Subscribe to Bharti Infratel IPO at lower band, says Emkay
Emkay Global Financial Services has come out with its report on Bharti Infratel IPO. According to the research firm, the company has robust business model. Near term growth in the industry is not encouraging due to slower expansion by the telecom service providers and license cancellations.
December 10, 2012 / 14:19 IST
Emkay Global Financial Services has come out with its report on Bharti Infratel IPO. According to the research firm, the company has robust business model. Near term growth in the industry is not encouraging due to slower expansion by the telecom service providers and license cancellations. However, long term story remains intact and operating leverage would drive RoEs for the company, says Emkay.
- Bharti Infratel has tower market share of 40% with 80,656 towers. Tenancy growth of 8% CAGR over FY09-12 resulted in revenue /EBITDA /PAT CAGR of 23%/33%/57%
- Near term outlook not encouraging due to over supply in the tower industry & slowing revenue growth for telecom service providers. Growth in data to drive tenancies in the long-run
- Valuations - EV/EBITDA at 11.9x/10.4x on H1FY13 annualized basis. Implied EV/tower is Rs5.6mn/Rs5.0mn and EV/tenant at Rs2.9/2.6mn on higher/lower price band
- Recommend subscribe at lower price band of Rs210, which is justified, as historically tower deals have been valued in the range of Rs4.6mn to Rs5mn EV/Tower
Also Read: Avoid Bharti Infra, CARE, PC Jeweller IPOs: Rajen ShahIndustry in an over supply situation
Revenue growth for tower companies is slowing on muted tenancy growth. 2G license cancellation has further impacted growth for tower companies. Muted response in 2G auctions and lesser number of telecom operators is threatening incremental growth in tenancies. Ground based tower and roof top tower have capacities of 4-5x and 2-3x, respectively. However, industry data clearly indicates that the industry is running at a significantly low utilization level of ~52%.BIL, a dominant player in the industry with committed anchor tenants
Bharti Infratel with Indus, is by far the largest tower company with 80,656 towers -34,220 owned and 46,436 as proportionate 42% share in Indus. Consolidated tenancy was at 1.9x as on Q2FY13. On consolidated basis, it enjoys 40% tower market share. Bharti Vodafone and Idea control 66% of telecom services revenue and are the anchor tenants on the Infratel and Indus towers. Bharti Airtel contributes 62% to Bharti Infratel’s standalone revenues, which provide better visibility and stability to cash flows.Long term annuity contracts with predictable cash flows
The tower business is highly capital intensive, entailing high capex upfront and low maintenance subsequently. Three dominant players in telecom industry are the major revenue contributors for the company. This provides assurance for stable revenue and cash flows. Tower companies do not face huge churn like service providers, which leads to customer stickiness and better visibility on revenues and cash flows. Moreover, high shifting cost and termination charges further ensures lower churn rate.Premium valuations – Subscribe at lower price band of Rs210
Valuations at H1FY13 annualized EV/EBITDA stands at 11.9x/10.4x on Higher/Lower price band. Implied EV/tower is Rs5.6mn/Rs5.0mn and EV/tenant at Rs2.9mn/Rs 2.6mn. At the lower price band BIL is trading at Rs5mn EV/tower, which we believe is justified as tower deals in the past have been valued in the range of Rs4.6mn to Rs5mn EV/Tower. Valuations similar to historic deals despite deterioration in overall business scenario is justified as BIL has committed anchor tenants that provides visibility on cash flows and its un-leveraged balance sheet also gives some comfort.Valuations
Bharti Infratel has robust business model. However, near term growth in the industry is not encouraging due to slower expansion by the telecom service providers and license cancellations. However, we believe long term story remains intact and operating leverage would drive RoEs for the company.Telecom industry has seen cancellation of 122 licenses in Feb’12, resulting in lower number service providers. Existing operators are also trimming operations in loss making circles. Next growth driver for tenancy is growth in data, which we believe would grow gradually. Valuations at H1FY13 annualized EV/EBITDA stands at 11.9x/10.4x on Higher/Lower price band. Implied EV/tower is Rs5.6mn/Rs5.0mn and EV/tenant at Rs2.9mn/Rs 2.6mn on lower/higher price band.At the lower price band BIL is trading at Rs5mn EV/tower, which we believe is justified as tower deals in the past have been valued in the range of Rs4.6mn to Rs5mn EV/Tower. Valuations similar to historic deals despite deterioration in overall business scenario is justified as BIL has committed anchor tenants that provides visibility on cash flows and its un-leveraged balance sheet also gives some comfort.Comparison with global peers would not be justified as most of the globally listed tower companies have evolved business model with 3x tenancies and high operating leverage with 65-75% EBITDA margin. Further, current business environment in the domestic telecom market is not lucrative due to intense competition and high spectrum cost. Cancellation of 2G licenses has also reduced the demand for towers, resulting in oversupply in the industry.Disclaimer: 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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