Hold Bharti Infratel; target of Rs 330: ICICI Direct

ICICI Direct's research report on Bharti Infratel

Bharti Infratel (Infratel), on 25th April, 2018 announced its merger with Indus Towers (Indus) creating a Pan-India leading tower companies with 163162 towers and 367073 tenancies. The share swap is 1,565 shares of Bharti Infratel for every 1 Indus Towers share. The merger implies Indus enterprise value of ~Rs 71500 crore (equity valuation of Rs 67600), which is 9.3x TTM EV/EBITDA. We highlight that implied valuation of Indus is slightly lower than our target valuation of Rs 69,600 crore for Indus.  The merger envisages complete exit of Idea Cellular’s 11.15% stake in Indus at Rs 6500 crore, while Providence (currently holding 4.85% of stake in Indus) is likely to offload 3.35% of its stake for ~Rs 1900 crore, while retain1.1% holding in combined entity. Post-merger entity (in case Idea & Providence exit full and partially, respectively) is expected to have Vodafone holding 29.4% stake, Airtel – 37.2%, Providence 1.1% and remaining held by public shareholder.

Outlook

We note that while the merger would result in opex synergy of ~Rs 50-60 crore annually coupled with savings on double taxation impact of dividend distribution to the tune of Rs 200 crore, the basic premise of less than optimum capital structure persists. We believe that despite merger benefits, the focus currently would be the impact of consolidation (exits from Voda-Idea) and future growth potential. We maintain our HOLD rating with a target price of Rs 330, valuing it at 9.5x FY20E EV/EBITDA. We highlight that similar multiple of 9.5x on combined entity FY20E EBITDA (post opex synergy) yields a fair value of Rs 344/share (exhibit 3), which we shall consider only post consummation of the deal.