Bharti Infratel - Risk-reward favourable again! - ICICI Securities

At CMP, Bharti Infratel (BHIN) provides a huge margin of safety and an opportunity to earn dividend of Rs17.8 per share. This means the effective price of buying BHIN is Rs160 per share. Our working shows, in worst case of VIL shutdown, the fair value of BHIN dips to Rs130-150 per share. However, the probability of VIL shutting down has been reducing with staggered AGR payment and the company's efforts to raise fresh capital. Further, any tariff hike, which is imminent, will increase confidence among investors. The new scheme of arrangement also provides additional security in terms of merged entity share pledge by Vodafone Plc. We believe 5G will open up new business opportunities such as higher core rentals, and small cell and fiber business. Reiterate BUY with an unchanged target price of Rs245.

- VIL's going concern status still under risk, but probability reducing. BHIN's worst case would be shutdown of VIL, which will significantly impact its financials: tenancy, cash EBITDA and FCF will be cut by 34%, 47% and 46% respectively. But, the risk to VIL's going concern status has been reducing with AGR payout now staggered over 10 years and the company in process of raising fresh capital. The situation for VIL is much better now than a few months back. Further, as part of merger (BHIN-Indus Towers), VIL is making advance payment of Rs26bn towards MSA (rental), and Vodafone Plc has pledged its holding in the proposed merged entity worth Rs82.5bn (17% of post-merger market cap at CMP), which provides safety for 12 months' rental.

The stock will get more credibility on VIL confirming itself as a going concern based on two key events: 1) significantly large tariff hike or floor price implementation (in favour of operators), and 2) successful fund raising or strategic stake sale. Further, VIL may not require much of cash funding for the next two years considering the moratorium on deferred spectrum liability. Having said that, if competitive intensity remains high and VIL is unable to raise funds, then we don't see VIL continuing as going concern.

- Post-merger capital structure to improve, but still sub-optimal. We don't see much hurdle to completion of the merger between BHIN and Indus Towers with the new scheme of arrangement. The merger requires final approval from NCLT (though already received in the old scheme of arrangement) as there have been changes in the merger scheme. As per the agreement, VIL will receive ~Rs40bn in cash towards its 11.15% stake in Indus Towers and the merged entity would make dividend payout of Rs48bn within three months of merger. This cash payout would mean the merged entity would turn into a net-debt company from net-cash. However, 'net debt to equity' will be 30% and 'net debt to cash EBITDA' (FY22E) is at 0.8x, which is much lower than the targeted 2x 'net debt to EBITDA'.

Shares of BHARTI INFRATEL LTD. was last trading in BSE at Rs.178.7 as compared to the previous close of Rs. 178.65. The total number of shares traded during the day was 190085 in over 2732 trades.

The stock hit an intraday high of Rs. 182.8 and intraday low of 176.8. The net turnover during the day was Rs. 34048569.

Source : Equity Bulls

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