Estimates revised upwards due to Jio plans which are likely to sustain growth and margins; consolidation risks and rich valuations negatives
Infratel delivered strong but in-line revenues with margins slightly ahead, on the back of strong tenancy additions. A large portion of these tenancies are R Jio related, in our view, likely to continue for another 2-3 quarters as it increases network footprint. We believe that this is already baked into forecasts with offsetting risks from potential redundancies on the back of sector consolidation and rich valuations. We tweak our estimates and price target, maintain Hold.
Headline numbers in line on revenue, margins higher
Infratel consolidated revenue growth of 9.8% y-o-y was in line with estimates, with growth similar across rental and energy revenues. Ebitda was slightly ahead driven by rental margins improving 120 bps y-o-y on the back of tenancy increase and consequent operating leverage even as energy margins came down to normalised levels (sub 5%).
Tenancy additions robust, operating metrics stable
Tenancy growth was strong at 11.2% y-o-y, with the absolute tenancy additions the highest ever at 7,795 for the quarter (to 218.4K). This has primarily been driven by R Jio over the past few quarters; impact most on the standalone towers as operators move to the second leg of their network rollout (the first leg saw acceleration in Indus). Tower additions remained tepid, in line with recent trends. Top-3 incumbents’ increase of data network footprint is reflected in higher loading and higher per tower/tenant rentals.
Puts and takes
The near-term momentum due to the recent R Jio feature phone launch should lead to higher data network expansion in the rural areas. This should sustain growth/margins and is captured in our estimates, offset by the potential risk of redundancies on the back of Idea-Vodafone merger. There were exits in Q1FY18 as well, 1048 at the consolidated level (95 for standalone and 2269 at Indus) which underline the risks due to sector consolidation.
We revise our estimates for higher tenancy additions in FY18e due to the recent plans announced by R Jio to increase coverage, to be matched by the Top-3 incumbents. Our 12M PT is increased to Rs 385 as we change our exit EV/Ebitda to 10x vs 8.5x earlier, due to slightly better near term momentum and lesser risk from the MSA reset going forward. This should be seen in context of the rich valuations at 11x/10x EV/Ebitda on FY19/20E estiMates which will cap stock upside. Maintain Hold. Risks — Upside: higher-than expected capex outlay from operators. Downside: weak site additions, pressure on rentals.
Revision to estimates and PT
We revise our estimates to incorporate the results and potentially higher tenancy additions in FY18e due to the recent plans announced by R Jio to increase coverage. These would need to be matched by incumbents. Our 12M PT is increased to `385 as we change our exit EV/Ebitda to 10x vs 8.5x earlier. We also introduce FY20e forecasts.
The near term momentum due to the recent R Jio feature phone launch should lead to higher data network expansion in the rural areas. This should sustain growth and margins, captured in our estimates and offset by the potential risk of redundancies on the back of Idea-Vodafone merger. This should be seen in context of the rich valuations at 11x/10x EV/Ebitda on FY19e/20e estimates.