EUR 120.00 For Business Accounts Only

MOSL: BHARTI INFRATEL (Neutral)-Exit penalties – a saving grace-outlook uncertain

Bharti Infratel: Exit penalties – a saving grace; outlook uncertain

(BHIN IN, Mkt Cap USD6.8b, CMP INR263, TP INR290, 10% Upside, Neutral)

 

• Performance driven by exit penalties and higher rentals: Pro forma consol. revenue declined 1% QoQ to INR36.4b (in-line) in 3QFY19, but consol. EBITDA increased 1% QoQ to INR15b – a significant 10% beat. The EBITDA outperformance can be ascribed to the 7% increase in rental rates on account of exit penalties amounting INR553m, loading and the favorable impact of falling tenancies. Subsequently, rental margin expanded 30bp QoQ (290bp beat). Gross colocation addition improved to 2,477 (v/s 1,503 in 2Q), but exits meant that net colocation was flat. Energy EBITDA grew 13% QoQ (2.5% miss). Adjusted for the exceptional item in 2Q, PAT was up 4% QoQ to INR6.5b (16% beat). For 9MFY19, revenue grew 1% YoY, EBITDA declined 6% YoY, while PAT was flat YoY.
• Concall highlights: (1) Charges for tenancy exits have been settled at INR20b, with INR11b cash settlement via recurring revenue of INR900m for the next 12 quarters. (2) Expect the Infratel-Indus merger to conclude by 1QFY20.
• Earnings visibility uncertain: Three points from the 3QFY19 results are noteworthy, in our view: (1) Settlement of exit charges for the lost tenancies comes in as a major positive. Apart from the cash settlement of INR11b, management has received five-year extension of contracts valued at INR18b (2x of residual INR9b exit charges). (2) Recurring revenue of INR900m from exit penalties for the next 12 quarters insulates the EBITDA impact from sizeable ~28k tenancy cuts – we now expect EBITDA decline of merely 6% in FY19/20 (v/s 10% earlier). We, thus, revise up our FY19/20 EBITDA estimate by 6%/10%. (3) Non-cash settlement, however, indicates low bargaining power, despite the long-term sticky clientele, as the existing customers are facing a stretched balance sheet and a falling market share, while the new entrants do not offer ROFR. This blurs earnings visibility, in our view