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MOSL: BHARTI INFRATEL (Neutral)-Telco consolidation hurts earnings

Bharti Infratel: Telco consolidation hurts earnings

(BHIN IN, Mkt Cap USD10.1b, CMP INR344, TP INR380, 11% Upside, Neutral)

• Flat rental revenue pulls down overall growth: Muted rental revenue at INR22.6b (flat QoQ, in-line) arrested consolidated revenue growth (flat QoQ; +8% YoY) at INR36.6b (in-line). Energy revenue grew 1% QoQ to INR14b. Consolidated EBITDA declined 1% QoQ ( grew 8% YoY) to INR16b (1% beat) due to 22% QoQ decline in energy EBITDA to INR1b, partly offset by 1% QoQ rise in rental EBITDA to INR15b. Consolidated margin declined ~50bp QoQ to 43.7% (70bp miss). Net finance cost of INR15m (v/s net finance income of INR510m in 2QFY18) led to a sharp 8% QoQ PAT decline to INR5.9b (our estimate: INR8.5b).
• High tenancy exits stalled rental EBITDA: Colocations dropped 3% QoQ to 213,476, resulting from net tenancy exits of 6,612 (possibly driven by smaller operator closures), diluting gross colocations adds of 1,950. However, a 1% QoQ rise in tenancy rate to INR34.8k coupled with 20% QoQ saving in other expenses led to some solace – rental EBITDA margin grew 60bp to 66.4%. Energy margin declined 210bp QoQ (flat YoY) to 6.9% due to 3% QoQ rise in power & fuel cost.
• Telco exits/mergers should continue to hurt tenancies: We have cut our overall tenancies by 5%, expecting tenancy additions of 11,040/14,400 in FY19/20. We have cut our EBITDA by 6-7% for FY19/20E. We understand tenancy growth from incumbents remains steady; however, smaller operators’ exit from the telecom market (contributing 8-10% of total colocations) should put pressure. Additionally, risk of tenancy cut from Vodafone-Idea also hovers.