Bharti Infratel: Well placed to ride 3G wave

Likely acquisitions, RJio's roll-out to increase customers and rentals

The stock of Bharti Infratel has surged 15 per cent over the week on the back of expectations that the entry of Reliance Jio coupled with data explosion will ensure higher tenancies. A series of price target upgrades by brokerages, which peg the per share value in the Rs 275-Rs 300 range, helped the stock touch its yearly high of Rs 273.90 intra-day on Tuesday.

The key going ahead will be additional tower rollouts by telecom operators to accommodate the surge of data traffic. Currently, 3G equipment is loaded on to the existing 2G sites and analysts estimate this to be about 25 per cent for the top three telecom players. Once the 3G capacity utilisation increases (high for metros at 60 per cent plus) and demand increases even in non-metros areas, towers dedicated to meet the standalone 3G demand will need to be created.

This will mean higher payout for tower companies, as loading on 2G sites yield an incremental 10-15 per cent of 2G rentals. Axis Capital analysts indicate full tenancies from 3G/4G rollout starting FY16 on the back of higher data usage deployed on inefficient 2.1Ghz and 2.3Ghz bands, availability of spectrum post recent auctions and 3G inter-circle roaming.

After remaining static or muted in FY13 and the first half of FY14, tenancy of Bharti Infratel has increased in the last two quarters, reaching 1.9 times as against 1.81 over a year ago. The pick-up in tenancies puts to rest fears that the RJio-Rcom deal and sharing of infrastructure is due to an overcapacity of towers. Standard Chartered analysts say the pace of 3G site additions have picked up (post February spectrum auctions) and monthly demand was four-five times more year-on-year in the first half of CY14. This is largely on the back of a doubling of data usage in FY14 for the bigger operators. They estimate (after recent upgrades) that tenancies will be at 2.08 for FY15 (earlier 2.06) and 2.20 (2.16) for FY16.

A key investor concern for the stock has been the inefficient use of cash by the company, which has depressed its return on equity (RoE). The company has indicated that it could look at acquiring Bharti Airtel's towers in Bangladesh and Sri Lanka and could also consider buying out Vodafone and Idea's standalone (non-Indus) towers. Any potential deal according to Bank of America Merrill Lynch analysts could be RoE accretive if the deal valuations capture the difference in existing tenancy. Incentives in the Budget will also be a big positive.

While a strong balance sheet and improving metrics are key reasons to invest in the scrip, the upper end of the latest target prices means that there is about 15 per cent upside from these levels.