Bharti Infratel awaits 4G boost

The stock of telecom tower services provider Bharti Infratel is up about 10 per cent since the commercial launch of Reliance Jio (RJio) a month ago. Expectations that telecom service operators, which spent  ~66,000 crore in the recent auctions for spectrum, will accelerate their deployment of fourth-generation (4G) technology services, has also helped the stock.

Operators are expected to not only defend their market share in key circles but expand their presence in areas where they are weak. Analysts at Motilal Oswal Securities say with data coverage at only 55 per cent, there could be aggressive network rollout over the next two to three years.

Further, RJio’s launch might lead to higher data consumption, leading to congestion on existing networks. This wll lead to operators spending more on the network to match rivals, and ease congestion and service quality.

Analysts at Macquarie Capital expect India’s data consumption to grow 12-fold by 2020, driven by a sharp fall in rates for data and rise in smartphone penetration. Some of this is already happening, with data growth growing 20 per cent quarter-on- quarter. This is leading to higher tenancies for Bharti Infratel as telecom companies (telcos) rapidly expand their 4G services, alongside the existing 2G and 3G networks.

Given Bharti Infratel’s footprint (including its 42 per cent stake in Indus Towers) and with the top three telcos as anchor tenants in 85 per cent of the sites, it is placed well to ride on the data growth story. What will add to the tenancies is demand from RJio in its second phase of tower expansion.

While the longer term prospects look good for Bharti Infratel, it is pertinent to highlight key risks on tenancy and tower rollout due to consolidation among telcos and cost pressures on incumbent operators. Consolidation among smaller operators (22 per cent of tenancies) could lead to less tenants per tower over a period. However, unlike the sector average, less than 15 per cent of tenancies on Bharti Infratel’s towers are of smaller operators.

The other key factor, according to HSBC analysts, is the limited ability to control spectrum capital expenditure (capex), as incumbent telcos are likely to bargain hard with tower companies for volume-based discounts. In the near term, operators are expanding at a frenetic pace to improve coverage and penetration. For instance, Idea Cellular recently announced it was raising its capex to ~8,000 crore in FY17, from ~7,000 crore

in FY16.

To reduce uncertainty on renewals (in FY18) and bring all tenants at par, irrespective of period of tenancy, Bharti Infratel introduced new rates from April 1. The new master services agreement ensures revenue visibility and extends contracts to 2022, to ensure co-termination of all these. This would, however, mean lower average rental growth in the near term, as rentals for anchor tenants at legacy towers will be frozen at FY16 levels.

On the margin front, the company is looking at optimising power costs while maintaining uptime, thus minimising operational costs, as key areas of focus. It has increased the number of green sites to 33,000 and will utilise solar energy or other sources to minimise diesel consumption. Operating cost margins, excluding power costs, stand at 68 per cent.

Given the outlook, the stock at 10.5 times FY18 earnings estimate is attractively valued, compared to valuations of global peers in the 15-17 times range. Further, Macquarie Capital analysts believe the Street is underestimating the inherent strong and annuity-based business model, and secular data-led tenancy growth opportunity from telcos, including RJio.

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