Commentary from Idea post-merger announcement should alleviate some risks — cell site reduction for Idea + Vodafone at c20% vs 28% in our worst-case scenario; long duration for deal closure and integration should spread impact over multiple years; possibly lesser impact on Indus vs other tower companies due to the management intent to protect value there.
We believe exit penalty, rental reset for remaining tenants and higher loading are further mitigants Idea in its analyst briefing indicated that the cell site reduction in the combined Idea + Vodafone footprint could be c20% vs the 28% impact in our worst-case scenario.
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This means tenancy impact on Infratel at 11% (vs 15% in worst-case scenario) and similar EPS impact. This does factor in mitigants and a long deal closure/integration, whichwould spread out the impact. Consolidation also provides Infratel an opportunity to acquire tower assets and use the excess cash, a positive. Our 12M price target is based on DCF; we have built in a slowdown in tenancy additions in FY18E on the back of industry consolidation. We believe that the recent stock correction brings it to a level where it undermines the stability of the business model and the longer term cash flow visibility due to nature of contracts. Maintain Buy.
While the dip in tenancy rates would cause a cut in revenues, there are fairly concrete mitigants for Bharti Infratel as defined in its master services agreement with respect to the cancellation.