We see incremental pressure on earnings as Vodafone Idea (VIL) has guided for exit of an additional 22,000 tenancies that have overlapping coverage.
We downgrade Bharti Infratel one notch to ADD (from Buy) with a revised target price of Rs 290 (from Rs 325). We see incremental pressure on earnings as Vodafone Idea (VIL) has guided for exit of an additional 22,000 tenancies that have overlapping coverage. Unlike the earlier 66,000x tenancies exited by VIL at one go, we believe these incremental exits could be spread out over next four to six quarters, which means earnings will continue to remain under pressure even in FY20. VIL will also physically remove equipment, where it has exited tenancies but continue to use it as loading; means lower loading revenues as well. We don’t have visibility on higher tenancies coming from Bharti Airtel or Reliance Jio, which could have offset the decline.
Our scenario analysis show Bharti Infratel Indus Towers’ (on 100% basis) 10-14% of FY19E EBITDA at risk from incremental tenancy exit by VIL; and 3-6% EBITDA at risk from lower loading revenues. Nonetheless, we see rising probability of fibre business materialising for Bharti Infratel as VIL has already decided to exit it and Bharti Airtel may follow.
We have cut our EBITDA estimates for Bharti Infratel by 2-8% over FY19-FY21E as we incorporate incremental tenancy exits by VIL. We have not included any penalties receivable, and the company has already stated it would potentially receive Rs 15 billion (3.2% of market cap) from earlier tenancy exits. We expect pro forma EBITDA for Bharti Infratel (including 100% of Indus Towers) likely to dip by 21% in FY20E vis-à-vis FY18. Strong free cashflow (FY20E FCFF yield of 6.4%) and dividend yield 3.1% will restrict meaningful downside for
VIL is doing cost optimisation in 276 districts (out of 668 districts), which are contributing 7% to VIL revenues but are a 29% drag on its EBITDA – probably a key reason to re-evaluate its network plans in our view. Further, VIL plans to remove physical cell sites on redundant tenancies, which it exited earlier, thereby saving on loading charges. These are incrementally negative for Bharti Infratel as it would drag its revenues and EBITDA in FY20E.