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Bharti Infratel lost more than a third of its value from its initial public offering (IPO) price on fears that rentals could be hit due to consolidation, cut in capex and a muted growth outlook. The Street is also worried about the company’s acquisition strategy given cash on the balance sheet and whether the same will be value-accretive.
A large part of the investor concerns relate to the recently concluded deal between Reliance Communications and Reliance Jio for sharing of the former’s tower infrastructure. Given the deal terms, analysts estimate the Reliance Jio deal was done at a monthly per-tower rental of around Rs 15,000 while Bharti Infratel at the end of March quarter fetched rentals to the tune of Rs 35,000.
Given the maturity in the 2G voice business and competitive nature of the business, companies might want to keep the rental cost of tower infrastructure down.
Further, investments in 3G have not led to higher rentals for Bharti Infratel. Shobit Khare of Motilal Oswal in a recent report says sharing revenue per operator for Bharti Infratel has remained largely flat at Rs 35,000 per month despite 3G sites increasing from nine per cent to 19 per cent of the 2G base for Bharti/Idea over the past eight quarters.
Given the need to turn profitable and significant rollouts already in place, most companies are winding down their capex. Slowdown in subscriber numbers and maturity of the 2G voice segment have put a question mark on some of the growth assumptions, says an analyst. What works in favour of Bharti Infratel is that the largest player in the sector is a tenant in most of its towers and long-term contracts (typically 10 years plus) will ensure stable cash flows.
Bharti Infratel is banking on data and strong traffic growth in recent quarters to lead to higher demand for coverage and capacity, requiring more towers. Further, operators sharing and not rolling out new towers and tenancies lost due to cancellations coming back on its towers, acts in its favour. The company adds that with tenancy ratios improving, rental revenues per tower could look up, too.
On the issue of cash (about Rs 3,800 crore) utilisation, there are concerns that this might be used to fund the acquisition of its parent Bharti Airtel’s Africa tower business. While there could be a potential acquisition, some believe a value dilutive one, most analysts say this issue was already discounted as it has been hanging fire since the company hit the markets with its IPO in December last year.
Given that a large part of the valuation built in was due to the growth potential, which might not pan out, some degree of correction was justified. However, analysts say the correction is overdone. This is because the RCom-Jio deal could be a one-off. Kotak Institutional Equities analysts say the RCom-Jio deal is a special case (a large buyer squeezing a seller desperate for cash) and do not see the same impacting the market rentals. Further, the research firm which has an ‘add’ rating on the stock, says the current estimated FY14 valuations (5.7x FY2014 EV/Ebitda, 6.1 per cent FY2014 free cash flow yield) amply price in the risks. A majority of analysts (60 per cent), according to Bloomberg consensus estimates, have a ‘buy’ rating on the stock and peg the target price at about Rs 200.
