Strong structural appeal and market positioning, with little competitive risks
We upgrade Bharti Infratel (BHIN) to Buy with a 37% increase in our discounted cash flow-based target price to R480. We acknowledge that the stock is up 30% YTD (vs Sensex up 2%), but: (i) its operating trends remain superior-we estimate 14% per annum. Ebitda growth and 20% NPAT (net profit after tax) growth over FY16-17F (forecast); (ii) we review its cash deployment options in detail, and conclude that Indian M&A deals can add 5-11% to valuations, plus expansion into fibre and distributed antenna systems (DAS) can provide further revenue upside; (iii) its structural appeal and market positioning remain strong with little competitive/regulatory risks; and (iv) at 14x FY16F Ebitda, it still trades at a 10% discount to peers like TBIG (Buy).
Our key M&A analysis and conclusions: BHIN is a net cash company and the company is reviewing the scope for M&As in India/Bangladesh, and expanding into fibre/DAS. Our review of these concludes: (i) acquiring towers in India has more merits than in Bangladesh. India’s tower space is far well established, plus Bangladesh has regulatory risks, eg, a licence fee of $390k, differential VAT treatments for leasing, and weaker tower economics with 6-9% ROICs (return on invested capital); (ii) for M&As in India, we estimate valuations in the $60-120k/ tower range make sense for BHIN, which could raise our valuation by 5-11%; and (iii) while it is still early days for fibre/DAS leasing in India, using examples in Indonesia, we note Ebitda margins on fibre are 80%-plus, but for DAS, while rents could be as high as $4.5k/month, margins vary widely with projects.
Risks: While it is well known that data, voice, capex and tenancies should grow in the foreseeable future for telcos, of which BHIN is a key beneficiary, an immediate market concern could be slower tenancies and margin decline in Q1, which we think is largely seasonal. Also, any changes to MSCI (Morgan stanley Composite Index) weighting or further sell-down by its parent Bharti Airtel (owns 71.8%) could lead to some volatility.
Growth aspirations should be value-accretive: Apart from organic growth driven by telcos’ continued network investments, Bharti Infratel’s management highlighted that it is looking at the following options for inorganic growth/diversification:
(i) Acquiring operator-owned towers in India, and/or towers in Bangladesh,
(ii) Venturing into new segments like fibre and distributed antennas systems (DAS), and
(iii) The government’s ‘Digital India’ programme.
How much to pay for tower assets: We estimate per tower valuations in the range of $60-120k make sense for BHIN for M&As in India. These imply a positive NPV (net present value) of $700m-1.6 bn with IRR (internal rate of return) of 12-20%. This should be positive for BHIN’s share price, too, by around 5-11%.
Infrastructure firms are allowed only to lease out dark fibre (without active equipment like repeaters, etc) to telcos as of now, and that too is quite limited at this stage. For active sharing of equipment, regulations are still awaited. Hence, we do not have many data points to review the fibre opportunity in India as of now.
However, based on our discussions with infrastructure firms in Indonesia, a market which is close to India in terms of the adoption of infrastructure sharing, we note that Ebitda margins on fibre (with active equipment) could be 80%-plus, with paybacks of within three-four years.
Even DAS leasing is quite limited in India as of now. Again, looking at Indonesian examples, we note – unlike for towers, there is no “typical” DAS capex and rental. The range of revenue of DAS can be $1,400-4,500 per month, and these projects usually have varying Ebitda margins.
As part of the Digital India plans, the government of India is aiming to expand mobile phone and internet connectivity to the farthest corners of India. This project offers strong opportunities for leading infrastructure providers like BHIN, which can get involved by rolling out towers, poles, fibre and Wi-Fi.