Bharti Infratel's Q2FY18 results (Outperformer) - Soft operating metrics; Indus acquisition could be game changer
Q2FY18 result highlights
- Soft operating performance: Reported revenue was up 3.5% qoq to Rs36.5bn led by 9.4% qoq increase in energy re-imbursements even as core rental revenue was flat at Rs22.6bn. Rental revenue growth was muted as +2.2% qoq increase in average tenancies was offset by +2.0% decline in yields. EBITDA at Rs16.1bn was up 11.4% yoy but missed estimates (Rs16.5bn), as margins decreased by 45bp qoq to 44.3% (IDFCe 44.9%); sequentially higher energy margins (9% vs 4.7% in Q1) was offset by overheads and lower yields. PAT at Rs6.4bn was down ~17% yoy led by lower other income and higher taxes.
- Tenancy addition slows; growth remains healthy: Infratel (BHIN) standalone added 2,334 tenancies sequentially (adjusting for 1093 exits); while Indus Towers saw tenancy additions of 4,914 (3852 exits) – both have slowed down from recent high (Exhibit 2). Overall reported tenancy growth for consolidated entity was 10.7% yoy (+1,687 qoq after exits vs IDFCe 6,103) as gross additions were offset by exits during the quarter. However, core rental revenue and EBITDA growth remained healthy at 9-12% yoy.
- Right time for value accretive acquisitions: As expected management has clarified on the interest to increase its stake in Indus Towers (from 42% currently to majority owned subsidiary) due to its capacity to invest and the strategic fit of assets. Full control of Indus would ensure BHIN becomes a direct beneficiary of all future network rollout by the top 3 incumbents in India, widen gap with peers, and also improve BHIN’s capital structure. This would make BHIN the largest towerco globally with healthy RoE/ ROCE of 20%+.
Key positives: Enabling resolution for increasing stake in Indus Towers
Key negatives: Slowdown in tenancy additions; margin miss
Valuations & view
BHIN reported a mixed quarter with healthy EBITDA growth but soft underlying operating metrics. Management clarity on BHIN looking to increase its stake in Indus Towers is a key positive. At 10x FY19E EBITDA, valuations have room for re-rating with improving visibility of better capital structure, and an opportunity to own largest independent tower portfolio globally. Maintain Outperformer with target price of Rs480 (Rs455 earlier).
Bharti Infratel provides telecom tower infrastructure in India. Co. acquires, builds, owns, operates, and manages towers and related infrastructure for wireless telecommunications service providers. As of Mar 31 2014, Co. owned and operated 83,368 towers and 167,202 co-locations in 22 telecommunication circles.
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