Bharti Infratel shares rally 6% after Q1 show; Morgan Stanley, Ambit positive on the stock

The outperformance was on account of core rental revenues that came in at Rs 2,182 crore, up 3.5 percent YoY against its expectation of Rs 2,065 crore.

The company reported a net increase of 523 co-locations on consolidated basis against brokerage's expectations of net loss of 1,750 tenancies. The addition of tenancy happened after six quarters which was anyway positive development.

Consolidated profit in June quarter grew 46 percent sequentially (up 39 percent year-on-year) and revenue increased 3.1 percent QoQ (up 1 percent YoY). At the operating level, earnings before interest, tax, depreciation and amortisation (EBITDA) rose 27 percent QoQ (up 28 percent YoY) and margin expanded by 1,000bps QoQ.

The stock was quoting at Rs 273.70, up Rs 9.60, or 3.63 percent on the BSE at 1006 hours IST.

Here is what brokerages say about company's June quarter earnings and stock:

Brokerage: Morgan Stanley | Rating: Overweight | Target: Rs 323 | Return: 22 percent

Tenancy movement was positive this quarter with fewer tenancy deletions. However, EBITDA continued to be soft even though rental revenues were marginally up.

Infratel's adjusted revenue was broadly in line with the estimate while adjusted EBITDA was weaker than the estimate. The miss on EBITDA was partially driven by lower energy margins this quarter at 5.4 percent compared to 11 percent last quarter.

Sequentially, lower energy margins and higher operating expenses led to overall EBITDA margin of 39.5 percent against 42.6 percent QoQ.

Additionally, there was a reversal of deferred tax liability which led to a lower tax rate during the quarter.

Brokerage: Ambit | Rating: Buy | Target: Rs 365 | Return: 38 percent

Infratel's revenue was 2/4 percent above/consensus expectations as total co-locations increased after six consecutive quarters of decline. Rental revenue increased 2.8 percent due to improved tenancy. Gross tenancy addition remains benign. EBITDA was above expectation as the impact of Ind-AS 116 eliminated rental expenses.

Ambit believes the beat will be negligible if one adjusts for the Ind-AS 116 impact. Notably, maintenance of gross tenancy addition (proving that the lull in 1HFY19 was a blip) is a key positive.

The brokerage remained buyers with an updated target price of Rs 365 (against Rs 352 earlier; on account of DCF roll forward) as it still believes in Bharti Infratel's ownership change (albeit in tranches).

Brokerage: CLSA | Rating: Sell | Target: Rs 285 | Return: 8 percent

Bharti Infratel's tenancy growth is set to be elusive in medium term with Vodafone Idea continuing to optimise its network and Reliance Jio unlikely to award tenancies post its tower infrastructure investment trust (InvIT).

The upcoming Indus merger will not result in an improvement in its capital structure and in the merged company Bharti Airtel and Vodafone combined will still own 66 percent, which will also be a share overhang.

CLSA lowered its valuation and cut its target to Rs 250, based on 7.5x EV/Ebitda (from 9x) and maintained sell rating.

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