Bharti Infratel India Equity Research Telecommunications September 2, 2015 Management Meet Update Emkay Your success is our success Data demand to accelerate growth CMP Rs396 Target Price Rs505 ( ) Rating Upside BUY ( ) 27.4 % Multiple triggers for tenancy growth: Data coverage expansion both in existing and new regions, launch of service by R-Jio, 4G launch by incumbents and conversion of loading into actual 3G/4G sites Management ruled out any pressure on rentals and tenancy growth due to multiple technology BTS deployed by the telecom operators. There is significant headroom for incremental tenancies, driven by increasing focus on data coverage expansion Majority of the cost control rationalization efforts have been reflected in EBITDA growth and margin expansion in FY15. Going forward, margin expansion will be driven by incremental tenancy growth We continue to remain bullish on the company s growth prospects, as increased capex spends by telecom operators provide visibility on tenancy growth. Given the recent stock price correction, we upgrade our rating to BUY with unchanged PT of Rs505 Tenancy growth to remain healthy We expect healthy tenancy growth for the company in the near future, due to - 1) Coverage expansion by telecom service providers due to rising data demand, 2) launch of R-Jio, and 3) conversion of loading into actual 3G tenancy and 4G launch. Increased focus on call drops by the regulator would further aid tenancy demand. Incumbent telecom operators have increased capex spends to expand data coverage beyond top towns and improve quality of service ahead of R-Jio s launch, which would augur well for Bharti Infratel. To counter R-Jio, incumbent operators would also accelerate BTS demand to deliver high quality data services. R-Jio has invested >$15bn in telecom business and company is focusing on quality of services, which would drive tenancy growth. In our view, focus on quality of data services and launch by R-Jio could accelerate tenancy demand, similar to China. China Mobile had 9.4lac only 4G BTS at the end of H1CY15, while Indian operators are nowhere close to it. Impact of R-Jio s tenancies would reflect in Infratel s financials from FY17E, as Jio would first utilize Rcom towers (low rentals). No threat to tenancy from deployment of multiple technology BTS Management continues to emphasize that they encourage operators to deploy multi technology BTS, especially in metros, as that would reduce the space demanded by the existing operators and increase possibility of new tenant. Metros have higher proportion of Roof-top-towers, which restrict tenancy growth. Multiple technology BTS also reduces load on the site and in turn, reduces opex as well. Incremental tenancies would not be impacted due to multi technology BTS, as there is huge scope for fresh tenancies driven by incremental data coverage expansion. Change in Estimates EPS Chg FY16E/FY17E (%) NA Target Price change (%) NA Previous Reco ACCUMULATE Emkay vs Consensus EPS Estimates FY16E FY17E Emkay 12.0 14.3 Consensus 12.8 15.4 Mean Consensus TP Rs 451 Stock Details Bloomberg Code BHIN IN Face Value (Rs) 10 Shares outstanding (mn) 1,896 52 Week H/L 505 / 268 M Cap (Rs bn/usd bn) 751 / 11.36 Daily Avg Volume (nos.) 6,189,953 Daily Avg Turnover (US$ mn) 36.5 Shareholding Pattern Jun '15 Promoters 71.7% FIIs 24.3% DIIs 0.6% Public and Others 3.4% Price Performance (%) 1M 3M 6M 12M Absolute (11) (13) 10 45 Rel. to Nifty (1) (7) 28 54 Relative price chart 500 Rs % 70 450 54 Financial Snapshot (Consolidated) 400 350 38 22 (Rs mn) FY13 FY14 FY15 FY16E FY17E Total Revenue 102,720 108,267 116,683 126,738 141,657 EBITDA 38,302 44,001 50,041 54,348 62,150 EBITDA Margin (%) 37.3 40.6 42.9 42.9 43.9 APAT 10,003 15,179 19,924 22,750 27,070 EPS (Rs) 5.3 8.0 10.5 12.0 14.3 EPS (% chg) 33.5 51.7 31.3 14.2 19.0 ROE (%) 6.9 9.7 13.4 16.4 20.6 P/E (x) 74.8 49.3 37.6 32.9 27.6 EV/EBITDA (x) 20.3 17.6 15.1 13.9 12.0 P/BV (x) 4.8 4.8 5.2 5.6 5.8 Emkay Research is also available on www.emkayglobal.com, Bloomberg EMKAY<GO>, Reuters and DOWJONES. 300 6 250-10 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Aug-15 Bharti Infratel (LHS) Rel to Nifty (RHS) Source: Bloomberg Naval Seth naval.seth@emkayglobal.com +91 22 66242414 Ashish Agrawal ashish.agrawal@emkayglobal.com +91 22 66121241 Emkay Global Financial Services Ltd.
Exhibit 1: Energy spread trend Operating leverage and outlook on energy margins Majority of the cost control measures have been reflected in EBITDA growth and margin expansion in FY15. Margin expansion will be driven by incremental tenancy growth, going forward. The management had increased its energy margin guidance from 3-5% to 5-7% in the Q1FY16 earnings call. However, the company is confident of achieving 5% margin, while 7% remains an optimistic assumption. Rs mn Q114 Q214 Q314 Q114 Q115 Q215 Q315 Q415 Q116 Energy reimbursements 10136 10619 10759 10963 11156 11718 11500 11048 11303 Power and fuel costs 9990 10407 10302 9921 10566 11009 10540 9835 10733 Spread 146 212 457 1042 590 709 960 1213 570 % Margin 1.4% 2.0% 4.2% 9.5% 5.3% 6.1% 8.3% 11.0% 5.0% Incremental spread -356 66 245 585-452 119 251 253-643 Incremental EBITDA 501 179 554 243 264 361 580 638-398 Incremental spread as % of incremental EBITDA -71% 37% 44% 241% -171% 33% 43% 40% 162% Rentals and loading Currently, 30% of sites would have 3G loading, which is expected to rise substantially, going forward. As per management, loading factor could inch up to 90% in medium term as 1) telcos are focusing on improving quality of data services, ahead of R-Jio launch and, 2) expanding data coverage to non-urban and smaller towns. Continued rise in loading factor would aid rental/tower/month as well. Currently, loading contributes 4% of rental revenue. Other highlights Micro cell sites - There has been re-tendering of NDMC contract for micro cell sites on 18,000 poles with minimum commitment of 1000 cites/ year for 3 years. Indoor coverage cell sites would have RoI s better than a normal tower. Fibre deployment and smart city would be clearly based on the incremental demand. Smart city fiberization is a long term growth avenue, but the same would reflect in FY18 financials of the company, if it participates in bidding of the same Emkay Research September 2, 2015 2
Exhibit 2: Incremental tenancy growth 85000 5000 84000 4000 83000 3000 82000 2000 81000 1000 80000 0 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 No of tower (LHS) Incremental tenancies (RHS) Exhibit 3: Tenancy trend 2.20 2.15 2.10 2.05 2.00 1.95 1.90 1.85 1.80 1.92 1.94 1.97 2.01 2.03 2.07 2.10 2.12 2.14 34400 34200 34000 33800 Q1 FY14 Q2FY14 Q3FY14 Q4FY14 Q1 FY15 Q2FY15 Q3FY15 Q4FY15 Q1 FY16 Tenenacy Derived Rent/ tower/ Month Exhibit 4: Operating performance 1500 47% 1300 1100 900 700 45% 43% 41% 500 39% Q1 FY14 Q2FY14 Q3FY14 Q4FY14 Q1 FY15 Q2FY15 Q3FY15 Q4FY15 Rs mn Q1 FY16 EBITDA EBITDA margin Outlook and valuations Continued data demand and data services roll-out in non-urban towns would accelerate demand for incremental BTS, going forward. Launch of 4G would also add to the tower demand from telcos. Recent purchase of 2100Mhz by Bharti and Vodafone would swell loading demand in the near-medium term. Telecom service providers have increased capex guidance for FY16E and it will remain at elevated level in medium term, to achieve data network expansion. Incremental tenancies from R-Jio on Infratel and Indus towers would also boost company s operating performance, as incremental operating leverage would be driven by new tenancy. We estimate Revenue/EBITDA/PAT CAGR of 21%/24%/36% over FY15-17E. Higher capex spends by telecom operators provide increased visibility in tenancy growth for the company. At CMP of Rs405, stock trades at 14x/12x FY16/17E EV/EBITDA, with a 3% dividend yield. Given the recent stock price correction, we upgrade the stock to BUY with unchanged target price of Rs505. Emkay Research September 2, 2015 3
Exhibit 5: SOTP valuation Particulars Enterprise value- Standalone (Rs mn) 432,353 Indus - 42% Stake Enterprise value (post 17% hold co. discount)- (Rs mn) 463,178 Total Enterprise Value (Rs mn) 895,531 Consolidated EBITDA (Rs mn) 62007 Target EV/EBITDA (x) 14 Net Debt (Rs mn) 58,182 Implied Mcap (Rs mn) 953,713 Implied PE (x) 353.5 Target Price/Share (Rs) 505 Emkay Research September 2, 2015 4
Exhibit 6: Key assumptions Standalone FY12 FY13 FY14 FY15 FY16 FY17 FY18 Number of towers 33147 35119 35905 37196 38396 39596 40796 % Growth 1% 6% 2% 4% 3% 3% 3% Towers added 372 1972 786 1291 1200 1200 1200 Tenancy 1.8 1.8 1.9 2.0 2.1 2.2 2.4 % Growth 5% 1% 3% 6% 6% 7% 7% Number of tenants 60160 63573 69137 75819 83148 91679 100972 % Growth 4% 6% 9% 10% 10% 10% 10% Rent/ tower/ Month 36908 35970 37135 36911 36940 37470 37727 % Growth 0% -3% 3% -1% 0% 1% 1% Rental Revenue 26082 27441 29569 32103 35233 39304 43609 Energy Reimbursements 15499 17160 20424 21786 23642 26381 28718 Revenue from operations 41,582 44601 49993 53889 58875 65685 72326 Indus (100%) Number of towers 109,325 111819 113008 115942 118604 121404 123804 % Growth 1% 2% 1% 3% 2% 2% 2% Towers Added 593 2494 1189 2934 2662 2800 2400 Tenancy 1.9 1.9 2.0 2.1 2.2 2.4 2.6 % Growth 6% 2% 3% 6% 6% 7% 7% Number of tenants 213685 221511 233488 253513 273294 301614 326861 % Growth 6% 4% 5% 9% 8% 10% 8% Rent/ tower/ Month 31496 31523 31683 32086 32359 32955 33314 % Growth 3% 0% 1% 1% 1% 2% 1% Rental 78385 82313 86240 93233 102282 113677 125622 Energy Reimbursements 41808 49560 52507 56276 59025 66816 73810 Revenue from operations 120193 131873 138748 149510 161308 180493 199432 Consolidated (Standalone + 42% of Indus) Number of towers 79064 82083 83368 85892 88210 90586 92794 % Growth YoY 0% 4% 2% 3% 3% 3% 2% Towers Added 621 3019 1285 2523 2318 2376 2208 Tenancy 1.9 1.9 2.0 2.1 2.2 2.3 2.5 % Growth 0% 1% 3% 6% 6% 7% 7% Number of tenants 149908 156600 167202 182294 197931 218357 238253 % Growth 0% 4% 7% 9% 9% 10% 9% Rent/ tower/ Month 33721 34717 33863 33983 34274 34851 35176 % Growth -3% 3% -2% 0% 1% 2% 1% Rental Revenue 60661 63847 65790 71261 78192 87049 96370 Energy Reimbursements 33860 38873 42477 45422 48432 54444 59718 Revenue from operations 94521 102720 108267 116683 126624 141492 156088 Emkay Research September 2, 2015 5
Key Financials (Consolidated) Income Statement Y/E Mar (Rs mn) FY13 FY14 FY15 FY16E FY17E Total Revenue 102,720 108,267 116,683 126,738 141,657 Expenditure 64,418 64,266 66,642 72,390 79,507 EBITDA 38,302 44,001 50,041 54,348 62,150 Depreciation 22,199 21,259 21,847 22,940 24,541 EBIT 16,103 22,742 28,194 31,407 37,609 Other Income 3,127 4,487 5,223 5,854 5,910 Interest expenses 3,945 3,997 2,902 2,644 2,504 PBT 15,285 23,232 30,515 34,618 41,015 Tax 5,282 8,053 10,591 11,868 13,945 Extraordinary Items 0 0 0 0 0 Minority Int./Income from Assoc. 0 0 0 0 0 Reported Net Income 10,003 15,179 19,924 22,750 27,070 Adjusted PAT 10,003 15,179 19,924 22,750 27,070 Balance Sheet Y/E Mar (Rs mn) FY13 FY14 FY15 FY16E FY17E Equity share capital 18,887 18,893 18,938 18,938 18,938 Reserves & surplus 153,038 161,490 151,262 145,657 142,961 Net worth 171,925 180,383 170,200 164,595 161,899 Minority Interest 0 0 0 0 0 Loan Funds 32,296 26,836 17,131 17,131 17,131 Net deferred tax liability 7,610 11,249 12,247 12,247 12,247 Total Liabilities 211,831 218,468 199,578 193,973 191,277 Net block 163,239 153,205 148,121 146,281 142,330 Investment 38,911 74,803 58,822 58,822 58,822 Current Assets 58,314 31,521 34,742 37,140 46,110 Cash & bank balance 1,267 1,656 9,120 11,500 20,284 Other Current Assets 0 0 0 0 0 Current liabilities & Provision 65,099 67,889 71,969 80,511 91,754 Net current assets (6,785) (36,368) (37,227) (43,371) (45,644) Misc. exp 14,743 25,301 27,602 29,981 33,510 Total Assets 211,831 218,468 199,578 193,973 191,277 Cash Flow Y/E Mar (Rs mn) FY13 FY14 FY15 FY16E FY17E PBT (Ex-Other income) (NI+Dep) 12,158 18,745 25,292 28,764 35,105 Other Non-Cash items 0 0 0 0 0 Chg in working cap 7,423 33,611 9,321 8,524 11,058 Operating Cashflow 31,795 51,438 38,200 39,968 45,195 Capital expenditure (18,103) (11,029) (17,496) (21,100) (20,590) Free Cash Flow 13,692 40,409 20,704 18,868 24,605 Investments (35,548) (35,892) 15,981 0 0 Other Investing Cash Flow 0 0 0 0 0 Investing Cashflow (50,524) (42,434) 3,708 (15,246) (14,680) Equity Capital Raised 31,801 148 1,206 0 0 Loans Taken / (Repaid) 704 (5,460) (9,705) 0 0 Dividend paid (incl tax) (12,724) (9,726) (27,685) (23,203) (26,517) Other Financing Cash Flow 4,161 11,687 6,298 12,624 18,791 Financing Cashflow 19,996 (7,348) (32,788) (13,222) (10,230) Net chg in cash 1,267 1,656 9,120 11,500 20,284 Opening cash position 479 1,267 1,656 9,120 11,500 Closing cash position 1,267 1,656 9,120 11,500 20,284 Emkay Research September 2, 2015 6
Key Ratios Profitability (%) FY13 FY14 FY15 FY16E FY17E EBITDA Margin 37.3 40.6 42.9 42.9 43.9 EBIT Margin 15.7 21.0 24.2 24.8 26.5 Effective Tax Rate 34.6 34.7 34.7 34.3 34.0 Net Margin 9.7 14.0 17.1 18.0 19.1 ROCE 10.4 14.0 18.3 22.2 27.1 ROE 6.9 9.7 13.4 16.4 20.6 RoIC 10.0 16.8 26.0 32.5 44.8 Per Share Data (Rs) FY13 FY14 FY15 FY16E FY17E EPS 5.3 8.0 10.5 12.0 14.3 CEPS 17.0 19.3 22.1 24.2 27.3 BVPS 83.2 82.1 75.5 71.3 68.0 DPS 5.3 4.4 11.0 10.5 12.0 Valuations (x) FY13 FY14 FY15 FY16E FY17E PER 74.8 49.3 37.6 32.9 27.6 P/CEPS 23.2 20.5 17.9 16.4 14.5 P/BV 4.8 4.8 5.2 5.6 5.8 EV / Sales 7.6 7.1 6.5 5.9 5.3 EV / EBITDA 20.3 17.6 15.1 13.9 12.0 Dividend Yield (%) 1.3 1.1 2.8 2.6 3.0 Gearing Ratio (x) FY13 FY14 FY15 FY16E FY17E Net Debt/ Equity 0.2 0.2 0.1 0.0 0.0 Net Debt/EBIDTA 0.8 0.6 0.2 0.1 (0.1) Working Cap Cycle (days) (28.6) (128.2) (145.0) (158.0) (169.9) Growth (%) FY13 FY14 FY15 FY16E FY17E Revenue 8.7 5.4 7.8 8.6 11.8 EBITDA 8.4 14.9 13.7 8.6 14.4 EBIT 15.8 41.2 24.0 11.4 19.7 PAT 33.5 51.7 31.3 14.2 19.0 Quarterly (Rs mn) Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Revenue 28,427 29,301 29,488 29,467 30,157 EBITDA 11,790 12,151 12,731 13,369 12,971 EBITDA Margin (%) 41.5 41.5 43.2 45.4 43.0 PAT 4,628 4,652 5,069 5,575 5,757 EPS (Rs) 2.5 2.5 2.7 3.0 3.0 Shareholding Pattern (%) Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Promoters 79.4 74.9 74.9 71.8 71.7 FIIs 11.7 18.1 18.7 22.5 24.3 DIIs 1.7 0.8 0.8 0.9 0.6 Public and Others 7.3 6.3 5.6 4.9 3.4 Emkay Research September 2, 2015 7
Emkay Rating Distribution BUY Expected total return (%) (Stock price appreciation and dividend yield) of over 25% within the next 12-18 months. ACCUMULATE Expected total return (%) (Stock price appreciation and dividend yield) of over 10% within the next 12-18 months. HOLD Expected total return (%) (Stock price appreciation and dividend yield) of upto 10% within the next 12-18 months. REDUCE Expected total return (%) (Stock price depreciation) of upto (-) 10% within the next 12-18 months. SELL The stock is believed to underperform the broad market indices or its related universe within the next 12-18 months. Emkay Global Financial Services Ltd. CIN - L67120MH1995PLC084899 7th Floor, The Ruby, Senapati Bapat Marg, Dadar - West, Mumbai - 400028. 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