Deployment of 3G capacity could reduce need for infill sites
Pan-India play on telecom infrastructure deployment: Bharti Infratel is a tower infrastructure provider. The company is well placed via its wholly owned towers and 42% stake in Indus Towers (Indus) to benefit from long-term structural growth trends in the mobile telecoms sector, like spectrum constraints, data growth and rural penetration. The company was recently listed with 8% free float. In our view, the listing was largely aimed at creating a reference value for tower assets, with a potential listing of the Indus Towers JV, according to public announcement by the management.
Positives undermined by short-term headwinds: In addition to its long-term growth story, we see the coming 3G capex (capital expenditure), high exposure to Tier-I telcos (80% of revenues) and its deleveraged balance sheet as key positives. In addition, its cash of Rs 25 per share, the good chance of dividend growth and its better-than-global-average FCF (free cash flow) yield of 6% should provide downside support. However, the stock is also vulnerable to short-term headwinds, which may limit upside. Most notably, we see downside risk in tenancy demand, as a combination of higher tariffs (which would hurt minute growth) and the deployment of 3G capacity (which would decongest 2G networks) potentially reduce the need for infill sites.
Don?t be swayed by the deep EV/Ebitda discount: While the stock trades at a 45% discount to its US peers based on EV/Ebitda (enterprise value/earnings before interest, taxes, depreciation and amortisation), we note EV/Ebitda may not be the best valuation yardstick as Bharti Infratel has no leverage. Indeed, the discount narrows when we switch to market cap/Ebitda. Furthermore, global tower companies enjoy a premium due to their historically robust growth (e.g., site rental revenue per tower has grown at a CAGR of 10% in the last 10 years for Crown Castle), much higher visibility on data growth and independence from service providers. We also note country-specific issues, including: (i) slower-than-expected benefits from data growth as operators will likely load 3G equipment on existing rented towers, and (ii) regulatory risks, which would limit visibility on capex.
Initiate Neutral: We value the company using a blend of DCF (discounted cash flow) and EV/Ebitda. Our target price of Rs 220 implies an FY14e EV/Ebitda of 9x and PE (price-to-earnings ratio) of 33x. The key upside risk to our view is higher-than-estimated new tenancies due to 3G rollout. Key downside risks include the potential introduction of regulatory fees impacting telco capex, a slower-than-estimated pick-up in 3G and value-destructive M&A.
Vulnerable to factors affecting India telecommunication services: Bharti Infratel?s and Indus? operational performance is closely tied to the performance of India?s wireless telecommunications industry, which is sensitive to various factors, including: consumer demand; service providers? debt levels; regulatory changes, such as the recent cancellation of 2G licences issued to some service providers; coupled with increasing competition and declining ARPU (average revenue per user).
Delayed roll-out of 3G and 4G services: Regulatory risks and unclear spectrum road map may delay the roll-out of 3G and 4G services as estimated by us. If incumbent telcos need to pay higher than estimated amounts for regulatory issues, there is a possibility that 3G deployment may be at a slower pace.
Competitive intensity: The tower infrastructure business in India is highly competitive. Bharti Infratel and Indus face competition from other tower infrastructure companies backed by wireless service providers and independent tower infrastructure companies. Key competitors are Reliance Infratel, VIOM Networks, GTL Infrastructure, American Tower Corporation, Aster Telecom Infrastructure and Tower Vision India, Power Grid Corporation of India.
HSBC