Avoid Bharti Infratel – Angel Broking - IPO Note

Bharti Infratel limited (Bharti Infratel) is tower and related infrastructure providing company of Bharti group. It is one of the largest tower infrastructure providers in terms of number of towers own and operated by a company having pan India presence on a consolidated basis.

Largest player in the sector: Bharti Infratel is one of the largest tower infrastructure providers in terms of number of towers own and operated by a company on a consolidated basis. Given the nationwide network of towers we believe the company is well placed to gain an advantage over their existing and potential competitors.

Extensive presence across India: Bharti Infratel has a pan India presence with operations in all 22 telecommunications circles in India, with Bharti Infratel's and Indus' operations overlapping in four telecommunications circles. The company has a significant presence in B-category and C-category telecommunications circles, while Indus operates in the Metro and A-category and B-category telecommunications circles.

Long term contract provides revenue visibility: Bharti Infratel has entered into MSAs with the leading wireless telecommunications service providers in India. We believe long term contract agreement and the adverse consequences of contract termination provide stability to Bharti Infratel business throughout the term of the MSAs thereby providing comfortable visibility of future revenues.

Strong parental, an advantage: The Bharti group has been one of India's leading business conglomerates, with operations in the telecommunications, retail, insurance and real estate sectors. Over more than decade, company created a strong brand and credibility which we believe Bharti Infratel can leverage to its advantage in growing its business.

Outlook and valuation: Bharti Infratel has registered a 3.4% and 9.6% CAGR in towers and tenancies, respectively over the last three years. The company posted 15.9% and 21.0% revenue and EBITDA CAGR over FY2010-12. In terms of valuation, the current IPO price band of Rs.210-240 implies a June 2012 annualized EV/EBITDA of 11-13x, EV/tower of Rs.0.5-0.56cr; P/E of 45-53x, and P/BV of 2.7-3.0x, which we believe is at a premium. In addition, low asset turnover and minimal use of leverage in a capital intensive industry have resulted in low RoE for Bharti Infratel over the past three years. Bharti Infratel's RoE has remained in the range of 4.0-5.2 in the past couple of years. Also, the overcapacity in the industry is expected to limit the demand for rollout of new towers. Further, regulatory changes and the resultant uncertainty pose a risk to telecom players as their network rollout plans could be hampered. Hence, we recommend Avoid to the issue on account of its premium valuations.

Source : Equity Bulls

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