GTL Infrastructure: Towering above the rest

Despite becoming the world’s largest telecom tower firm, GTL Infra would have to spruce up operations, profitability matrices.

After the acquisition of 50,000 towers from Reliance Communication, GTL Infrastructure became the world’s largest telecom tower company overnight. However, there will be other pangs that the company faces as it grows into the market leader.

The tenancy ratio of the merged entity is around 1.52 times (with 125,000 tenants). Analysts consider this low, as the ideal tenancy ratio, one that is earnings accretive, is between two and three times. At present, GTL Infra has one of the strongest earnings before, interest, tax and depreciation and amortisation (Ebitda) margins of 68 per cent. This is better than peers like American Towers and Crown Castle. However, its rental per tenant per month, at $750, is half that of these peers. This means the ability of the management to expand its margins depends entirely on ability to attract higher rentals and a better tenancy ratio.

The current valuation ratios look attractive enough to seek strategic investment. The enterprise value per tenant, at $76,000, is also a third of that of its peers. The debt to ebitda at 3.10 times might look high in the Indian context, but is less than that of peers. So, the lower tenancy ratio and lower rentals balance out with the valuations, reckon analysts.

The management has expressed its confidence in raising funds for the merger. The merged entity is expected to have a debt-to-equity ratio of 1:1. It will also be raising Rs 4,000-4,500 crore from a 10 to 15 per cent strategic equity sale. The company intends to expand further and have around 105,000 towers. It also plans to improve the tenancy ratio to 2.5 times and the rentals to $796 by 2013. This could set the earnings on the right track, reckon analysts.

However, the management seems to focus only on the tower business, and thereby, runs a risk. Diversification and derisking of operations will add verve to the stock.