Near-term earnings are expected to remain muted; concerns over long-term margins; stock is fully valued.
Infratel reported muted but better than expected quarter with revenues 4% and margins 90bps ahead of expectation. The beat though was entirely led by higher energy cost and margin. Tenancies saw further exits with FY18 seeing exits for c10% of overall tenancies. We expect near term earnings to remain muted as Voda/Idea exits are still ahead. With stock trading at 9x FY20 EV/Ebitda, and our concerns on long term margins, we maintain our Hold.
Muted results: Infratel reported muted quarter though slightly better than expectation. Revenues grew 4% y-o-y (JEFe 4%) and margins declined 117bps y-o-y (JEFe 200bps). The beat was led by energy revenues. Energy revenues grew +10% y-o-y while service revenues were flat. Energy Ebitda increased 18% y-o-y while service margins declined 30bps y-o-y.
Tenancies see c10K exits: Q4 saw 9813 tenancy exits. Of this standalone saw 3956 exits and Indus the rest. Overall FY18 has seen 22,134 exits (10% of total tenancies). Of these 2,514 exits have not yet happened. Interestingly, tower addition improved in the quarter to 444 towers vs 52 in Q3.
Near term earnings growth muted: We expect near term earnings for Infratel to be flat as operator consolidation impact offsets 4G rollouts. The Idea/Voda merger impact is ahead of us and mgmt indicated that it could be c20K tenancies for the company. We expect Ebitda to grow at 1% CAGR over FY18-20e, led by 2.6% revenue CAGR and 170bps margin decline. We expect dividend yield to remain high at 3.5%.
Long-term dynamics: While in the near term, earnings and return ratios are largely shielded, we are cautious on long-term outlook. With operators likely to remain under pressure, there may be stress on growth and margins for tower companies too. While Infratel makes c20% RoCEs, operators are expected to be below that even over medium term. We expect margins to see gradual moderation as increments and loading charges are negotiated.
We marginally tweak our estimates and our FY19-20 EPS change by c1%. While Infratel islargely shielded from the turbulence facing operators in the near term, we are concerned on medium term margins. Trading at 9x FY20 EV/Ebitda, we believe the stock is fully valued.We maintain Hold and price target of Rs 300.