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Bharti Infratel's Q3FY19 results (Outperformer) - Good quarter and cash flow performance steady

Q3FY19 result highlights

• Financial performance above estimates: Reported revenue was flat qoq and -5.9% yoy to Rs36.4 bn above our estimates of (IDFCe: Rs.35.5 Bn). Core rental revenues were way  ahead of our estimates and down 1.1% qoq at Rs 20.9 bn (IDFCe: Rs.19.5bn). EBITDA at Rs 15.04bn was ahead than our estimates (IDFCe:Rs. 13.8bn) bn was up 1.2% qoq & -5.9%  yoy. Margins increased by 80bps qoq to 41.3% ahead than our estimates (IDFCe : 38.9%). Energy Margins came higher at 8.1% in Q319 (7.2% in Q219). Importantly, EBITDA margins(ex- of energy) came in ahead of estimates at 65.8% (IDFCe: 64.3%). PAT at Rs 6.1  bn(IDFCe:Rs.5.9 bn) was up  4.7% yoy led by higher EBITDA. EPS was at Rs. 3.5 for Q319 (IDFCe: Rs.3.2).
• Metrics better than expected, strong gross adds: BHIN std tenancies declined QoQ by 582  (Q2FY19: 7,778); while Indus Towers saw tenancy addition of 1236  qoq. Total towers increased by 0.2% QoQ (net add: 178). Exit Tenancy ratio was at 1.89x flat QoQ. Rental  per operator increased this quarter by 7.3%. Bharti Infratel and Indus had EOP sharing factors of 1.93 and 1.86 per tower respectively.
• Tax efficient deal to be EPS accretive: BHIN management reiterated the deal will be tax efficient and EPS accretive from day 1. Payouts made by the merged entity will be more tax efficient as currently there is a dual incidence of Dividend Distribution Tax (first paid by Indus and subsequently by Infratel on declaration of dividend to its shareholders) which will be eliminated. Transaction also to improve capital structure by bringing higher leverage to the merged entity as net debt is expected to increase to 0.6x Net Debt/EBITDA vs. net cash position currently (as per Sept 30 calculation by the company

Valuations & View

BHIN reported an good  quarter with strong margin performance. The EOP tenancy ratio is ahead  with expectations. Despite flat tenancy growth core margins were ahead of our estimates. Lower energy & operating cost & higher rental fee also helped. We believe that  Vodafone-Idea will add demand as it attempts to catch up with competitors which may have also led to highest gross add in last 5 quarters. We expect tenancy and tower addition to improve as telcos aim to increase their 4G coverage and improve network quality. Indus acquisition is also likely to provide better cash deployment opportunity and cost efficiency.   We value BHIN on DCF basis to arrive at our Mar2019 TP of Rs340.