BHAVIKK SHAH's BLOG: VODAFONE

Scrip Code: 534816 / INFRATEL

CMP: Rs. 390.85; Market Cap: Rs. 74,131.23 Cr; 52 Week High/Low: Rs. 499.65 / Rs. 341.35.

Total Shares: 189,66,67,069 shares; Promoters : 136,00,00,000 shares – 71.70 %; Total Public holding : 53,66,67,069 shares – 28.29 %; Book Value: Rs. 94.73; Face Value: Rs. 10.00; EPS: Rs. 8.80; Dividend: 110.00 %; P/E: 44.41 times; Ind. P/E: 26.32; EV/EBITDA: 19.88.

Total Debt: NIL; Enterprise Value: Rs. 69,639.41 Cr.

BHARTI INFRATEL LIMITED: The Company was incorporated on November 30, 2006, Bharti Infratel Limited is a provider of telecom tower and related infrastructure. Bharti Infratel is one of the world's largest telecom tower infrastructure providers which deploys, owns and manages telecom towers and communication structures for all wireless operators. The business of Bharti Infratel and Indus is to acquire, build, own and operate telecom tower and related infrastructure. The company come with an IPO in December 14, 2012 issuing 18,89,00,000 equity shares of face value of Rs. 10 each at an issue price of Rs. 220 raising Rs. 4,155.80 cr. The company got listed on December 28, 2012 at Rs. 200 which was also its days high and making a low of Rs. 188.70. The object of the issue was raise money for installation of 4,813 new towers, to arrange funds for up gradation and replacement on the existing towers, to facilitate green initiatives at tower sites, and for the other general corporate purposes and to get the benefits of listing of the equity shares on the stock exchanges. The company has not declared splits in face value of its shares nor have given bonus shares till now. Bharti Infratel and Indus currently provides access to their towers primarily to wireless telecommunications service providers. Bharti Infratel's and Indus's three largest customers are Bharti Airtel (together with Bharti Hexacom), Vodafone India and Idea Cellular. They are the three leading wireless telecommunications service providers in India by wireless revenue. In India, Infratel with Indus has over 88,000+ towers, across 18 states, and 22 Telecom circles, and still growing. Bharti Infratel also has a 42 % stake in Indus Towers which was created as a Joint Venture in 2007 between Bharti Infratel (42 %), Ortus Infratel Holding (Vodafone 42 %) and IDEA Aditya Birla Telecom (16 %) to hive off the Towers business in 15 telecom circles. BHARTI INFRATEL LTD is locally compared with GTL Infrastructure Ltd, Sujana Towers Ltd, Kalpataru Power Transmission Ltd, BS Limited, KEC International Ltd, Technofab Engineering Ltd, Jyoti Structures Ltd, Premier Energy and Infrastructure Ltd, Shriram EPC Ltd, Om Metal Infraprojects Ltd and globally compared with American Tower of USA, Crown Castle of USA, SBA Communication of USA, United States Cellular Co. of USA, Vertical Bridge of USA, Insite Towers of USA, BNSF Railroad of USA, Time Warner of USA, Phoenix Tower International of USA, Tower Ventures of USA, AT&T Towers of USA.

Investment Rationale:

Bharti Infratel Limited is an India-based company engaged in providing tower and related infrastructure sharing services. The Company has operations in around 22 telecommunication circles. Bharti Infratel has been the industry pioneer in adopting green energy initiatives for its operations. The business of Bharti Infratel and Indus is to acquire, build, own operate tower and related infrastructure. Bharti Infratel received the prestigious Golden Peacock Awards in 2015 for their unique initiatives and significant contribution towards corporate social responsibility. This award recognises and felicitates institutions, corporates and government enterprises for their dedication and high level of quality at work. Bharti Infratel and Indus currently provide access to their towers primarily to wireless telecommunications service providers on a shared basis, under long term contracts with Bharti Airtel, Vodafone India and Idea Cellular, which are the three leading Wireless telecommunications service provider in India by wireless revenue. As on September Dec 31, 2015, Bharti Infratel owned and operated 37,801 towers with 78,949 co-locations in 11 telecommunications Circles while Indus operated 1,17,579 towers with 2,61,159 co-locations in 15 telecommunications Circles. The Company's towers come in two varieties, which include ground-based towers (GBT) and roof-top (RTT) towers. The Indian telecommunications industry is one of the most competitive globally. The focus of Indian operators in the last ten years or so has been to develop an affordable mass market telecommunications service model which allows for service availability across India’s urban and rural areas at affordable prices. A strong focus on optimization of operational expenses through the outsourcing of non-core areas, process innovation, cost to serve alignment and strategic partnerships has also resulted in steady growth of the Telecom Tower Industry in India. Today, all operators prefer to lease towers from tower companies rather than build them for captive use. Infrastructure sharing is effective in optimizing the utilization of available resources and helps to bring down the cost of providing telecommunications services. With the reduction in overall tariffs and restrictions placed by various local regulatory bodies on the installation of telecom towers, infrastructure sharing amongst service providers has become the norm rather than the exception in the Indian telecommunications industry. Tower companies provide the entire range of tower infrastructure that is required by wireless telecommunications service providers to offer mobile telephony services to their subscribers. Tower infrastructure refers to equipment’s such as towers, shelters, power regulation equipment, battery banks, diesel generator sets, air conditioners, fire extinguishers and a security cabin, required at a site where such towers are installed. There are generally two types of towers – the Ground Based Towers (GBTs) and Roof Top Towers (RTTs). India will emerge as a leading player in the virtual world by having 70 Cr internet users from the 4. 7 billion global users, by 2025. With the government’s favourable regulation policies and 4G services hitting the market, rapid growth is expected in the Indian telecommunication sector in the next few years. Also, with developments in this sector, services such as security and surveillance, remote monitoring of ATM machines, home automation, traffic management, retail, logistics and grid energy could eventually facilitate optimisation of resources. Mobile Data is going to be the key pillar of growth for the Indian telecom industry. In addition, the sector is also seeing increased focus on quality of service and a possible utilization of unused spectrum. These trends are positive for tower companies. The Telecom towers have changed the skylines of India’s cities—or even its towns and villages dramatically over the past 10 years, but one of the most striking differences has been the appearance of telecom towers which are 30-70 meter-high structures that mostly crown the tops of the tallest buildings. India’s telecom boom has been well charted. Some 18 years after the mobile phone first appeared on the Indian consumer stage, there are more than 90 Cr mobile phone users in a country of 1.2 billion, which is more numbers than have access to a toilet, according to a statistic often touted by development agencies, and three times the entire population of the US. And the growth of the sector in the last decade has been explosive—in 2002, the number was just 6.68 million. India’s telecom sector is now the second largest in the world, and the fastest growing. Providing network coverage to these hundreds of millions of users are around 500,000 telecom towers, covering more than 90 % of the country’s land area, and unnoticed for the most part by the people who rely on them. Most are made of iron girders painted red and white, with up to six long, bar-shaped antenna pointing skywards, linked with wires to a small shed at the base. A tower connects two callers to each other via switching centres or telephone exchanges, providing urban and rural India with access to mobile communication on a scale which is just second to China. Not only do the towers provide a crucial service, they represent an annual Rs. 1.36 trillion revenue industry, for India’s economy, mobile phones mean money: for every 10 % of the population using basic services (voice and SMS) in the country, national gross domestic product rises by 0.5 %, according to a department of telecommunications (DoT) report, and for Internet and other non-voice communications (data), the same penetration adds 1 %. It’s not surprising then that the telecom tower sector has become an industry in its own right. The government granted towers an “infrastructure” status, putting them on the same footing as roads, ports, hospitals and even electricity generation. This brought encouragement and investment in this sector, which was crucial for the growth of the country. These towers were proving expensive at Rs. 20 lakhs to 40 lakh each and so the idea of tower sharing, encouraged by the government, became popular. Today, a single tower is often shared by multiple tele-coms. The capital deployed is much more efficient and it offers considerable savings in operational expenditure. It’s a win-win for the telcos and the towercos. A telco renting 75 % of its sites from tower companies can reduce its first-year costs by 60 %.

Building up towers is complex thing. There are two types of tower requirements: green-field i.e. for expanding into a new area and brownfield which is to fill a gap in an existing network. Once the choice has been made, it’s up to the network provider to decide on the location. The telcos, along with their network partners, vendors and towerco, come up with a “network design” for a particular region, based on anything from the amount and quality of spectrum available, to the amount of concrete and height of buildings at the location. The design of a tower must take into account the wind velocity in an area, its proximity to an airport runway and even the curvature of the earth. Each tower must have line of sight with its neighbour, with all of them being arranged in a hexagonal or octagonal pattern. The shorter the tower, the more towers or repeaters are needed to amplify the signal—a particular problem in the Indian context, where operators work with one-tenth of the spectrum that’s available in developed markets and need to serve a much larger user base. Telecom towers are a lot like real estate—everything depends on the location. Land must be acquired at the exact coordinates where the tower is needed. After the telco has decided on a location, the coordinates are given to the towerco, which checks to see if there are any other towers in the area that can be used. To cut costs, towercos rent the land for a tower on a long-term lease. That brings the challenge of dealing with landlords, which can be something of an ordeal. If there are no unforeseen delays, a ground base station takes around 60 days to build and roof top takes around 45 days to build the tower. The biggest challenge, however, is not in the building of a telecom tower, but in its maintenance: the rising cost of fuel and the need to be environmentally responsible, as well as reassuring the public that its structures are not health hazards, is proving a sticking point for the towercos. Trai had directed all towercos to reduce their dependence on diesel and cut carbon emissions by running at least half of all rural towers and 20 % of urban towers on hybrid power by 2015. The problem for the towercos is that due to an unreliable grid, and the remote locations of some towers, more than 60 % of the towers currently depend solely on diesel for power generation. The rise in diesel prices may increase the troubles. The Tower and Infrastructure Providers Association is working on a model where towercos partner with renewable energy service providers to make a viable business case for both, the idea is that the towercos buy energy from a renewable energy provider in rural areas. Few years back Bharti Infratel and Indus announced to replace their diesel generators with batteries. Bharti Infratel already generates as much as 5 million units of solar power every year. While continual growth of the tower sector has led to much scrutiny, their ubiquity and importance to the economy has forced a significant amount of innovation and research that can be tapped by other industries. There is tremendous demand for data in India and the telecom towers can become the focal point for delivery of broadband, at least outside the urban markets, these towers can be connected to the ATMs and even computer kiosks. As with the tower, you get both communication capabilities and power, which are difficult to find in rural areas.

Outlook and Valuation:

BHARTI INFRATEL is the largest telecom tower provider company and enjoys a good position in the industry. Recently, Bharti Infratel will be included in Nifty 50 from April 1, 2016, this would bring more interest of institutional and funds managers into the stock. Telecom towers are the integral part of the telecom network infrastructure. In fact they are the most expensive to build and the valuations are heavy. This business has outgrown itself that most of the companies have hived off the tower business as its own entity. Tower business is making explosive growth and exponential investments are involved. It requires a lot of investment to survive and the smaller companies are finding it difficult. There has been massive consolidation in the telecom space with players such as Videocon, Reliance Communications, Systema Shyam, Aircel etc. either scaling down its operations or contemplating merging with each other, like American Tower Corp acquird Xcel Telecom for Rs. 700 Crs, Quippo Telecom acquired Spice Telecom’s tower business and Tata Teleservices WITIL is merged into it. Bharti Infratel did face loss in tenancies owing to such a phenomenon, which also led to 610 exits in the quarter on a consolidated basis. However, the management reiterated that the loss in tenancies is only temporary and weeding out inefficient players leads to higher room available for efficient telcos. Consolidation trends are also visible in the tower space with ATC emerging as a competition to Infratel post the acquisition of Viom. Because of the intense competition each tower needs more than 2 tenants to stay profitable. The current rates are a bit low and hence the sharing and consolidation. The independent mobile tower companies will gain a lot as it is difficult for new companies to build their towers. If the established player too shares their towers then the new telecom players can roll out their networks quickly and the tower companies can increase their revenues. There are 13 major tower companies in India – Indus towers has approx. 80,000 towers; Reliance Infratel has 31,000 towers; Quippo Telecom Infrastructure has 23,000 towers; GTL has 9,000 towers, Essar Telecom has 6,000 towers, American Tower Corp has 4,000 towers, Tower Vision has 3,000 towers, Aster Infrastructure has 1,000 towers, India Telecom Infra Ltd has 1,000 towers, KEC Internatioal has 400 towers, Independent Mobile Infrastructure has 400 towers and Bharti Infratel has 20,000 towers. The Telecom Regulatory Authority of India (TRAI), has proposed levying penalties on companies whose calls are getting dropped. Call traffic increases with dropping call rates but the spectrum is limited and companies need to put more and more sites and finding sites is a difficulty. This difficulty in getting sites is also due to the myth and fears about radiation and also due to some prime location where there is government property. Hence in order to avoid call drops tower sharing becomes more important and hence tenancy for these tower companies increases.

Bharti Infratel has tenancy around 3,000 and as more and more data networks get rolled out, acceleration would happen. Also with the launch of Rel Jio and with the 4G roll out would mean more tenancy for tower companies and more data volumes. Airtel and Idea are expected to post data volume growth of 55 % CAGR in FY16E-18E to 695 and 415 billion MB, respectively. Hence, data revenues may then form about 23 % to 25 % of total revenues from 15 % to 17 % currently. Bharti Infratel Ltd with Airtel, Idea and Vodafone as anchor tenants, who together control about 70 % revenue market share, is certain to benefit from increasing tenancies as data volumes increase. With the call drops issue coming into limelight and the government’s stance to make telcos liable for the breach in quality standards, this would increase the demand for installation of more cell sites, thus benefitting Bharti Infratel Ltd. In addition, installation of a single RAN would also augur well for the company as equipment’s in such a case are smaller, thus freeing up more room for more tenancies. Bharti Infatel Ltd has an annuity led business with a remaining estimated contract life of 5.9 years, which lends certainty of future cash flows to the tune of more than Rs. 47,500 Cr. The company delivered 2.8 % dividend yield by declaring a dividend of Rs. 11 in FY15. Bharti Infratel is expected to pay dividends to the tune of Rs. 11.0 and Rs. 12.1 per share in FY16E and FY17E, respectively. Bharti Infratel is also awaiting regulatory clarity about buyback norms, which could help in optimising the capital structure and, hence, improve return ratios. On financial side Bharti Infratel reported its Q3FY16 numbers with revenues at Rs. 3,093 crore, up 4.9 % YoY. Revenues from rentals grew 9.0 % YoY to Rs. 1,966.7 crore as consolidated tenancies grew from 2.08 to 2.17 over the same period. Energy revenues declined 2.0 % YoY to Rs. 1,126.3 crore as input prices declined. Bharti Infratel’s EBITDA came in atRs. 1,343.0 crore, up 5.5 % YoY. EBITDA margins came in at 43.4 %, up 25 bps YoY, as expenses towards rent & other expenses were up 12.4 % YoY and 37.5 % YoY, respectively. Energy margins remained at 4.8 % as it continued to pass on the energy benefits. PAT came in at Rs. 565.4 crore, due to higher other income, which came in at Rs. 132.9 crore. With robust growth in data volumes, there are an increasingly higher number of tenants on the company’s network. The average tenancy at the Consolidated level has grown from 1.90 x in FY12 to 2.06 x by FY15 leading to 32 % CAGR in FY12-15 in sharing revenues from Rs. 3,099.9 crore in FY12 to Rs. 7,126.1 crore in FY15. Going ahead, it is expected that the average sharing factor at the consolidated level to reach 2.28 x. Bharti Infratel Ltd is a play on the operating benefits that would flow in with increasing tenancies. As a new tenant comes on board, rentals multiply whereas costs do not have a linear increase. Loading revenues are also highly margin accretive and would flow in directly into margins. As tenancies rose from 1.9x to 2.13x in the last few years, margins for the consolidated entity have risen to 43 % in the current quarter from 37 % in FY13. However, as there is currently higher tower requirement in cities, which command a higher rental expense, the growth in EBITDA margins would be slower than expected earlier. With ballooning data growth and tremendous opportunity, going ahead, considering the kind of spectrum purchased by telcos and stable annuity based business model, Bharti Infratel Ltd looks attractive. At the current market price of Rs. 390.85, the stock is trading at a PE of 32.03 x FY16E and 27.14 x FY17E respectively. The company can post Earnings per share (EPS) of Rs. 12.20 in FY16E and Rs. 14.40 in FY17E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.

SOTP Valuation :-

Business Subsidiary	Per Share (₹ Rs)
Enterprise Value of Standalone business	262.13
Enterprise Value of Indus Towers Rs. 678.91 per share
BIL holding (42%) in IT Rs. 285.15 per share (Less) Holding discount (15%)	242.37
Total Enterprise value	504.50
Less: Net Debt (Rs. Cr)	4.22
TOTAL Value per Share (Rs.)	500. 28

KEY FINANCIALS	FY15	FY16E	FY17E	FY18E
SALES (₹ Crs)	11,668.30	12,322.50	13,553.30	14,950.10
NET PROFIT (₹ Cr)	1,992.40	2,296.00	2,727.40	3,122.50
EPS (₹)	10.50	12.20	14.40	16.50
PE (x)	35.00	30.40	25.60	22.30
P/BV (x)	4.90	5.10	5.40	5.50
EV/EBITDA (x)	14.10	13.20	11.50	10.10
ROE (%)	13.40	16.50	20.50	24.40
ROCE (%)	18.30	22.40	27.50	32.10

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