indus Towers. Tenancy ratio is the single-most important factor impacting revenues and profitability for telecom tower companies.

After the good results and the announcement of the buyback and dividend following market hours on Tuesday, the stock was up over 3.2 per cent on Wednesday.