CRISIL assigns grade 4/5 to Bharti Infratel IPO
CRISIL has assigned a CRISIL IPO grade of '4/5' to the proposed IPO of Bharti Infratel Ltd (Bharti Infratel). According to the research firm, this grade indicates that the fundamentals of the IPO are above average relative to the other listed equity securities in India.
December 03, 2012 / 10:10 IST
CRISIL has assigned a CRISIL IPO grade of '4/5' to the proposed IPO of Bharti Infratel Ltd (Bharti Infratel). According to the research firm, this grade indicates that the fundamentals of the IPO are above average relative to the other listed equity securities in India. However, this grade is not an opinion on whether the issue price is appropriate in relation to the issue fundamentals. The grade is not a recommendation to buy, sell or hold the graded instrument, its future market price or suitability for a particular investor.
Bharti Infratel (including its 42% equity interest in Indus Towers Ltd) is a leading passive infrastructure service provider for telecom services in India. Its network of towers covers all the 22 telecom circles in the country. The company stands to gain from the increase in penetration of voice and data services, which is expected to drive the telecom companies’ (telcos’) demand for base transceiver stations (BTS) and additional towers. The tenancy ratio is expected to increase as telcos roll out 3G/4G on 2100 Mhz and 2300 Mhz bands. Network expansion by India’s leading telcos - Bharti Airtel, Vodafone and Idea Cellular Ltd - works in Bharti Infratel’s favour; due to the right of first refusal, Bharti Infratel and Indus Towers will benefit from any expansion of the network by the three telcos. Large-scale operations, first-mover advantage and pool sharing arrangement among the top three telcos have resulted in better-than-industry tenancy ratio for Bharti Infratel; it is expected to improve further leading to high operating leverage and improvement in profitability. The assigned grade also reflects the strong and stable operating cash flows resulting from long-term contracts. The company’s robust back-end processes, which ensure higher reliability of network uptime for its clients, support the grade.Also Read
Bharti Infratel IPO price band set at Rs 210-240/share
Veto Switchgears and Cables IPO opensHowever, low return on capital employed (RoCE) is a concern. Since tower infrastructure is a business with high operating leverage, the RoCE is expected to improve in line with increase in tenancy ratio albeit from a lower base. Low asset turnover and minimal use of leverage in a capital intensive industry have resulted in low return on equity (RoE) for Bharti Infratel over the past three years, which can increase if the leverage is corrected. Also, the overcapacity in the industry is expected to limit the demand for rollout of new towers. Further, regulatory changes and the resultant uncertainty pose a risk to telecom players as their network rollout plans could be hampered.Bharti Infratel’s consolidated operating income has increased at a four-year CAGR of 91% to Rs 92.6 bn in FY12 driven by addition of new towers and an increase in the tenancy ratio. EBITDA margins have remained steady at 35-37% over FY10-FY12. Strong growth in EBITDA and an increase in non-operating income (primarily interest income on loans given to group companies) resulted in adjusted net profit growing at 108% CAGR over FY08-12 to Rs 7.5 bn. RoCE and RoE have increased over the past five years largely due to increase in asset turnover but they continue to remain low (RoE was 5.3% in FY12). The company’s consolidated net worth is Rs 139 bn as of FY12 and it has a low debt-equity ratio of 0.2x.Disclaimer: A CRISIL IPO Grading is a one-time assessment and reflects CRISIL's current opinion on the fundamentals of the graded equity issue in relation to other listed equity securities in India. A CRISIL IPO Grading is neither an audit of the issuer by CRISIL nor is it a credit rating. Every CRISIL IPO Grading is based on the information provided by the issuer or obtained by CRISIL from sources it considers reliable. CRISIL does not guarantee the completeness or accuracy of the information on which the grading is based. A CRISIL IPO Grading is not a recommendation to buy / sell or hold the graded instrument; it does not comment on the issue price, future market price or suitability for a particular investor. CRISIL is not responsible for any errors and especially states that it has no financial liability whatsoever to the subscribers / users / transmitters / distributors of CRISIL IPO Gradings.The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.To read the full report click on the attachment 
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