Bharti Infratel IPO - Robust Business Model; valuations at premium - Religare

We attended the IPO analyst meet of Bharti Infratel, one of the largest tower companies in India - the company intends to raise Rs.40-45 bn. Overall business model is robust and towerco is a better way to play the Indian telecom story given the B2B nature, long-term contracts and a steady cash flow generation business. Further, Bharti Infratel through strong relationships with the leading telcos in India and co-owndership in Indus (42%) has a strong market presence and is exposed to limited competition.

While its business model is good, valuations at the higher end of the IPO band at 12x H1FY13 annualised EV/EBITDA are not cheap given muted near term growth outlook. Further, a key risk in our view is a potential levering of the balance sheet to expand inorganically internationally. Overall, we advise applying for the IPO at the mid-lower end of the price bands.

- One of the largest towercos in India with strong carrier relationships: Bharti Infratel has an economic interest in 80,656 towers, with 34,220 towers owned by themselves and the remaining through 42% ownership of Indus towers (India's largest tower company). Combined, Bharti Infratel and Indus account for 38% of the total market share and have strong relationships with the top three operators in India. This is also reflected in their industry leading tenancy ratio of 1.9x.

- Growth drivers: While 2G network coverage is largely in place, growth for tower companies will be driven by higher data usage (slow uptake so far) driving need for additional BTS and 3G and 4G network expansions by the telecom operators. Bharti Infratel has Rev/EBITDA/PAT of Rs 94.5bn/Rs 35bn/Rs 7.5bn as of FY12.

- Low ROEs - could improve with improving tenancies: We note that ROEs at 6% are below global peers. In our view, while single tenancy towers have a lower economic value, the presence of a 2nd/3rd tenancies increases the profitability significantly as costs are largely fixed and additional energy costs are passed on. Given their strong relationships and a still modest tenancy ratio of 1.9x, we expect improving tenancy ratio to help drive improvement in return ratios going forward.

- Unlevered balance sheet - inorganic expansion? The balance sheet is relatively unlevered with 2QFY13 net debt/EBITDA at 0.8x. This leaves room for inorganic expansion in India and abroad. Bharti Infratel generated an FCF of Rs 17bn in FY12 and Rs 6.5bn in 1HFY13. The company plans to utilise the Rs 31-35bn raised from the IPO towards capex (FY12 capex Rs 15bn). In our view, a key risk could be inorganic expansion into other emerging markets given the relatively unlevered balance sheet and healthy cash flow generating nature of the business.

- Valuations: The current IPO band of Rs 210-Rs 240 implies EV/EBITDA valuation of 10.5x-12x on H1FY13 annualised and 43x-49x P/E. Implied EV/tower in the IPO band is Rs 5mn-Rs 5.6mn and EV/tenant stands at Rs 2.6mn-Rs 2.9mn. In terms of cash flow metrics, implied FCF yield is 3% on 1HFY13 and 4% on FY12 numbers.

Source : Equity Bulls

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