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