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Bharti Infratel's Q3FY18 results (Outperformer) - Weak operating metrics cloud outlook

Q3FY18 result highlights

• Inline financial performance: Reported revenue was up 0.2% qoq and 7.5% yoy to Rs36.53bn`(IDFCe: Rs.36.5 Bn) led by 0.8%/8.5% qoq/yoy increase in energy re-imbursements. Core rental revenues grew 6.7% yoy at Rs22.6bn (IDFCe: Rs.22.6bn). EBITDA at Rs15.9bn was up 8% yoy and margins decreased by 53bp qoq to 43.7% (IDFCe : 43.4%). EBITDA margins (ex- of energy) improved to 66.4%, +76bps yoy ahead of our estimate of 65.7% for the quarter. PAT at Rs5.8bn was down ~5.6% yoy led by lower other income and higher taxes.
• Metrics weak but extent of tenancy drop is much higher: Tenancy decline of 2,327 qoq in Infratel Standalone and 10,202 decline in Indus Towers was below expectations. The extent of decline is higher than our expectations, and was also be impacted by lower incumbent addition (read capex) in Q3. The management has recognized all exits requests (incl due in next quarter) received so far; however outlook remains muted for CY18.
• Lower tenancies to lead to weak growth, no update on Indus: The exit tenancy ratios dropped to 2.35 vs. 2.41 average for the Q2FY18. This leads to cut in our tenancy ratios for FY19E, and cut in Rev/EBITDA of 9.5%/13% in FY19E and 10.5%/13.7% in FY20E. Current share of marginal players is 7% post this quarter. Importantly, there was no update on the Indus.

Key positives: Margin performance

Key negatives: Decline in tenancies.

Valuations & view

Clearly, the drop in tenancy is higher than anticipated and it seems the rollouts from incumbents have been slower, and as a result the net drop is more accentuated. Management expects near-term tenancy drag to continue. Near-term earnings are likely to be impacted given the extent of exits due to ongoing consolidation in the sector, we like the cash flow profile of the business. We adjust down our estimates to factor this and believe that slip in growth for FY19E due to exits is a negative and will pause the near-term share price performance. Maintain Outperformer with revised DCF based March 2019 target price of Rs370 (Rs480 earlier).