With the economy in a slowdown and corporate earnings dwindling, companies offering predictable prospects are much sought after. Bharti Infratel, the tower arm of telecom major Bharti Airtel, scores high in this aspect.

Steady rates of tower occupancy with strong anchor tenants and the potential for business expansion with increasing mobile usage in under-penetrated rural areas are key positives for the company. Increasing usage of data and adoption of technologies such as 3G and 4G, although slow currently, can provide further impetus to growth too. The company is locked into lucrative contracts with clients backed by stringent clauses in case tenants choose to exit.

The offer isn’t cheap. At the upper end of the price band (Rs 210-240), the offer asks for 49 times (annualisd half year) for FY13 and about 42 times at the lower end, on a post-offer fully diluted equity base, making it much costlier than the broader markets. But global valuations enjoyed by tower companies in mature markets suggest that the offer is not completely overpriced.

The EV/EBITDA multiple demanded by Bharti Infratel is about 11 times, which is cheaper than listed players in the US such as American Tower, SBA Communications and Crown Castle, which trade at over 18 times on the valuation parameter. Between 2008-09 and 2011-12, the company’s revenues rose at a compounded annual rate of 22.8 per cent, while net profits grew at 56.7 per cent.

There are no listed peers for the company in India. In FY12, Bharti Infratel’s revenues were Rs 9597 crore, while net profits stood at Rs 750.7 crore.

We would be comfortable with investments made at the lower end of the price band. The investment horizon needs to be about two years for meaningful capital appreciation.

Rising tenancy

Bharti Infratel (including its 42 per cent stake in Indus Towers – jointly owned by Bharti, Vodafone and Idea Cellular) owns over 80,000 telecom towers. The tenancies in its sites have risen steadily from 1.5 a couple of years ago to about 1.9 currently. This level is among the highest in the industry.

With Bharti’s own operations along with anchor tenants such as Vodafone and Idea Cellular, the company has had a steady growth in revenues. These three operators command more than two-thirds of the revenue market share on a pan-India basis, which has been expanding in the last two years.

Tenancies may not dramatically improve to the levels seen in markets such as the US (2.5-3 operators per tower site) in the near future as top Indian operators such as RCom, Tata Teleservices and BSNL have their own tower businesses and many new operators have folded up after the Supreme Court cancelled 122 2G licences.

But with its strong partnership with the top operators which continue to dominate the market, Bharti Infratel would have a fairly steady flow of rentals from its key tenants.

Expansion in RURAL areas

A recent report from the telecom regulator indicates that there is substantial scope for expansion in rural areas for operators. Even as the urban tele-density is over 160 per cent, the figure in rural areas is just a little over 40 per cent.

In fact, subscriber additions have slowed or declined in recent months in urban areas, but continue to grow steadily in rural areas.

Both Bharti Infratel and Indus Towers operate in several states where the telecom penetration is still 45-65 per cent, giving ample scope for subscriber additions and erecting more towers.

Also, with new spectrum allocation being done in the 1800 MHz band for most operators, there would be a greater necessity for more towers, as this band has lower coverage capability compared with the 900 MHz band.

Finally, with data usage continuously increasing on mobiles and the launch of 4G technology by Bharti Airtel, and also broadband wireless access services to be started by Reliance and a few others, there is some scope, albeit over the long-term, for increasing tower requirements.

Favourable contracts

Bharti Infratel’s contracts with customers are structured to its advantage. Agreements are generally signed for periods ranging from 5 to 15 years.

In case a customer decides to cancel the contract at any point in time, the tenant would have to pay 35 per cent of the amount to be paid for the remaining period of the tenure or one year’ rentals, whichever is higher.

Also, customers which take tower sites on rent tend to be quite stable, as shifting locations is both technically as well as financially expensive.

Offer details

Bharti Infratel hopes to raise about Rs 4,500 crore through this IPO, part of which is an offer for sale from existing investors,for installation of new towers, upgradation and replacement of existing ones and green energy initiatives at its sites.

The offer is open from December 11-14.

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