Bharti Infratel: Towering presence - Buy

As a play on the improving prospects of top telecom operators, Bharti Infratel — the tower operating arm of Bharti Airtel — is an interesting prospect.

Steady increase in the rates of tower occupancy with strong anchor tenants, the potential for business expansion with increasing mobile usage, and enhanced focus of players on still under-penetrated rural areas are key positives for the company.

The company has reduced the debt in its books significantly; this has reduced the interest outgo.

Bharti Infratel’s stake in Indus Towers (a JV between Bharti Airtel, Idea Cellular and Vodafone India) gives it greater reach and makes it a strong pan-India player. With two rounds of successful spectrum auction in the last couple of years and most top players renewing their licences, there are strong prospects for increasing tower tenancy.

The adoption of technologies such as 3G and 4G too, can provide further impetus to growth. Bharti Infratel has lucrative contracts with clients backed by stringent clauses in case they choose to exit.

At ₹388, the stock trades at 29 times its likely per share earnings for 2015-16; this is in the 25-32 times band that the stock has traded in the last three years. Given the stock’s strong 40 per cent upmove in the past three-four months, investors should have a horizon of at least two years to see meaningful capital appreciation.

In 2014-15, Bharti Infratel’s revenue rose 8 per cent to ₹10,827 crore, while profit increased 31 per cent to ₹3,052 crore.

Bharti Infratel (including its 42 per cent stake in Indus Towers) owns 85,892 telecom towers. The tenancies in its sites have risen steadily from 1.5 levels three-four years ago to 2.12 currently. With Bharti’s own operations along with anchor tenants, such as Vodafone and Idea Cellular, the company’s revenue has grown steadily. These three operators command nearly 70 per cent of the telecom revenue market share on a pan-India basis. The company also serves several other operators in many circles.

Indus Towers has an even better tenancy ratio of 2.17.

With Reliance Jio signing tower sharing agreements with both Bharti Infratel and Indus Towers, there is scope for improving tenancies further.

Also, with many operators buying considerable spectrum in the 1,800 MHz band, there would be a greater necessity for more towers, as this band has lower coverage capability compared with the 900 MHz band.

Bharti Infratel’s contracts with customers are structured to its advantage. Agreements are generally signed for five to 15-year periods. That said, customers that rent tower sites tend to be quite stable, as shifting locations is technically as well as financially expensive.

According to a report from the telecom regulator, wireless penetration in rural areas is still only a little over 45 per cent.

This low tele-density in the hinterland presents a significant opportunity for operators. So, a pan-India tower operator such as Bharti Infratel would benefit.

In the last three-four years, operators have seen an increase in non-voice revenues from low single digits to nearly 15-20 per cent across mobile players. This trend along with increasing preference for smart phones means that data usage is likely to grow multi-fold. Operators would optimise costs by co-locating their towers with established players to achieve adequate reach.

A report from research firm Analysys Mason says that data traffic (2G+3G) would grow to 1,728 million GB by 2016-17, at a scorching rate of 52.8 per cent annually its 2011 level.

Bharti Infratel has reduced debt from ₹3,342 crore in 2013-14 to ₹2,582 crore currently. Interest costs have reduced by 27 per cent in FY15 to ₹290 crore.

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