Stock at 52-week low, co loses 11,400 cr m-cap in two days; CLSA down­grades stock

The Economic Times - - Companies: Pursuit Of Profit - Deepali Gupta & Ari­jit Bar­man

Mum­bai: The pos­si­ble merger of Idea Cel­lu­lar and Voda­fone In­dia, lead­ing to ra­tio­nal­i­sa­tion of ten­an­cies and sites, seems to have hit the for­tunes of Bharti In­fratel the hard­est with bro­ker­ages such as CLSA down­grad­ing the stock af­ter a 17% share price drop and ₹ 11,400 crore mar­ket-cap loss in two days.

This in turn is likely to im­pact the firm’s on-go­ing fund raising plans. A con­sor­tium of KKR and CPPIB was in ad­vance ne­go­ti­a­tions to buy a con­trol­ling stake in the com­pany and help par­ent Bharti delever­age its con­sol­i­dated bal­ance sheet.

Air­tel cur­rently owns 71.96% in Bharti In­fra while the rest is held by pub­lic share­hold­ers. Bharti In­fratel also owns 42% in In­dus Tow­ers — In­dia’s largest telecom tower com­pany that is a joint ven­ture be­tween Bharti, Voda­fone and Idea Cel­lu­lar. To­gether with its share in In­dus, the com­pany has 90,000 tow­ers across 22 telecom cir­cles na­tion­wide.

Its stand­alone mar­ket share of in­stalled tower bases was 9.8% in FY15; but to­gether with In­dus, it makes the dom­i­nant player with a 40.8% share. The com­pany de­rives ~85% of rev­enue from the top-three op­er­a­tors — Bharti, Voda­fone and Idea. Re­lated party trans­ac­tions data in­di­cate that In­fratel gets around 45.5% rev­enue from Bharti, which means around 39.5% rev­enue is de­rived from Voda­fone and Idea. A po­ten­tial merger be­tween the two tel­cos will inevitably im­pact the rev­enues of In­fratel as ten­an­cies will get ra­tio­nalised. “In case of 15% site ra­tio­nal­i­sa­tion by the Idea-Voda­fone com­bine, it will lead to 5.9% rev­enue con­trac­tion for In­fratel, while 20% rev­enue ra­tio­nal­i­sa­tion will lead to 7.9% rev­enue con­trac­tion for In­fratel,” es­ti­mates San­deep Agar­wal and Pranav Ksha­triya, telecom an­a­lysts, at Edel­weiss.

In ab­so­lute terms, that could po­ten­tially lead to a short-term loss of 14,000 ten­an­cies for In­dus Tow­ers and 4,000 ten­an­cies for Bharti In­fratel, which in tur n could im­pact its Ebitda and prof­itabil­ity pro­jec­tions. Other es­ti­mates sug­gest be­tween Idea and Voda­fone there are 250,000 tow­ers that are leased out across all tower com­pa­nies. Out of these, around 115,000 lo­ca­tions are from In­dus Tow­ers. A per­son fa­mil­iar with de­tails said about 44,000 ten­an­cies are over­lap­ping and around 3035% of these will come up for can­cel­la­tion.

A bulk of the lease con­tracts signed with In­dus Tow­ers come up for re­newals in the next three years, mak­ing these ten­an­cies the most vul­ner­a­ble to can­cel­la­tion.

Be­yond mar­gins and prof­itabil­ity, even the ten­ancy growth out­look of the com­pany will get im­pacted con­sid­er­ably. In the re­cent past, the four lead­ing tel­cos have all ac­cel­er­ated their net­work roll­outs. “But with two of these four merg­ing, the prospects of tower com­pa­nies, in­clud­ing Bharti In­fratel, of reach­ing a higher ten­ancy ra­tio of ~3x have de­clined,” felt CLSA an­a­lyst Deepti Chaturvedi and Ak­shat Agar­wal.

Both In­fratel and In­dus are in­ter­linked thereby mak­ing both vul­ner­a­ble. The val­u­a­tion of In­dus flows through into the val­u­a­tion of In­fratel’s 42% stake in the com­pany. But fol­low­ing the merger, In­fratel will be re­duced to a mi­nor­ity in­vestor in In­dus as the com­bined Idea-Voda­fone will own 58% and this again will im­pact In­fa­tel’s con­sol­i­dated val­u­a­tion. Man­age­ment Op­ti­mistic How­ever, the com­pany’s man­age­ment feels the im­pact will be short term. “We be­lieve the pos­si­ble short-term im­pact on rev­enue on ac­count of some over­laps as a re­sult of this merger will be more than off­set by the exit charges as well as the in­cre­men­tal rev­enue on ac­count of rapid roll­outs by all op­er­a­tors,” Akhil Gupta, chair­man of Bharti In­fratel told ET.

Out­side of In­dus, most of the tower leases signed by In­dia’s num­ber two and three telecom op­er­a­tors are from the 2006-09 vin­tage, which puts them five years away from re­newal.

“The con­tracts are pretty tight and there are prece­dents of suits that will de­ter sim­ple can­cel­la­tion from ei­ther op­er­a­tor,” said a se­nior of­fi­cial at a large tower com­pany. Both Te­lenor and Air­cel could not wrig­gle out of their ex­ist­ing con­tracts with their ven­dors in the past.

“It is our be­lief that all three (Air­tel, Idea-Voda­fone, Jio) op­er­a­tors would race to ac­tively cover every nook and cor ner of the coun­try with data net­works,” Gupta said. As a re­sult, for the next five to six years there isn’t much scope for Idea and Voda­fone to cut the sites they lease from other tower com­pa­nies such as Bharti I n f r a t e l a n d Vi o m Net­works. This presents an op­por­tu­nity to re­lo­cate and match cov­er­age with Bharti Air­tel that leases around 160,000 tow­ers with about 170,000 base sta­tions. Reliance Jio, cur­rently on around 90,000 sites, has es­ti­mated its full net­work de­ploy­ment would need around 200,000 sites.

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