Data and rental growth worries for Bharti Infratel

The Bharti Infratel stock lost around eight per cent in the past two trading sessions, even as the buy-back offer price at Rs 424 was higher than the then prevailing price of Rs 380. The company has fixed June 16 (Thursday) as the record date for the buy-back, wherein it will buy shares worth Rs 2,000 crore on a proportionate basis from shareholders through the tender offer route.

Usually, markets react positively when buy-backs are at a decent premium to market price. Part of the recent fall can be attributed to low acceptability as Bharti Airtel (owns 71.7 per cent in the company) will participate, and the Street’s expectation of a price of Rs 450. The more important reason is brokerages downgrading the stock.

Bank of America Merrill Lynch (BoFA-ML) analysts downgraded the stock to underperform from buy because expectations of slower-than-expected data growth led to muted estimates on loading and tenancies. All things remaining equal, the single biggest trigger for tower companies such as Bharti Infratel is the increase in tenancies, the higher the better. Further, any dip in rental renewals (financial year 2018-19 or FY19) on the back of higher discounts to telcos would impact earnings.

Slow revenue growth for data in the sector has been one of the key takeaways from results of the quarter ended March. Data revenue growth in the quarter dropped to 35 per cent from the 100 per cent levels seen a year ago. Demand elasticity (in data) is not encouraging, which means that despite lower prices, demand has not seen the jump that was expected.

The key worry is the lack of pricing power for tower companies. Analysts at J M Financials say tower companies are unable to pass on an increase in lease rentals charged by landlords whenever a new tenant comes onto the site with base rentals for new tenants remaining unchanged for the past eight years. If contracts are renewed (starting the first quarter of FY19) and given the rental gap between older and new tenants, it could lead to a 10-15 per cent cut in rentals for Bharti Infratel, they add.

Given the expected pressure on earnings over the next couple of years, analysts have cut earnings estimates (by seven-nine per cent) and valuation multiples from upwards of 11 times enterprise value to operating profit to under 10 times. While BoFA-ML has cut its target price to Rs 232 from Rs 440, JM Financial has cut to Rs 350 from Rs 410.

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