RJio shad­owover tel­cos’ tower gains

While debt re­duc­tion will help Bharti Air­tel and Idea Cel­lu­lar, some gains are off­set by cash losses and higher ren­tal outgo

Business Standard - - THE SMART INVESTOR - RAM PRASAD SAHU

For the in­cum­bent op­er­a­tors (Bharti Air­tel, Voda­fone and Idea) fac­ing in­tense com­pe­ti­tion from Re­liance Jio (RJio), cut­ting of debt and in­vest­ing in ex­pan­sion of fourth-gen­er­a­tion tech­nol­ogy (4G) ca­pa­bil­ity si­mul­ta­ne­ously have be­come im­per­a­tive. Re­ports sug­gest Bharti In­fratel will buy out the stake of its part­ners in In­dus for about $5 bil­lion and given Idea’s 11.15 per cent stake (13,706 tow­ers), the deal could fetch the lat­ter com­pany about $1.2 bn or ~8,000 crore. Cou­pled with val­u­a­tions of an­other $500 mil­lion for stand­alone tow­ers (9,984 of th­ese), the to­tal Idea could get af­ter sale of all its tow­ers will be about $1.7 bn or ~11,000 crore.

Idea’s debt was ~53,925 crore at the end of June, with net debt to op­er­at­ing profit nearly 7.19 times. The sale of stake in tower as­sets would help it. While debt re­duc­tion would be sub­stan­tial at 19 per cent, the fall in op­er­at­ing profit so far has been even faster. In fact, op­er­at­ing prof­its are ex­pected to see fur­ther pres­sure in com­ing quar­ters. More­over, Idea also needs to in­vest in capex which given the lack of cash prof­its for the last three quar­ters would en­tail tak­ing more debt. Af­ter a profit of ~91 crore in the Septem­ber 2016 quar­ter, Idea has tot­ted up net loss to tune of ~1,500 crore (com­bined) over the last three quar­ters. Net loss in the Septem­ber 2017 quar­ter is ex­pected to be nearly ~1,200 crore with op­er­at­ing profit fall­ing by nearly half to an es­ti­mated ~1,400 crore from ~2,838 crore a year ago. So, rais­ing of funds through stake sale in tower as­sets should pro­vide some re­lief. Ro­hit Chor­dia, an­a­lyst at Ko­tak In­sti­tu­tional Eq­ui­ties, says Idea’s stand­alone net debt to op­er­at­ing earn­ings on a quar­ter’s an­nu­alised base is likely to cross 10 times. “The com­pany might need to ac­cel­er­ate its ef­forts on tower mon­eti­sa­tion or have to live with con­straints on capex in a phase where it would do well to step up capex spends,” he adds.

For Bharti Air­tel, which has so far sold 14 per cent stake in Bharti In­fratel in two tranches since the start of the year, bring­ing stake down in its sub­sidiary to 57.96 per cent from 71.96 per cent, the to­tal con­sid­er­a­tion has been about ~9,000 crore. Given its gross debt of over ~1 lakh crore and pres­sure on op­er­a­tions, re­duc­tion in debt would be small. If it were to sell its re­main­ing stake in In­fratel, it would (given the cur­rent mar­ket cap­i­tal­i­sa­tion of Bharti In­fratel) fetch it a siz­able ~40,000 crore.

Over­all, while the tower mon­eti­sa­tion moves are pos­i­tive for Bharti Air­tel and Idea Cel­lu­lar in terms of re­duc­ing the an­nual in­ter­est outgo, the gains will be partly off­set by the higher outgo from rentals (in­de­pen­dent tow­ers) and lack of div­i­dends they get now as own­ers. Mean­while, Bharti Air­tel con­tin­ues to con­sol­i­date its po­si­tion, the lat­est ac­qui­si­tion be­ing the mo­bile ser­vices busi­ness of the Tatas. For Idea, the key trig­ger would be an early merger with Voda­fone. While the com­bined debt of the con­sol­i­dated en­tity (Idea+Voda­fone) would be about ~1 lakh crore, it will have the ben­e­fit of size (400 mil­lion sub­scribers) and syn­ergy gains.

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