Sharp slowdown makes Kotak put Reduce rating on Bharti Infratel stock with Rs 385 TP

By: | Published: November 2, 2017 4:43 AM

Sharp slowdown in core service EBITDA growth trajectory was the key highlight of what was a disappointing earnings print.

 

PSB, metal stocks, PSB improve, metal stocks improve, metal companies, shareholder funds, commodity prices, rebound in commodity pricesA quarter’s disappointment by itself is not material; what is important to appreciate is the risk associated with multi-year extrapolation of good quarters in a customer-capex-linked business like towers. (Image: Reuters)

Sharp slowdown in core service EBITDA growth trajectory was the key highlight of what was a disappointing earnings print. Service revenues and EBITDA were impacted by weakness in both the core operating metrics –tenancy additions and rentals. A quarter’s disappointment by itself is not material; what is important to appreciate is the risk associated with multi-year extrapolation of good quarters in a customer-capex-linked business like towers. Our EBITDA forecasts see modest cuts. From an operational standpoint, there was disappointment on both the key metrics – (1) net tenancy additions of 1,687 q-o-q fell materially short of our estimated 6,040; net additions pace was also significantly below the levels seen for the past three quarters and (2) service rental per tenant fell 2% q-o-q and 1.6 % y-o-y to Rs 34,427/month, 3.1% below our estimate.

 

Decline in service rentals was a negative surprise. Tenancy adds were impacted by exits of 2,711 tenancies. Adjusted gross adds of 7,248 were below the 9,700-13,500 pace seen in the past three quarters. The high levels of exits and likely sustained momentum in 3G/4G loading by the incumbents should have both been accretive to the rental metric. That rental/tenant declined despite these kickers was a surprise. The company termed the weak tenancy additions for 2QFY18 as an aberration and expects strong tenancy growth momentum to resume.

The management guided for a flat to marginal decline trajectory for service rental/tenant. Tower build-out pace to remain slow in the near term as incumbents focus solely on loading 3G and 4G on existing sites. Indus has won bids for two smart city projects — Vadodara and New Delhi. The company refused to scope out the revenue or profit potential of the three such projects won to date, third one being Bhopal. Our DCF/SOTP based target price for the stock stands revised up to Rs 385/share. TP increase is on account of removal of holdco discount for Indus stake. Reduce.

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