ICICI Direct recommended hold rating on Bharti Infratel with a target price of Rs 275 in its research report dated January 25, 2019.
ICICI Direct's research report on Bharti Infratel
Revenues (on a proportionate consolidation basis) came in at Rs 3640.2 crore, better than our estimate of Rs 3567.4 crore. Core rental revenues at Rs 2096.1 crore YoY (-1.1% QoQ) were better than our expectation of Rs 1999.9 crore (down 5.7% QoQ). We note that rental revenues include one-time exit charge of ~Rs 55.3 crore. Energy revenues came in at Rs 1544 crore vs. our estimate of Rs 1567 crore. EBITDA came in at Rs 1512 crore (I-direct estimate of Rs 1354.5 crore), up 1.8% QoQ, with EBITDA margins at 41.6 %( down 104 bps QoQ), against our estimates of 250 bps QoQ decline to 38.0%. The margin beat was aided by superior topline (aiding operating leverage) as well as energy margins of 8.1% vs. our expectation of 6.5%. PAT came in at Rs 648.4 crore vs. our expectation of Rs 534.4 crore, driven by operating performance.
We note that apart from future growth potential amid price competition among operators and Jio’s continued preference to build some of the towers on their own, the key risk is Vodafone Idea’s survival (it is an anchor tenant). Moreover, there will also be share price overhang as none of Bharti Airtel, Vodafone Group or Vodafone-Idea (if it elects to receive shares), will be subject to a lock-in on their shareholdings post-merger. While the company’s intent to diversify into optic fibre business along with foray into additional services such as Smart City projects is a positive move, we believe benefits from the same would accrue over a longer time horizon of three to five years. Therefore, we maintain our HOLD recommendation with a revised target price of Rs 275/share. Our target price implies 8x FY20E EV/EBITDA (vs. 8.5x earlier) on the merged entity proforma financials (refer page 3), the lower target multiple is to account for lack of growth visibility and unfavourable exit penalty resolution.
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