Buy Bharti Infratel; target of Rs 420: ICICI Direct

ICICI Direct's research report on Bharti Infratel

The spectrum auction led deferrals led to tenancy remaining soft, albeit the pressure of loss in tenancies owing to exit of marginal players, as witnessed in prior quarters, was not visible in Q2FY17. The co-locations addition was at 2394 (vs. 1367 in Q1FY17) with average tenancy ratio at 2.21x (0.6% QoQ). We note that Bharti Infratel is a leading telecom tower infrastructure player with 89352 towers (including its proportionate stake in Indus) across 22 circles. While near term tenancy additions have been soft, the medium to long term demand story is intact. The 4G network rollouts is likely to boost the tenancy additions in H2FY17 and FY18E. The revision in capex guidance by several telcos and strong demand in data is expected to boost higher tenancies for Infratel. Going ahead, with 2.6% & 7% increase in towers & tenancy over FY16-18E to 93523 towers and 223331 co-locations, respectively, we expect rental revenues to grow at 8% CAGR in FY16-18E to Rs 9116.0 crore.

We note that rental freeze and operators preferring loading as the first mode of data network expansion is likely to have an impact on rental revenue growth. However, BIL remains a key play on rising demand of telecom towers emanating from increased 4G rollout post the spectrum auction. We highlight that Infratel is better placed from an operating matrix, balance sheet and return ratios perspective than telecom service operators who are struggling with huge leverage and increased competition. We are also enthused by the company’s intent to foray into additional services such as Smart City projects, in-building installations and B2B Wi-Fi hotspots. We maintain our BUY recommendation with a target price of Rs 420.