Offer seen fairly valued at lower band of price range

Written by fe Bureau | Mumbai | Updated: Dec 2 2012, 05:12am hrs
Given low barriers to entry in the industry and oversupply in the domestic tower capacity, analysts expected the initial public offering of Bharti Infratel (BIL), the tower unit of Bharti Airtel, to be priced at valuations lower than its global peers.

According to their estimates, the fair value of the issue was expected to range between 8.5 and 12 times its EV/Ebitda. As per the announced price range for the BIL ipo, this multiple is pegged at 10.5 to 12 times its annualised June quarter Ebitda.

The issue is attractive at the lower end of the price range, given that it is one of the better tower companies with no debt in its standalone balance-sheet, said an analyst from an institutional desk of a brokerage house.

BIL is a subsidiary of Bharti Telecom, in which the latter holds 86.1% stake. The subsidiary, with the capacity of about 80,000 towers more, holds 42% of Indus Towers, a joint venture between Bharti Airtel, Vodafone India and Idea Cellular.

In the past, some experts have questioned Bharti's rationale behind the stake sale in BIL, given that the cash-rich company has lower leveraging compared to its peers and does not require an imminent capex push.

Nomura, in a note in October, said that BIL could be one of the lowest geared power company compared with regional and global players whose net debt are three to five times their operating profits.

As per the Ipo prospectus, BIL's Ebitda for three months to June 2012 was R940 crore and R1,118 crore of net cash flow from operations. Credit Suisse estimated the consolidated net debt-to-equity ratio for BIL to be less than 0.5.

The brokerage also pointed out that the attractiveness of the Infratel, which owns 42% of Indus, may be limited as the management does not believe in the potential listing of Indus over the 2-3 years.

Some believe that the listing of its tower business may help Bharti lower its net debt burden and may add to Bharti's stock price if BIL gets listed at a higher earnings multiple. As per Morgan Stanley estimates, BIL has an enterprise value (EV) of about $7 billion, which, in turn, depicts a valuation multiple of 10.5 of its current fiscal earnings.

Given Bharti's ownership in the company, this equates to R83 per share for the holding company. Hence, the brokerage concludes that every one points change in EV/Ebitda multiple of BIL can change the target price for Bharti by R8.

However, as per the IPO prospectus, which does not make a mention of a future dividend payment to the holding company, BIL is planning to utilise nearly R2,940 or close to 70% of net proceeds from the ipo in installation of new towers and upgradation and replacement on existing towers.