Hold Bharti Infratel; target of Rs 400: Edelweiss

Edelweiss's research report on Bharti Infratel

Bharti Infratel (Infratel) reported Q2FY17 revenue of INR 32.9bn (up 2.5% QoQ) with improvement in tenancy addition, in line with Street’s estimate. EBITDA margin rose 70bps QoQ of 44.2% versus Street’s 44.0% estimate, as energy margin jumped to 6.0% from 3.4% in Q1FY17. Although energy margin is envisaged to lead to volatile margins on quarterly basis, we expect overall margin to rise steadily with increase in contribution of rental revenue. We believe, while correction in capital structure is critical for the stock’s rerating, active infrastructure sharing will be the key risk. Maintain ‘HOLD’ with DCF-based target price of INR 400.

We estimate Infratel to report 7.4% EBITDA, 16.9% earnings CAGR and 370bps RoE expansion over FY16-18. The stock is trading at 11.0x FY18E EV/EBITDA. We believe, improvement in capital structure or significant involvement in Reliance Jio’s next phase of network expansion could be key triggers for rerating, while active infrastructure sharing leading to low tenancy addition will be key risk. We maintain ‘HOLD/SP’ with DCF-based target price of INR 400.