Amendment in MSA will provide a framework for contract renewal
Bharti Infratel (Infratel) reported Q1FY17 revenue of R32.1 bn (up 0.9% q-o-q), in line with Street’s estimate. Ebitda margin dropped 210bps q-o-q to 43.4% as energy margin declined to 3.4% from 9.6% q-o-q. Management clarified that to achieve parity between anchor and new tenants they have amended the master service agreement (MSA). It will escalate the base rate by 2.5% each year, but freeze rentals for anchor tenants till parity is achieved. This arrangement will take away some revenue growth, but it will be partly compensated by higher rentals on incremental tenancies and provide a stable renewal framework.
Revenue in line; ex-energy margin stagnant
Infratel added 544 towers and 1,366 tenancies in Q1FY17 versus 753 towers and 3,114 tenancies in Q4FY16. Tenancy addition was impacted by 1,179 tenancy cancellation by Videocon. Management attributed deceleration in tenancy addition to slower capex intensity of telcos. Ebitda margin declined 210bps q-o-q to 43.4% on sharp fall in energy margin; ex-energy, Ebitda margin was flat q-o-q/up 10bps y-o-y to 65.9%. Lower tax rate due to one-time gains related to mark-to-market revaluation of investments led to 71.0% y-o-y PAT growth.
MSA amendment to provide certainty for renewal
The MSA amendment will provide a framework for contract renewal. It will provide option for anchor tenants to freeze rentals till parity between anchor and new tenancies is achieved leading to R150 million per month impact, which will start reducing over a period of time. However, as the base rate itself starts increasing by 2.5% for every incremental tenancy, there will be no reset of rental in case of renewal; the complete arrangement will be NPV neutral.
Outlook and valuations: Low risk, low returns; maintain hold
We estimate Infratel to report 8.8% Ebitda and 16.0% earnings CAGR over FY16-18. The stock is trading at 11.0x FY18E EV/Ebitda and factors in 350bps RoE expansion over same period. We believe improvement in capital structure in Reliance Jio’s next phase of network expansion could be key triggers for rerating. We maintain ‘HOLD/SP’ with a DCF-based TP of R400.
Infratel, including Indus Towers, is the leading telecom tower infrastructure provider in India. Backed by parent Bharti and by virtue of 42% stake in Indus Towers, Infratel shares a strong relationship with Bharti, Vodafone and Idea, which are expanding their 3G/4G footprint. On consolidated basis, Infratel has 89,352 towers with 196,401 tenancies.
o Availability of substantially more spectrum.
o Meaningful pick-up in infrastructure sharing.
o Reliance Jio’s collaboration with Infratel.
o Disruption in wireless technology.