Bharti Infratel Ltd IPO review

Issue Highlights

Issue period	11/12/12-14/12/12
Issue Size	Rs. 45.33 billion/ 18,89,00,000 equity shares
Price Band	Rs. 210-240
Face value	Rs. 10
Lot Size	50
Maximum Retail Subscription Amount	Rs. 1,92,000 or 16 lots
Industry	Telecom Towers & Infrastructure
Registrar	Karvy Computershare
Issue Type	100 % Book Building
Listing	BSE,NSE
Retail Discount	Rs. 10

Issue Details

Issue	Fresh Issue	Offer for Sale
18,89,00,000 shares	14,62,34,112 shares	4,26,65,888 shares

Industry Profile

The revenue of the Indian telecom & towers industry is in excess of Rs. 1361billion with mobile subscriber base of around 919 million out of which around 868 million are 2G subscribers and approximately 51 million are 3G subscribers. Urban mobile penetration has reached around 163 % while rural penetration remains a meager 38.3 %.Though, Indian telecom industry is very competitive globally with over 10 operators but the top 3 players account for the 68 % of the market share.

In a period spanning 2005-2010, Indian wireless industry has grown at a CAGR of 56 % with the surge in subscriber base being attributed to a sharp decline in tariffs and the expansion of services by existing players.

Company Profile

Bharti Infratel Ltd. (BIL) is one of the largest tower and related infrastructure provider company in India (on a consolidated basis considering its stake in Indus).In India BIL has over 34,000 towers across 18 states and 11 telecom circles.

Indus: Indus is a joint venture between Bharti Infratel, Vodafone India and Aditya Birla Telecom with holding equity interests of 42 %, 42% and 16 % respectively.

Objects of the Issue

·         For the funding of installation of 4813 new towers : Rs. 1087 crore

·         up gradation & replacement work of existing towers : Rs. 1214 crore

·         For taking green initiatives at tower sites: Rs. 639 crore

·         General corporate purposes: NA

Strengths & Opportunities

·        With  the sprawling 3G/4G user base in future, the need for newer towers shall increase significantly

·        As 3G spectrum operates on a higher frequency band , its reach being limited, the demand for new towers will increase considerably

·         Considering BIL’s interest in Indus, BIL has economic interest in around 80,656 towers in India.

·         BIL and Indus have got 1255 and 975 solar powered sites respectively under their environmental friendly initiatives.

·         BIL has long term MSA (Master Service Agreement) with tenant telecom companies.

Under MSA, tenant-telecom companies use towers (and related infrastructure) provided by BIL and installs their equipment on it. This is termed as tenancy.

     

Concerns

·         This business is prone to litigations arising on the issues like nuisance, pollution, health hazards, land disputes ,power theft etc

·         Demand for the tower infrastructure (building, acquiring, owning and operating towers and related infrastructure) may decrease due to factors such as slump in the overall economy, reduced capital expenditure by Wireless Telecom Operators due to various reasons like lesser demand, higher network sharing among operators, cutting edge technology leading into efficient network requiring lesser towers, unfavorable government policies, scarcity of power, slow growth of 3G/4G infrastructure etc.

·         Wireless telecom operators may opt for enhancing their existing towers to embrace the 3G/4G technology instead of going for newer towers

·         The cancellation of 2G licenses of telecom operators at the discretion of the Supreme Court resulted in the closure of around 2.25% of the total co-allocations (tenancy) and a substantial part of the termination fee was lost besides resulting in a lower demand for newer towers.

·         BSNL and MTNL have their own tower portfolios and are contemplating to share their towers with telecom operators. Reliance Communications and Tata Teleservices ltd. have hived off their towers businesses into separate tower companies which will be  imparting strong competition in the future

·         Besides smaller players like GTL infra  etc, state power player like Power Grid Corporation is also desirous of letting its infrastructure to telecom operators who shall be equipping telecom equipments on their towers

·         Retrospective tax law changes (similar to Vodafone vs. GOI case) are negative for the company’s growth prospects

·         A few of the group companies incurred losses in the past 3 years

·         Tower infrastructure business is highly capital intensive and cash flow from operations will be insufficient to repay the debt and accumulated interest

Financial Profile #

# post issue equity used for the calculation of the EPS

# Calculations at the upper price band of Rs. 240

	FY 13 Annualized	FY 12
P/E	49.2	60.4
P/B	3.2	3.1
PEG	.73	1.06
Profit CAGR (3 year)	67 %	57%
NPM	9%	8%
M-Cap/ Sales	4.6	4.8
Net Asset per share	Rs. 76	Rs. 77
EV/EBITDA **	13	12.3
ROE	6.4 %	5.2 %
EPS	Rs. 4.9	Rs. 4
Debt Equity Ratio	.65	.8
Current Ratio	1.14	1.21

** A rough estimate

Comparison to Peers

No Indian listed peer company is available for the comparison

Inference

At the upper price band of Rs. 240, shares will be trading at a FY 13 price-to-earnings multiple of 49 appearing as a highly priced issue but a high profit CAGR brings the PEG ratio below 1.(4-year CAGR being too high was categorically avoided while analyzing the financials)

Bharti Infratel is not a high leveraged company with a comprehensive debt-to-equity ratio of .65 and this is why it has seen a low ROE of 6.4 %.EV/EBITDA ratio is in a range of 12-13.

Both Price-to-earnings multiple and EV/EBITDA ratio defines this issue as an overpriced one despite having a very high profit CAGR growth.

Though in future returns on equity and capital will increase with rising tenancy income but aforementioned concerns like government policies, competition from peer companies especially PSU companies (BSNL, MTNL and Power Grid) is spooking enough.

It seems, there is nothing left on the table for investors and listing gains shall depend on the then prevailing market sentiment and frenzy. Besides, issue being a large one, a bout of profit booking can be easily seen on and after the listing day.

Risk-averse value investors better skip this issue. Even long term investor should down size their buying so that they could cost-average in case shares fall below the issue price.

 BIL is a long term bet because -

Share shall fundamentally perform well only when BIL gets its ROE increased and for that company should have a higher growth in tenancy income and will gave to adapt to a judiciously calibrated higher leverage. This hypothesis makes BIL a long term bet that too after successfully overcoming the aforementioned concerns.

 Disclaimer

        Analysis is for the information purpose only. Though due care and caution have been taken while preparing this report, analyst shall not be responsible for any error and shall not bear any financial liability to the users of this report.