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Bharti Infratel's Q1FY19 results (Outperformer) - EOP Tenancy fully factor marginal operator exits

Q1FY19 result highlights

• Financial performance ahead of estimates: Reported revenue was up 0.3% qoq and +4% yoy to Rs36.7 bn (IDFCe: Rs.35.1 Bn) led by better than expected rental revenue performance. YoY growth was supported by sharp increase of 16.6% yoy in energy re-imbursements. Core rental revenues were flat qoq at Rs21.9 bn (IDFCe: Rs.20.9bn) – ahead of expectations. EBITDA at Rs 15.2bn (IDFCe:Rs. 14.9bn) bn was down 5.3% qoq & 3.5%  yoy. The drop was larger driven by lower energy margins. EBITDA margins(ex- of energy) came in ahead of estimates at 66.7% (IDFCe: 63.8%). PAT at Rs 6.38 bn was up  ~5% qoq.
• Tenancy exits continue: Infratel (BHIN) standalone tenancies declined sequentially by 2612; while Indus Towers saw tenancy decline of 5254  qoq.  Exit tenancy ratio (Cons) was at 2.19x in Q1FY19 as compared to 2.25x in Q4FY18(cons). Bharti Infratel and Indus had EOP sharing factors of 2.17 and 2.20 per tower respectively
• Key takeaways from conference call: Infratel has seen a consolidated tenancy decline in Q1; however the management indicated that the EOP tenancy fully factor the impact of exit of marginal operators. There is no material update on the realisation of exit penalties from these operators as yet. The Vodafone-Idea merger impact on tenancy is still not known but merger approval should provide more clarity on the exit quantum and realisation of penalty.

Key positives: Margin and cash flow performance

Key negatives: Decline in tenancies.

Change in estimates: Cut EBITDA estimates for FY20E by 13% as tenancies loss due to TTSL exit and Vodafone-Idea merger.

Valuations & view

BHIN reported a better than expected quarter with lower tenancy exits. The EOP tenancy ratio was better than our expectations, and exit of marginal operators is now fully accounted for. We note that despite drop in tenancy, the cash generation of profile (Rs9.9bn/qtr) remains robust. The clarity on quantum of tenancy exits from the Vodafone-Idea merger remains a overhang on the stock. We value BHIN on DCF basis to arrive at our Mar 2019 TP of Rs340. Outperformer.