See huge headroom to boost tenancy ratio: Bharti Infratel

Bharti Infratel (BIL), one of the largest tower infrastructure companies, opened its 18.89 crore shares initial public offer for subscription.

The price band for the issue is fixed at Rs 210-240 a share. With 81,000 towers, it will be the largest listed tower company globally. It aims to raise around Rs 3,967-4,534 crore through this issue. Speaking to CNBC-TV18 about the issue, Akhil Gupta, vice chairman & managing director, Bharti Infratel says he sees significant headroom for improving the tenancy ratio. Broking firm Nomura is relatively more bullish on tower companies. Relative to those of the operators, cashflow, churn and margins of the towercos are more appealing, says a Nomura report. "The projections which are part of the red herring prospectus (RHP) say that from 1.7, which is the industry average, it will go to 2.46 over five years. We are already at 1.9, so we should be able to maintain that lead," Gupta adds. Meanwhile, Nomura expects BIL’s tenancies to rise moderately. Given data and voice growth along with limited spectrum, its tenancies may rise to 2.2 times by FY15F versus the current 1.9 times, the report adds. It also highlights that the average monthly rental for tower companies in India is USD 800, which is well below USD1.5-2000 in Indonesia and the US. Below is the edited transcript of Akhil Gupta’s interview with CNBC-TV18. Q: Investors are grappling with growth as they value your issue. Your tenancy ratio went up from 1.6 two years back to 1.85. Is there more headroom or do you see growth plateauing out here? A: There is a tremendous amount of headroom and unfortunately as per the rules I can't talk about my projections. But I can refer from the analysis projections which are part of the red herring prospectus (RHP), their projection is from 1.7, which is the industry average, it will go to 2.46 over five years. We are already at 1.9 so I do assume that we should be able to maintain that lead. Q: The other criticism of your company is that your return ratios are more subdued as you make global comparisons. Do you see your Return on Equity (RoE) going into double digits as this improvement plays out? A: Absolutely. The fundamental nature of this business and the basic purpose is to sweat an existing asset. Therefore it is not about how many new towers you make, it is about how many new tenancies you have and how much of extra revenue you make. There comes a point when the incremental RoE and return on capital becomes very high. We are already at that point. Our incremental RoE for FY11 was 15 percent, for FY12 it jumped to 29 percent. So, when one looks at the incremental returns, we are getting there. Q: Do you see any scope for significant ramp up of tenancy from here on, what exactly would be the game plan in order to do that for Bharti Infratel? A: There are two things; one is the data because data is growing at a very rapid speed in India. We saw in case of Bharti Airtel for instance in the last six months that the data traffic has grown by 60 percent. We are seeing that all across and since the data particularly 3G is on the higher band of 2.1 gigahertz (GHz), it will need many more towers to go forward. That’s why we are very confident that the sharing factor will keep going up. Q: At this point you have dominant market position in the space that you function in. You have about 40 percent market share, is there a target that you hope to scale up to over the next couple of years? A: I don’t intend to monopolize the industry, but on the other hand it is everybody’s dream to try and consolidate on the market share. We will try to consolidate on our leadership position. Q: Do you see any risk from the cancellation of the 2G licenses which might impede growth because of the number of towers which get affected? A: Not really because we didn’t have too many of them. We had some which we have already written off. But it is  my believe that it is not about the number of operators, it is about some operators who have to be financially healthy because you need operators who are willing and able to invest in rollout of their networks. We are getting to that position with the recent auctions, limited number of players and the clarity on who is in which circle. Q: There is some perception that you could have to pay a license fee 6 percent on tower companies. Do you see that as a lower probability outcome? A: It is a very low probability outcome. When this recommendation came out we went to Department of Telecommunications (DoT) and they came out with an official press release saying that we are keeping in this for further study. We have been able to convince them that this will be a double taxation. The fact also is that this industry has now being recognized in infrastructure, I do see that as a very low probability. _PAGEBREAK_ Q: It is an extremely capital intensive business as well. Post this issue that you seek to do what exactly will be the means for raising capital and feeding this business? Is there also the risk of significant dilution over the next few years? A: In terms of the use of money which we are raising we will have good capex going forward. We will be using it for making more towers. We have given in the prospectus that we intend to look at about 4,800 new towers over the next 2.5 years. So, most of these proceeds will go there. Q: One of the brokerages said that ‘compared to global peers Bharti Infratel (BIL) has poor economics. If it were priced between Rs 140 to Rs 170 it would have been a far more reasonable valuation’. How would you defend the valuation that you have set out for your IPO because all comparisons are global right now? A: I respect the views of all analysts. We see different kinds, I have seen somebody saying it should have been at least Rs 280. But it is their individual views. What we have tried to do while fixing this valuation and we have done the anchor one at Rs 230 and not at the highest end despite our assessment that there was a very strong interest from whoever we met. The fundamental principle is the comparable ones are the three listed entities in US. We have seen to it that the multiples or the implied multiples are very reasonable and we have been driven by the philosophy that whenever you come for a listing, you should leave something on the table. Q: Just to go through those comparisons do you see your business in India being at the same level of the curve as those US companies and are those financials comparable or do you see significant differences? A: Since the multiple is on the absolute EBITDA therefore whatever be my stage of evolution, it obviously leaves more scope for improvement of tenancy, which also means more scope for improvement of margins and therefore an absolute growth of the EBITDA going forward. That is why the growth in India because the tenancy is still at 1.9 in our case versus a US average of 2.7, there is a big scope for growth. Also, we are on rental basis 59.3 percent EBIDTA margin, there the average is 68.6 percent. So, there is scope for margin growth also going forward which we will try to see as the tenancies grow. Q: Is competition a factor because we have been hearing that BSNL will get more aggressive, they will transfer it to a private tower company, Power Grid might get into that game? Do you see that taking away from growth in any way? A: In this business, the towers are not movable assets. It is not that the tower is here and suddenly a demand comes there, so you move it to that location, you can't do that. Therefore it is not necessary that all the towers will necessarily meet the footprint requirements of people going forward. For instance there are players who are on 900 like BSNL; they would have a different footprint entirely than a 2.1 GHz because 2.1 GHz at higher band will require many more towers and a different footprint. Fortunately, for a company like us because our customers are 900 as well at 1800 therefore I already have a footprint which is compatible for 1800. That means on a very small incremental basis, I can make it 2.1 GHz footprint. So, we are at some advantage there. Q: The other concern that people have at this point is that any exponential growth for a business like yours will have to be both inorganic and international which may down the course of the road lead to an extremely leveraged balance sheet. Would that be part of the game plan as well to start looking at international operations or international opportunities? A: Well infact on the contrary most of the people have concern that we don’t have leverage on our balance sheet right now. We are on a consolidated basis only at 0.5 times EBITDA. We do believe that over a period of time for a business of this nature we would like to take it to two times EBITDA. So, leverage is the least of the concern. As far as the inorganic part is concerned, for any business we should look at organic growth as well as inorganic opportunities and we will continue to look there. There is not plan at this point, but certainly there are possibilities both in India and globally. _PAGEBREAK_ Q: You have been part of a business that at one point enjoyed extremely good margins and then the regulatory landscape changed dramatically. Are you confident that on the tower side of the business you can maintain the kind of margins you have because that’s a strong rate? A: This is somewhat a different business. First difference being that this is a B to B business and therefore these kinds of businesses don’t face the same kind of price pressures. Towers are not inter-exchangeable; it is not that every tower can be offered as a substitute. There are no price pressures like we have seen on the consumer side. We feel very confident that as our tenancy sharing factor grows, there should be some improvement in the margins. Q: Just one clarification, yesterday we heard that the EGoM which met on reserve price fixing has decided to cut it by 30 percent. Would that be attractive enough because you guys let the first one pass without bidding that must have alarmed the government? Would 30 percent lower than the initial reserve price be good enough? A: As far as Airtel is concerned there is no real requirement of any bidding at this point because we don’t really need spectrum, none of our licenses were cancelled. The auctions were more for those whose licenses were cancelled or who would like to enter India if any as a new entry. Definitely they were not expecting us to be participating. As far as cutting down the reserve price is concerned, we sometimes forget it is only a reserve price so what is the big deal even if you cut it more - if there is demand it will show up. In 3G the reserve price was very low but since there was demand the price did go up. I don’t know whether 30 percent less is good, 50 percent less is good, let the industry associations take a stand on that. Q: Rs 230 is where you have done the anchor pricing. There may well be institutional appetite at Rs 230-240; you have given a Rs 10 discount for retail. Do you think you would want to leave more on the table so that retail makes a lot of money from this issue, may be even price it closer to Rs 215-220? A: I have to be fair to my existing investors. It has to take into account the overall demand and when you leave something on the table it still has to be fair. We believe what we have done at the anchor pricing is absolutely fair. The retail investors have 5 percent kind of discount which is the maximum, it is a fair pricing. Let us see, let’s not preempt the process. Let the book build, we’ll have on 13th the whole institutional demand and on 14th the full demand. I do sense my assessment after meeting 100s of investor’s world over and lot of Indian mutual funds and banks is there is very strong interest. I hope that converts into demand like I am assessing. Q: I’ll read between your lines and say that Rs 230 issue and Rs 220 for retail finally? A: I didn’t say that.