Private Client Research

Rating

Buy

Sector

Telecommunication - Service Provider

Company

Bharti Infratel Ltd

Telecommunication - Service Provider

July 03, 2020

Sensex: 36021.42

CNX Nifty: 10607.35

NSE: INFRATEL

BSE: 534816

Reco Price

Rs. 226

Price Target (1 Year)

Rs. 272

Upside

20.35%

Date

July 03, 2020

Sensex

36021.42

CNX Nifty

10607.35

Exchange

Code

NSE

INFRATEL

BSE

534816

Stock Data

CMP (Rs)

226.70

Face value (Rs)

52 Week Range (Rs)

296.50 - 120.05

Market cap (Rs Crores)

41893.63

Price To Book Value (x)

2.82

P/E Ratio (x)

11.86

EV/EBIDTA (x)

9.73

One Year indexed Stock Performance

Bharti Infratel Ltd Sensex

Return (%)

12m

36m

Absolute

3.42

-8.50

-14.75

-43.08

Sensex

5.61

-13.13

-9.58

15.37

Shareholders

(in %)

31-Mar

Promoter

53.51

Public

46.45

Others

0.04

Total

100

+91 22 6639 3000

research@stockaxis.com

Profile

Bharti Infratel Ltd. (BHIN), currently 53.5%-owned by Bharti Airtel, owns and operates over 40,000 telecom towers. It holds 42% in Indus Towers, which is a tri-partite joint venture between BHIN, Vodafone PLC, and Vodafone Idea in the 42:42:11 ratio. Indus has a portfolio of over 126,000 towers. BHIN’s presence in 11 circles and Indus’ presence in 15 circles (including 4 overlapping circles) give the combined entity presence in all 22 circles and a proportionate footprint of over 95,000 towers, making it the largest tower company in India. BHIN is in the process of merging Indus Towers with itself.

Source: Company, Stockaxis Research

Merger with Indus towers to unlock synergies

Investment Rationale:

Merger to unlock synergies:
The Indus-Infratel deal, which was announced in April 2018, had received approvals from CCI, the stock exchanges, shareholders and NCLT. The Department of Telecommunications’ (DoT) approval took inordinately long and came only in February 2020. BHIN’s shareholders, led by Bharti, wanted to reconsider the deal valuation, given: 1) Indus’ relatively weak financial performance vs. BHIN; 2) their decision to reassess the increase in stake in Indus, from the current 42% to a full merger, considering the larger exposure of Indus to Vodafone-Idea (VIL) and the weak long-term prospects of VIL (if it is rescued, for now) due to its high debt. This merger will enable to reduce costs and it will help to generate better return on investment. We believe the merger will unlock operational synergies in the form of future capital expenditures and operational expenditures. This merger will lead to largest Telco Tower Company outside China.

Better chances of VIL’s survival - positive for BHIN:
In our view, considering the testing times that the country and the economy are going through due to the pandemic, the government is likely to ensure VIL’s survival. The disruption, if VIL were to shut down and if its 300 million subscribers were forced to shift to peers, would be tremendous.

End user growth will be one of the key catalysts for BHIN’s growth:
Recent tariff hikes which are supported by The Telecom Regulatory Authority of India (TRAI) as well as other competitors will facilitate raising average revenue per user (ARPU). Currently, the ARPU is Rs.135-154 as on Q4 FY20 for Telecom companies in India, which was Rs.225 before Jio’s entry into the market. We believe price hikes in the near term will enable gradual rise in ARPU. We expect ARPUs to rise by 20-25% going forward. Growing ARPU is a key positive for Telecom operators. This leads to increase in tenancy as Telecom operators are willing to extend their network capabilities for their customers in order to provide best-in-class service and improve customer experience.

Covid 19:
Covid-19 would have a limited impact on Bharti Infratel. As social distancing is implemented, we expect people to connect with their families more through telecommunication. We also anticipate that due to the lockdown in the country, there would be a steep increase in data usage per user. Hence, we expect a boost in revenues for telecom companies in the upcoming quarters. As BHIN is dependent on the growth of its end users (Telecom operators), its growth is directly correlated to telecom companies.

Industry

Indian Telecom Industry
India is currently the world’s second-largest telecommunications market with a subscriber base of 1.20 billion and has registered strong growth in the past decade and half. The Indian mobile economy is growing rapidly and will contribute substantially to India’s Gross Domestic Product (GDP), according to a report by GSM Association (GSMA) in collaboration with the Boston Consulting Group (BCG). As of January 2019, India witnessed 165% growth in app downloads in the past two years. 4.8 billion Downloads of mobile applications were registered in India in the first three months of 2019.

The liberal and reformist policies of the Government of India have been instrumental along with strong consumer demand in the rapid growth in the Indian telecom sector. The government has enabled easy market access to telecom equipment and a fair and proactive regulatory framework that has ensured availability of telecom services to consumers at affordable prices. The deregulation of Foreign Direct Investment (FDI) norms has made the sector one of the fastest growing and a top five employment opportunity generator in the country. India ranks as the world’s second largest market in terms of total internet users. The number of internet subscribers in the country increased at a CAGR of 45.74% during FY06-FY19 to reach 636.73 million in 2018-19. Total wireless data usage in India grew 119% year-on-year to 17,940,576 terabytes between April-June 2019. Internet subscribers reached 665.31 million till June 2019. Over the next five years, rise in mobile-phone penetration and decline in data costs will add 500 million new internet users in India, creating opportunities for new businesses.

Growth Drivers for the Telecom Industry:

The number of internet subscribers in the country is expected to double by 2021 to 829 million and overall IP traffic is expected to grow 4-fold at a CAGR of 30% by 2021.
The Indian Government is planning to develop 100 smart city projects, where IoT (Internet of Things) would play a vital role in development of those cities.
The National Digital Communications Policy 2018 has envisaged attracting investments worth US$ 100 billion in the telecommunications sector by 2022. The Indian Mobile Value-Added Services (MVAS) industry is expected to grow at a CAGR of 18.3% during the forecast period 2015–2020 to reach US$ 23.8 billion by 2020.
India’s mobile subscriber base is expected to reach 1,420 million by 2024 from 1,200 million in 2018, with 80% users having 4G connections.

Source: Company, IBEF

Profit & Loss Statement:- (Consolidated)

(Rs Crores)

Year End	Mar-18	Mar-19	Mar-20	Mar-21	Mar-22
Net Sales	6621.20	6826.20	6743.00	6877.90	7428.10
Growth(%)	9.00%	3.00%	-1.00%	2.00%	8.00%
Power & Fuel Cost	2281.70	2525.80	2367.20	2476.00	2599.80
Employee Cost	291.60	291.50	293.50	299.40	323.30
Other expenses	1049.20	990.20	524.50	535.00	668.50
Total Expenditure	3622.50	3807.50	3185.20	3310.40	3591.70
EBITDA	2998.70	3018.70	3557.80	3567.50	3836.40
Depreciation	1180.10	1065.80	1281.50	1342.20	1369.10
EBIT	1818.60	1952.90	2276.30	2225.27	2467.31
Other Income	480.60	635.50	128.10	128.10	128.10
Interest	46.50	52.90	-2.00	67.50	69.50
Profit Before Taxation & Exceptional Items	2252.70	2535.50	2406.40	2285.90	2525.90
Exceptional Income / Expenses	-26.00	0.00	0.00	0.00	0.00
Profit Before Tax before share of Assoc	2226.70	2535.50	2406.40	2285.90	2525.90
Share of Associate	1302.50	1017.20	1380.50	1150.50	1472.20
Profit before tax	3529.20	3552.70	3786.90	3436.37	3998.11
Provision for Tax	1035.50	1058.90	488.80	446.70	519.80
Consolidated Net Profit	2493.70	2493.80	3298.10	2989.60	3478.40
EPS	13.48	13.48	17.84	16.16	18.81
Adjusted EPS	13.48	13.48	17.84	16.16	18.81

Source: Stockaxis Research, Company Data

Valuation

Bharti Infratel is the second largest telecom tower company in the Indian telecom industry in terms of number of towers. We believe that the merger deal closure between Indus-Bharti Infratel is imminent. We recommend a “Buy” on Bharti Infratel Limited for target price of Rs.272 based on PE 14.4x FY22E EPS.

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