Bharti Infratel has risen 41% in past six months and has outperformed the Sensex, up 22%, domestic telco peers, Bharti Airtel (up 4.5%), and Idea Cellular (down 19%). We believe a sharp run-up in stock price reflects potential pricing improvement (unlikely given excess inventory), 10% tenancy growth (we model 7%, as data-led demand will not result in incremental tenancy) and a lot of optimism around orders from Reliance Jio. Reliance Jio is likely to ask for sharp discounts on rentals as it requires a large number of towers in our view. Data, though a structural driver, are unlikely to result in new tenancies for tower companies in the next 12-18 months as the reliance on the tower companies will be more in terms of loading because of the economics.
Given an unleveraged balance sheet with net debt/ebitda at -1.1x, the company has been evaluating inorganic options such as buying Bharti Airtels towers in Bangladesh and Sri Lanka and towers owned by Idea and Vodafone in India. In our view, Bharti Infratel buying Bharti Airtels towers outside India is unlikely to be taken positively and may be perceived as special dividend as Bharti Airtel is the largest shareholder in Bharti Infratel.