Tenancy gains key worry for Bharti Infratel to maintain revenue momentum

After hitting a 52-week low following the Supreme Court's order on adjusted gross revenues (AGR) last month, the stock of Bharti Infratel has bounced back by gaining over 30 per cent. The overhang related to its two key anchor tenants, Bharti Airtel and Vodafone Idea, continues but the street believes that the worst is already factored into the stock.

Given that Bharti Infratel's revenues are dependent on the number of tenants it has, the confidence of its customers is important for maintaining its revenue momentum. The recent decision of the two anchor tenants to raise prices from December 1, is a positive for the tower operator. Analysts believe that if Vodafone Idea and Bharti Airtel increase their tariffs by 15 per cent, Bharti Airtel's operating profit could increase by 25 per cent. Both operators had cut their costs both on the opex and capex fronts in FY20; the tariff increases offers them room to strengthen their network.

While these are positives, there are some headwinds as well. The merger of Idea and Vodafone had led to synergy gains and thus exits from its network impacting its revenues. While lower tenancies from Vodafone Idea was expected, the ability of the company to survive came into question after the adverse AGR verdict. This would be huge blow for Bharti Infratel if the company were to shut down even in a scenario of price hikes. However, analysts increasingly this may not happen.

Analysts at IIFL believe with Rs 90,000 crore of spectrum dues for the government from Vodafone Idea at stake, the government has incentives to ensure the company's financial viability. They believe that the government spreading the penalty on licence fee on the AGR case over 5-7 years, enabling conditions for a price hike and not pursuing the spectrum penalty could help VIL survive with a lower market share. The current stock price factors in a Bharti-only scenario, according to a note IIFL released last month.

The other worry is on the operational front where pace of tenancy additions or ramp up even for Bharti Airtel has been low. In addition to Bharti Airtel, incremental tenancy gains from Jio appear unlikely given the fact that the operator has reached almost 99 per cent network coverage and has floated an investment trust comprising its own tower assets, say analysts at SBICAP Research. With Bharti Airtel the only telco operator that is likely to provide any incremental tenancies, the likelihood of growth in tenancies for Bharti Infratel is muted, they add.

While price hikes are positive, investors should not jump into the stock as it is not clear how Reliance Jio will react. Moreover, there is little clarity on the participation by companies in the 5G spectrum auction. Adoption of 5G is slated to be the next big trigger for Bharti Infratel.