Bharti Infratel (BHAINF) 385

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1 Initiating Coverage Rating matrix Rating : Buy Target : 450 Target Period : 12 months Potential Upside : 17% YoY growth (%) (YoY Growth) FY14 FY15E FY16E FY17E Net Sales EBITDA Net Profit EPS (Rs) Valuation summary FY14 FY15E FY16E FY17E P/E EV / EBITDA P/BV RoNW RoCE Stock data Particulars Amount Market Capitalization Crore Total Debt (FY14) Crore Cash and Investments (FY14) Crore EV Crore 52 week H/L 391 / 195 Equity capital Crore Face value 10 MF Holding (%) 1.7 FII Holding (%) 17.8 Price movement 10,000 8,000 6,000 4,000 2,000 0 Apr-14 Research Analyst Jul-14 Price (R.H.S) Sep-14 Karan Mittal karan.mittal@icicisecurities.com Sneha Agarwal sneha.agarwal@icicisecurities.com Jan-15 Nifty (L.H.S) Mar March 31, 2015 Bharti Infratel (BHAINF) 385 Stability of cash flows, safest bet in telecom Bharti Infratel (BIL), with a portfolio of about towers (36747 towers at the standalone level and towers via 42% stake in Indus) is the largest pan-india tower infrastructure player. Though the telecom sector went through various rough patches, BIL demonstrated revenue, EBITDA and PAT CAGR of 11.5%, 16.6% and 57.0%, respectively, in FY The company enjoys very high operating leverage, with any increase in tenancy adding to EBITDA. BIL is in a sweet spot owing to the huge coverage and capacity requirements emanating from impending data growth. With a ramp up in 3G/4G data offerings and the impending launch of Reliance Jio s services, tenancies/loading are bound to increase. In addition, the presence of industry leaders Airtel, Idea Cellular and Vodafone as its anchor tenants lends stability to BIL s earnings. We expect tenancies to increase from in FY14 to by FY17E. Hence, this may lead to 9.7%, 13.2% and 21.7% CAGR in revenue, EBITDA and PAT in FY14-17E. With a dividend policy of distributing 60-80% of standalone profit, dividend yields turn out to be attractive at 2.4%. Owing to the low risk profile coupled with the high probability of growth and stable dividend policy, we initiate coverage with a BUY rating with a target price of 450 based on SOTP DCF based methodology. With GOI keen on data, data growth remains inevitable, BIL to gain With GoI taking key initiatives to meet the PMO s Digital India vision and developing an eco-system for high speed data, data growth seems inevitable. The mobile data traffic, which is expected to grow 24x of the 2013 levels by FY18E, necessitates higher loading. Stable cash flows, strong dividend policy, optimisation of capital structure BIL has a stable annuity led business model with a remaining estimated contract life of about 7.5 years, which lends certainty to about crore of future cash flows. The company has a strong dividend policy of distributing about 60-80% of standalone profit (excluding DDT) to enhance shareholder wealth. The management has been constantly highlighting its keen interest in re-aligning its capital structure where the debt/equity ratio is currently 0.1x by resorting to buyback, excess dividend route, etc. Such a re-alignment will be return ratio accretive. Re-rating begins as data story unfolds, recommend BUY with 450 TP The stock has already rallied 27% over the past few months as data growth is ballooning. With the stable annuity based business model and tremendous growth opportunity considering the kind of spectrum purchased by telcos, we assign a target price of 450 to Bharti Infratel, based on a DCF based methodology, providing an upside of 19%. Exhibit 1: Valuation Metrics (Year-end March) FY13 FY14 FY15E FY16E FY17E Net Sales ( crore) 10, , , , ,296.6 EBITDA ( crore) 3, , , , ,402.9 Net Profit ( crore) 1, , , , ,758.7 EPS ( ) P/E (x) Price / Book (x) EV/EBITDA (x) RoCE (%) RoE (%)

2 Promoter and FIIs & DIIs holding (%) (Dec 2014) FII 18% Non-Insti 6% DII 2% Promoter and Group 74% Source: BSE, ICICIdirect.com Research Company background Bharti Infratel (BIL) was incorporated in 2006 as a subsidiary of Bharti Airtel, which is, in turn, a part of the Bharti Group. BIL plays the role of a telecom tower infrastructure service provider that deploys, owns and manages telecom towers and communication structures, for various mobile operators. In January 2008, Bharti Airtel transferred its tower assets to Bharti Infratel through a scheme of arrangement effective as of January 31, On a standalone basis, the company has about towers as on date spread across 11 circles. BIL also has a 42% stake in Indus Towers, which is a joint venture between Bharti Airtel, Idea and Vodafone for passive infrastructure sharing. On a consolidated basis, with the Indus stake, BIL has emerged as the largest telecom tower company in India with a tower portfolio of towers and a pan-india presence. The company enjoys the competitive advantage of a very strong clientele with Bharti Airtel, Idea and Vodafone forming about ~70% of the total telecom market share as its anchor tenants. Exhibit 2: Ownership structure Bharti Airtel 74.9% Bharti Infratel 42% 25.1% Public 42% Indus Towers Vodafone Idea 100% 16% Aditya Birla Group Source: DRHP, ICICIdirect.com Research Though the tower growth for the company has been in the range of 1-4% over the past few years, revenues, EBITDA and PAT have grown at 11.5%, 16.6% and 57.0% CAGR, respectively, in FY Growth has been aided by an increase in tenancy from 1.9x in FY12 to about 2.0x in FY14, lending high operating leverage. The company has a stated dividend policy of paying higher of 100% dividend received from Indus or 60-80% of BIL s standalone PAT (excluding DDT). Exhibit 3: Tower portfolio and tenancy growth 180, , , , ,000 80,000 60,000 40,000 20, , , , , ,819 73,921 78,442 79,064 82,083 83,368 FY10 FY11 FY12 FY13 FY14 Total Towers Total Tenancies Page 2

3 - The company has institutionalised the GreenTowers P7 programme, aimed at minimising dependency on diesel consumption and thereby, reducing the carbon footprint. BIL has 2700 solar powered towers with installed capacity of ~9 MW and almost diesel free towers on its network. During FY13, the company came out with an IPO and raised about 4118 crore (comprising public issue and subscription by anchor investors). The share price has rallied almost over 74% since then with the increasing investor confidence in BIL s business model and improving fundamentals. Exhibit 4: Bharti Infratel Presence across the country Page 3

4 Investment Rationale Colossal in terms of tower portfolio (~85064 towers), falling competition. Bharti Infratel (together with Indus) is India s largest tower player with a tower portfolio of towers across 22 circles. On a standalone basis, the company has towers and is present in 9 circles. As per industry data, for March 2012, there are ~3.7 lakh towers and 6.5 lakh colocations. BIL s standalone and Indus taken together had a market share of 37.8% in terms of installed tower base at a tower count of 1.4 lakh. In terms of co-location base transceiver stations (BTS), the market share was 42.5% with a co-locations count of 2.7 lakh. As on date, the co-locations of BIL and Indus put together have reached 3.2 lakh vs. the industry total of 7.5 lakh (estimated). Exhibit 5: Bharti Infratel vis-à-vis peers ('000) Bharti Infratel BSNL&MTNL Reliance Viom GTL Towers ("000s) Others American Tower Tenancy (x) 1.9 Crown Castle 2.4 SBA 1.9 Tower Bersama Group Sarana Menara Nusantara (x) Source: Analysys Mason, ICICIdirect.com Research Power in the sector is concentrated in the hands of six players. Even out of the six as shown below, the bottom three are reeling under a huge debt burden and losses. BIL at the standalone level with Indus has a strong balance sheet. The company is well placed to grow via the inorganic route and further enhance its market share, which currently stands at ~38% in terms of installed tower base. In addition, any consolidation in the industry will increase the pricing power of players. Page 4

5 Exhibit 6: Market share in terms of installed tower base (FY12) Exhibit 7: Market share in terms of number of co-locations (FY12) GTL Infra 9% Others Viom 11% 11% RTIL 13% Indus 29% BSNL.MTNL 18% Bharti Infratel (Standalone) 9% Viom 16% GTL Infra 7% RTIL 14% Others 10% BSNL.MTNL 11% Indus 32% Bharti Infratel (Standalone) 10% Source: Analysys Mason, ICICIdirect.com Research Source: Analysys Mason, ICICIdirect.com Research The capital intensive nature of the business insulates the company from the risk of new competition. The average cost to build a ground based tower and a roof-top based tower is 25 lakh and lakh, respectively. In addition to the initial capex, the tower business entails a maintenance capex of about per tower per annum. Moreover, additional tenancy and incremental loading would also entail about per tenant. Such a capital intensive nature of the business makes it difficult for any new player to enter as the visibility of healthy return ratios is highly oblique. Moreover, the B2B nature of the business coupled with significant penalties in case of termination of the contract makes a churn in tenancy highly improbable. The competition would remain limited within the players in the industry. Tenancy to be fuelled by data growth, shift in voice to other spectrum bands Exhibit 8: Growth drivers Near term triggers Medium term trigger Long term trigger Loading all the existing sites with 3G BTS Loading all the existing sites with additional tenancies for the 2100 MHz & 2300 MHz bands Building additional towers to meet the current coverage gaps in the network of the telcos Additional towers for new capacity to be generated over a period of time The loading will bring in revenues to the tune of 10-15% of the rentals paid Loading will bring in additional rental revenus (4-8% discount in rentals across operators) and, hence, high operating leverage The loading will bring in revenues to the tune of 10-15% of the rentals paid The loading will bring in revenues to the tune of 10-15% of the rentals paid Source: ICICIdirect.com Research Video, big data, social media, cloud and Internet of Things are gaining prominence with the increasing reach and access of the internet. As per Cisco VNI estimates, in India, internet traffic is expected to grow 5.5-fold from 2013 to 2018, at a CAGR of 41% and reach 3.1 billion GB per month in 2018, up from 0.5 billion GB per month in The mobile data traffic is expected to grow 24-fold from 2013 to 2018, at a CAGR of 88% reaching 1.2 billion GB per month in 2018, up from 52 million GB per month in Page 5

6 Exhibit 9: Growth in data subscribers E 2015E 2016E 2017E Data Subscribers (in millions) Source: COAI estimates, ICICIdirect.com Research MB consumed in various internet activities India is one of the fastest growing markets as far as data is concerned. The eco-system for data in India has been growing rapidly with smart phone shipments growing at 107% CAGR in FY09-13 to 41.1 million smart phones in 2013 (as per IDC estimates). As per Cisco VNI estimates, smartphones are expected to account for 35% (515.0 million) of all networked devices in 2018, compared to 11% (117.3 million) in 2013, (34.4% CAGR) with average mobile connection speeds expected to grow three-fold from 2013 to 2018, reaching 1,598 kbps in An increasing number of smart phones are being launched below $100, in keeping with the target market. Out of the total mobile shipments to India, smart phones account for in excess of 70%. Exhibit 10: Smartphone shipments to India (MB needed) ing 3 min song 3 min video 30 min internet browsing min TV show H12014 Source: ATC, ICICIdirect.com Research Shipments (in millions) Source: IDC, ICICIdirect.com Research Digital India plan of government to provide fillip to data growth The Finance Minister made several announcements in the Interim Budget, which augurs well for technology related stocks. The government had indicated an investment of ~ 6,000 crore for the Smart Cities initiative that could boost IT spending. Several other initiatives include 100 crore for start-up programmes to promote rural entrepreneurship, 100 crore for virtual teaching platforms and increase online teaching and 500 crore to boost software development and hardware manufacturing in the country. Overall costs towards ongoing schemes in the Digital India plan are estimated at about crore. The intensity of focus and size of investments would be a catalyst towards the data explosion in India that has already begun. As data traffic gets loaded, the radius of the propagation shrinks. Therefore, over a period of time even if there is full Page 6

7 coverage, as sites get loaded the coverage would shrink and more sites will be needed. Hence, BIL would directly benefit from mobile data proliferation. Exhibit 11: Government s plans for digital India Source: GOI, ICICIdirect.com Research The benefits of Smart City deals are already visible in BIL. Indus recently got an order for about 3000 towers in the Delhi area at an estimated outlay of ~ 220 crore over three years. Though the finer details of the deal are unavailable, the deal value of 220 crore translates to a per tower capex of about 7.3 lakh, which is significantly lower than the ground-based tower (GBT) and roof-top tower (RTT) capex requirements. In such towers, cell sites would be accommodated in specially designed street lights. The successful implementation of such an arrangement could be RoE accretive. We would, however, consider the same in our models once the company starts reporting benefits from the deal. Telcos have already demonstrated stellar data growth Airtel, Idea and RCom demonstrated average YoY growth of 101%, 125% and 87%, respectively, in total data volume in the past six quarters in total data volume. Data consumption per quarter has increased from about 161 MB, 154 MB, 280 MB in Q3FY13 to about 622 MB, 472 MB and 834 MB, respectively, in the last quarter. Exhibit 12: Total data consumed Exhibit 13: Data revenues (Million MB's) 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10, ,400 15,879 8,339 77,281 76,434 46,077 ( Crore) 2, , , , , , ,222.9 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Airtel Idea Cellular RCoM Q3FY15 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Airtel Idea Cellular RCoM Q3FY15 Source: ICICIdirect.com Research Source: ICICIdirect.com Research Banking on this data revolution, telecom operators have made huge investments in spectrum. The industry has spent nearly 2.9 lakh crore in acquiring spectrum since 2010 ( 1.06 lakh crore in the 2010 auctions (2100 and 2300 MHz bands), 9400 crore in the 2012 auctions (800 and 1800 MHz bands), 3639 crore in the 2013 auctions (800 and 1800 MHz band of spectrum), crore in the February 2014 auctions (1800 and Page 7

8 900 MHz bands) and ~ 1.1 lakh crore in the recently concluded auctions (800 MHz, 900 MHz, 1800 MHz, 2100 MHz and 2300 MHz bands)). Though players have bought huge quantum of the spectrum in the 2100 MHz and 2300 MHZ for data growth, spectrum bands come with a few constraints. These frequencies can carry more data and are suitable for mass coverage but cannot travel long distances or penetrate thick walls. This constraint necessitated players to bid for the 900, 800 MHz spectrum, which can be coupled with the existing 2100, 2300 MHz band for seamless data services. Players could, hence, re-align some of their spectrum in the lower bands towards data services. Hence, there may be a need to shift some proportion of the voice traffic served by lower bands to 1800, 2100 MHz. This would create room for additional tenancies as per the multiplier factor seen from the table below. Exhibit 14: Tower multiplier when switching frequencies Tower Multiplier when Switching New Frequency Band Frequencies 900 MHz 1800 MHz 2100 MHz 2300 MHz 2600 MHz Base Frequency Band 900 MHz 1.0x 1.6x 1.9x 3.2x 3.7x 1800 MHz 1.0x 1.2x 2.0x 2.3x 2100 MHz 1.0x 1.7x 2.0x 2300 MHz 1.0x 1.1x 2600 MHz 1.0x Source: Analysys Mason, ICICIdirect.com Research The exponential growth seen on the data front made telcos continue their investments towards cell sites. Total tenancy for the industry has grown at an estimated 5% CAGR in FY12-14 to ~7.1 lakh. Airtel and Idea have demonstrated a cell site growth of 7.1% and 12.2% CAGR in FY12-14 to 1.38 lakh and 1.05 lakh 2G sites, respectively. As regards 3G subscribers, they form only about % of the total subscribers for Airtel and Idea and are yet to gain momentum. The 3G cell sites have grown at 39.2% and 29.1% CAGR in FY12-14 for Airtel and Idea to and sites, respectively. However, they are far behind the requisite number for seamless connectivity. As per the MBit Index, 2014 Issue, Nokia Siemens Networks, in metros there are patches where 3G is handed over to 2G. On an average, additional 15-20% 3G sites are required to provide same coverage as 2G. As there is traction in 3G subscribers, we believe BIL will witness additional revenues through loading, which would bring in revenues to the tune of 10-15% of the rentals paid. In addition, 4G and 5G BTS would either come in the form of loading or additional tenancies. Also, Reliance Jio is all set to launch its services on a pan-india basis. The company has already entered into tower sharing agreements for as many as towers. The 4G services have just been launched in some states. Also, 5G is in a very nascent stage. With further development of the 4G, 5G eco-system, we can expect higher traction in loading revenues for BIL. Currently, only 30% of BIL s towers earn loading revenue whereas in an ideal scenario of perfect network coverage most of its towers should have loading. The sites of Airtel and Idea are, however, able to cover only about 85-90% of the population. Hence, there is further scope for growth. We expect Airtel and Idea to have and sites, respectively, by FY17E. Page 8

9 Exhibit 15: Growth in 2G, 3G cell sites for Airtel, Idea 160, , , ,000 80,000 60,000 40,000 20, , , , , , , , FY12 FY13 FY14 9MFY15 Airtel 2G cell sites Airtel 3G cell enabled sites Idea 2G cell sites Idea 3G cell sites Apart from incumbents, Reliance Jio is also all set to launch its services on a pan-india basis. The company has already entered into tower sharing agreements for as many as towers. The colossal size of the deal speaks volumes for the kind of site requirements to be generated in the industry in the coming future. We expect competition to follow suit and beef up their network expansion to match the network coverage of RJio. Hence, this will further benefit the overall tower industry. As the launch takes shape, we expect the tenancy to inch upwards for BIL. Since the length and breadth of the launch is still unknown, there could be some upside risk to our tenancy estimates post the launch. Exhibit 16: Deals signed by Reliance Jio till date Tower Companies Number of towers Indus Towers GTL Infrastructure Ascend Telecom Infrastructure Pvt Ltd 4500 Tower Vision India Pvt Ltd 8400 ATC India Tower Corp Viom Networks Bharti Infratel Reliance Infratel Total Voice led tenancy growth Voice led tenancy growth would come in two forms. Firstly, it would be through shifting of voice to higher bands to make room for high speed data in lower frequencies. This will have a multiplier effect on the tenancy requirements. It is a near term trigger. However, with the upcoming data boom, if Airtel plans to migrate voice to the 1800 MHZ band, the site requirement would escalate to 1.6x, directly benefiting BIL. Secondly, telecom penetration, though 145.8% in urban areas, is at 44% in rural areas. As and when penetration increases, there would be a need to strengthen the network infrastructure by deploying additional tenancies and filling the coverage gaps, which will be another growth driver. Page 9

10 Exhibit 17: Urban and rural penetration (%) FY09 FY10 FY11 FY12 FY13 FY14 Urban Rural Stable cash flows, long term contracts, built-in inflation linked escalation The company enters into master services agreements (MSAs) for years with its tenants, providing visibility for stable cash flows. There are significant exit penalties laid out in the MSA, which discourages early termination of contracts. Revenues are so designed that any additional tenancy has a multiplier effect on EBITDA margins. Tower operators have, however, remained insulated from the repercussions of the intense rivalry in the telecom space. A lot of new players entered the telecom space, leading to a hyper competition phase in the sector with about operators in each circle vs. the global average of five to six players. This led to a huge decline in the ARPU across telcos. Though telecom sector ARPUs (GSM) declined from 131 to 97 in FY10 to FY12, the sharing revenue per tenant per month remained pretty stable for BIL at ~ levels. There has been some resilience in pricing power in the past year. However, the fact that there is very little correlation between the revenues of BIL and other telcos comes in as a solace, especially when the industry fears an impending price war after Reliance Jio s launch. Exhibit 18: Sharing revenue per tower per month of BIL vs. telecom industry ARPUs ,625 34, ( ) , ( ) ARPU (GSM) Sharing Revenue/tenant/p.m for BIL Source:,Trai, ICICIdirect.com Research BIL is also insulated from the massive spectrum payouts to which the other players are exposed. The return ratios are not plagued by several payouts to the government in the form of license fees, spectrum usage charges. It is also safeguarded from various regulatory upheavals. Page 10

11 The company follows a simple annuity based business model wherein it earns a fixed stream of revenues from its tenants in the term of rentals with a built-in 2.5% per annum escalation, which is fixed for a years. The contracts are non-discretionary in nature with rentals being uniform. The company passes on the operating leverage so earned in the event of additional tenant coming on board by giving discounts in the range of 6-10% to all existing tenants. Such a strategy attracts players to the tower sharing arrangement rather than opting for their own towers. Rentals would only vary depending on the terms of the contract, service area and types of tower. In addition to cell sites, tenants have to pay additional rentals in case they bring in 3G cites to the existing tenancy. Such rentals are approximately 10-15% of rentals paid and are termed as loading. In addition to the rental income, the company also receives energy and other reimbursements from tenants. These are usually pass-through charges wherein the company has a small margin of about 2-4%. The energy contracts are primarily on a real time diesel price basis, which insulates BIL from any volatility in diesel prices and is borne by tenants. Exhibit 19: Contract specifications Tenor Long term (10 to 15 years) with built in escalations (2.5% p.a) Termination Penalty Higher of the 35% of the total remaining payment or 1yr s payment Base Rentals A base rental rate is applicable based on the number of service providers at the site. It also varies as per Ground Based Tower or Roof Top Tower Rentals As a new tenant comes on board, rentals are reduced for all the tenants Premium Fuel Cost A variety of premiums can be levied Rental premium Strategic premium Active infrastructure charges Contract term Energy costs (electricity and fuel charges) are treated as pass through in two ways: As per the amounts incurred Based on a rate card per circle The company usually has only 2-4% margins in the energy revenues. Service Agreement 1) Specifies service levels applicable 2) Site access service level sets out time period within which the service provider is to be provided access to the site Source: Quarterly Report- Company, ICICIdirect.com Research The key differentiating factor in the business model is the multiplier effect that comes in revenues with increasing tenancy while costs increase only marginally. As the tenancy moves from 1.0x to 2.0x, we can see EBITDA margins growing from 17% to 37% and in a similar fashion, going ahead. The representation below does not include revenues that flow in owing to additional loading on 2G sites that are margin accretive. Page 11

12 Exhibit 20: Cash flows in differing tenancies for a month for single tower Tenancy 1.0x 2.0x 3.0x Rentals Energy revenue Total revenues Expenses Energy costs as a % of energy revneues 95% 95% 95% Employee Expenses 4,025 4,025 4,025 Rent Repairs & Maintenance Other Expenses Total Expenses 63,025 70,625 77,465 EBITDA 12,675 41,375 67,735 EBITDA Margin % 17% 37% 47% Source:, ICICIdirect.com Research The high operating leverage nature of the business has helped BIL report margins of about 40.7% in FY14 from 37.4% in FY12 as tenancies rose from 1.90x to 1.96x in the same period. Going ahead, we expect the company to build a portfolio of towers at the consolidated level and record an average tenancy of 2.4x, also at the consolidated level, thus clocking an EBITDA margin of 44.8% by FY17E. Tenancies may, however, increase more-than-expected in case Reliance Jio rolls out sites at a rate higher-than-expected. Exhibit 21: Assumptions with regard to BIL Particulars FY13 FY14 FY15E FY16E FY17E BIL Standalone Towers No.s 35,119 35,905 37,023 38,146 39,303 Co-locations No.s 63,573 69,137 76,554 84,694 93,702 Average Tenancy x 17, , , , ,840.9 Revenues crore 4, , , , ,538.6 Indus Towers Towers No.s 111, , , , ,381 Co-locations No.s 221, , , , ,626 Average Tenancy x Revenues crore 14, , , , ,471.4 BIL Consolidated (Infratel + 42% of Indus) Towers No.s 82,083 83,368 85,702 87,707 89,863 Co-locations No.s 156, , , , ,585 Average Tenancy x Revenues crore 10, , , , ,296.6 Source:, ICICIdirect.com Research BIL has emerged as the safest bet in the telecom space both due to the business model as well as the operational business environment. The concomitant shift of the industry towards this kind of passive infrastructure sharing arrangement reinforces our belief in the growth prospects of the company. Competitive advantage of having Airtel, Idea, Vodafone as anchor tenants The company has top three telecom operators (Bharti Airtel, Vodafone and Idea Cellular), which command 70% of revenue market share, as its anchor tenants. The marquee client portfolio lends stability of earnings and cash flows to the company. The strength of the clients can be gauged from the charts below that show the combined revenue and subscriber market share of the three anchor tenants put together. Page 12

13 Exhibit 22: Subscriber and revenue market share (%) The anchor tenants together form ~70% of the RMS and 57% of the SMS Airtel Vodafone India Idea Cellular TTSL RCoM BSNL+ MTNL Aircel Others Revenue Market Share (RMS) Subscriber Market Share (SMS) The dependence on the three biggest telcos actually bodes well for the company in terms of stability of cash flows. In 2012, the Supreme Court had quashed 122 licenses that led to scaling down of operations and even complete exit by a few operators. This affected tenancies in the telecom industry. Hence, several tower infrastructure players were affected. However, as BIL s clients are markets leaders, it emerged safely from that period. Though there was some scale down and some churn seen on its network (~ ), the strength of the big three aided its tenancies. The company instead reported revenue, EBITDA and PAT CAGR of 7.0%, 11.7% and 42.9%, respectively, in FY12-14, a period that marks the transition of the telecom industry from operators to six to seven operators. Steady dividend policy to improve return ratios BIL generates sufficient free cash flows to meet its capex requirements. Hence, the management has shifted its focus towards maintaining a balance between growth capex and distribution of value to shareholders. The company has, thus, adopted a strong dividend policy by committing to distribute as much as to 60-80% of its standalone profit (excluding DDT) or 100% of dividend received from Indus, whichever is higher. The distribution of 4.4/share as dividend in FY14 and an announcement of interim dividend of 4.5/share in FY15 (represents the Indus dividend received by BIL) provides credence to its stated policy and also suggests an improvement in the return ratios, going ahead. We expect the company to disburse dividends to the tune of crore and crore (excluding DDT) amounting to dividends of 7.7 and 9.5 per share in FY16E and FY17E, respectively. This will help the company to clock RoCE and RoNW of 18.6% and 14.7%, respectively, by FY17E. Page 13

14 Exhibit 23: Trends in dividends ( Crore) 2,000 1,800 1,600 1,400 1,200 1, , ,253 1,453 1,793 FY13 FY14 FY15E FY16E FY17E (%) Dividends RoCE RONW Page 14

15 Financials Revenue to grow at 9.7% CAGR in FY14-17E BIL registered 7.0% CAGR in revenues in FY12-14 at the consolidated level, aided by 6% CAGR in total co-locations to and 3% CAGR in tower growth to towers over the same time period. At the standalone level, the company reported faster growth in both towers and tenancy at 7.0% and 4.0% CAGR in FY12-14 to and 69137, respectively. Indus Towers reported tower and tenancy growth of 5.0% and 2.0% CAGR to towers and co-locations, respectively, in FY Revenues also continued to be aided by the loading factor, which was enhanced by additional 3G BTS in the same. Currently, 30% of BIL towers attract loading revenues. According to our estimates, this comes to about 184 crore (FY14). Going ahead, with data explosion and additional spectrum in the ecosystem more cell sites would be required. Revenue growth would be a function of additional towers, tenancies and acceleration in loading revenues. BIL is expected to post revenue CAGR of 9.7% in FY14-17E to crore by FY17E. We are expecting a CAGR of 2.5% in towers to by FY17E contributed by 3.1% growth in BIL s standalone and 2.1% growth in the Indus portfolio over the same period. Tenancies are expected to reach by FY17E at the consolidated level. We expect overall loading to reach about 36.8% of towers and be a vital contributor to overall revenues. Loading directly flows into EBITDA as incremental revenues outweigh incremental costs. Exhibit 24: Revenue growth trend ( Crore) 16, , , , , , , , , , , , , (%) 0.0 FY13 FY14 FY15E FY16E FY17E Revenues Growth (%) 0.0 Increasing tenancies highly margin accretive, to touch 44% by FY17E BIL is a play on the operating benefits that would flow in from increasing tenancies. As per our analysis, a 5% increase in tenancies leads to an increase in ~100 bps EBITDA margin. As a new tenant comes on board, rentals multiply whereas costs do not witness a linear increase. Loading revenues are also highly margin accretive and would flow directly into EBITDA. As tenancies rose from 1.9x to 2.0x over the last few years, margins for the consolidated entity have risen to 42% in the last quarter from 37% in FY13. Going ahead, we expect BIL s standalone to clock a tenancy of 2.30x and Indus Towers to clock tenancies of 2.49x by FY17E. In addition, Page 15

16 loading is expected to increase to about 36.8% of total towers and clock about 310 crore by FY17E. Exhibit 25: EBITDA, PAT margins trend (%) FY13 FY14 FY15E FY16E FY17E EBITDA margin PAT margin Healthy FCF generation, huge dividend payout BIL has generated free cash flows in the range of crore over the last few years after meeting its annual capex requirement of about 2000 crore. The cash flows are sufficient for the company to fund its investing requirements. BIL is net debt negative and has ample scope to increase its leverage. Exhibit 26: Capex, operating cash flows trend ( Crore) 4, , , , , , , , , , , , , , ,102.9 FY13 FY14 FY15E FY16E FY17E (1,263.1) Capex FCF Owing to its strong FCF generation, the management has shifted its focus towards maintaining a balance between growth capex and distribution of value to shareholders. The company has, thus, adopted a strong dividend policy by committing to distribute as much as 60-80% of their standalone profits (excluding DDT) or 100% of dividend received from Indus, whichever is higher. The distribution of 4.4 per share as dividend in FY14 and an announcement of interim dividend of 4.5 per share in FY15 (represents the Indus dividend received by BIL) provides credence to its stated policy and also suggests an improvement in return ratios, going ahead. We expect the company to disburse dividends to the tune of 1453 and 1793 crore amounting to dividends of 7.7 and 9.5 per share in FY16E Page 16

17 and FY17E, respectively. This will help the company clock return ratios of 18% by FY17E. Exhibit 27: Dividends and return ratios ( Crore) 2,000 1,800 1,600 1,400 1,200 1, , ,253 1,453 1,793 FY13 FY14 FY15E FY16E FY17E (%) Dividends RoCE RONW Capex taken care of by BIL The company has a portfolio of about towers at the consolidated level. As explained above, growth in the near term would mainly come from growth in the tenancies and loading. Building additional towers at an accelerated pace to meet coverage gaps would not be essential in the short-term. BIL has been investing about 2000 crore in the last two years wherein ~ 1500 crore was used for new towers and maintenance capex while the remaining money was used for green capex purposes. Going ahead, we expect the company to incur a cumulative capex of ~ 3930 crore over FY16E and FY17E. In addition, the company raised about 4118 crore through an IPO in 2012 in order to meet capex requirements for the construction of about 4813 towers. BIL is yet to fully utilise the cash so raised and would use the remaining proceeds to build the committed towers. Treading towards optimal capital structure; capable of inorganic expansion The company has a very comfortable debt/equity ratio of about 0.1x and a negative net debt of about 1328 crore as on FY14. The management has continuously expressed its intention to re-align its capital structure and intends to achieve a net-debt/ebitda of about 2.0x. BIL is constantly evaluating the legalities with respect to return of surplus cash to shareholders in different possible ways. For example, this includes dividend, buyback of equities, reduction of capital or any other mode as may be legally permitted. It may make necessary recommendations to the Board for appropriate decisions in this regard by the end of the year. If we consider the purchase of shares using the surplus parked in the share premium account and P/L, the return ratios would dramatically increase to 28% in FY17E vs. our current estimate of 15.4%. Page 17

18 Exhibit 28: Capital structure re-alignment scenario analysis Current capital structure Buyback scenario Equity Capital crore 1, ,644.9 Reserve & Surplus crore 16, , Surplus in P&L crore 3, Securities premium account crore 6, Shareholders Funds crore 18, ,416.3 Gross Debt crore 2, ,783.6 Net Debt crore -3, ,345.1 Debt / Equity x Net Debt / EBITDA x RoE % RoCE % Page 18

19 Risk & concerns Rentals per sharing tenant may decline The sharing revenue per tenant per month has remained more or less flat for BIL in the past three to five years. The decline due to rising tenancy has been partially offset by higher loading. However, in the event of other smaller players in the tower space resorting to price discounts on rentals to telecom operators, the company may have to reduce its rentals. This could be a downside risk to our estimates. Technology risks The business is exposed to technology risks. If players are able to innovate and make the sites usable for both 3G and 4G coverage, the revenue from loading would be lower-than-expected. In addition, with the huge quantum of liberalised 800/900/1800 MHz spectrum put up for auction in the past two auctions, players would shift their data plans towards these efficient bands of spectrum. This could lead to a lower uptake in loading and tenancy. Imposition of license fees of 6-8% as initially recommended by Trai All telecom operators come under the purview of the licensing regime and have to part with about 6-8% of their revenues as license fees to the government. Trai had recommended similar license fees for tower infrastructure companies as they also derive their source of revenues from spectrum indirectly. If implemented, this will be a dent on margins as well as profitability. Reliance Jio deal contours unavailable The contours of the deal regarding Reliance Jio remain unknown, except for the number of towers. We do not have clarity on the timeline of deployment of cell sites on the contracted towers. Hence, we are not sure about the revenue booking for the entire contract. The deployment of towers, if earlier than our estimates, would be an upside risk to our tenancy assumptions. Vertically integrated promoters The promoter holding of the company is in the hands of Bharti Airtel, which is itself one of its key clients. Apart from Airtel, even Indus, a 42% JV of the company, is held by Bharti, Vodafone and Idea Cellular that are the anchor tenants for the company. It is possible that strategies undertaken by the company in future would yield benefits that would be skewed in favour of telcos. Any such activity in future could dent its goodwill. Page 19

20 Valuation Bharti Infratel is in a sweet spot with widest tower coverage and an impending data boom, necessitating higher tower requirements and tenancies. With 10.3% growth in tenancies, from in FY14 to in FY17E, the company is expected to witness 13.2% CAGR in EBITDA. Currently, the stock is trading at FY17E EV/tower valuation of 76 lakh and EV/EBITDA of 10.8x. Tower companies globally trade at higher EV/EBITDA multiple of 16.1x given higher tenancies and margin profile. With increasing tenancies, as EBITDA margins for BIL approach global levels, we believe the discount to international players would reduce. Exhibit 29: Comparison of global peers US$ million Revenue EBITDA EBITDA Margin (%) RoE (%) EV/EBITDA Mcap/Sales Company Country Mcap CY14 CY15E CY16E CY14 CY15E CY16E CY14 CY15E CY16E CY14 CY15E CY16E CY14 CY15E CY16E CY14 CY15E CY16E ATC US 40,828 4,100 4,621 5,167 2,491 2,954 3, Crown Castle US 28,659 3,690 3,782 3,871 2,007 2,164 2, NA SBA US 15,679 1,527 1,669 1, ,105 1, NA Tower Bersama Indonesia 3, Samara Indonesia 3, Average Bharti Infratel India 11,499 1,894 2,092 2, , For India, CY14 represents FY15E and so forth Source: Bloomberg, Company, ICICIdirect.com Research DCF based SOTP valuation of 450 per share We have valued the company using the DCF based SOTP methodology to arrive at a target price of 450/share. BIL s standalone business has been valued at crore while Indus business has been valued at The 42% contribution be to added in BIL s numbers have been valued at post considering 20% holding company discount. Exhibit 30: Assumptions with regard to BIL Implied Value FY17E Particulars Value ( crore) EV/Tower EV/EBITDA EV of standalone business 44, EV of Indus Towers 115, Contribution of BIL (42%) 48,601.0 Indus contribution post holding disount (20%) 38, Total Enterprise valuation 83, Less net debt -1,716.5 Target market capitalisation 85,161.5 Number of shares Per share value ( ) 450 Upside potential (%) 17% Source:, ICICIdirect.com Research Our SOTP based valuation implies an FY17E EV/tower of 0.9 crore and FY17E EV/EBITDA of 13.0x, which is almost a 27% discount to listed US players and in line with its Indonesian peers. We are initiating coverage on Bharti Infratel with a BUY recommendation. Page 20

21 Exhibit 31: DCF valuation of Bharti Infratel (Standalone) ( Crore) FY14 FY15E FY16E FY17E FY18E FY19E FY20E FY21E FY22E EBITDA 2, , , , , , , , ,492.1 Depreciation 1, , , , , , , , ,380.7 Tax ,057.9 NOPAT , , , , , ,053.5 Capital Expenditure Change in Working Capital -1, Free Cash Flow 2, , , , , , , ,960.0 DCF Valuation Crore Assumptions % PV of Cash flow till FY22E 11,964 WACC 10.3 PV of Terminal Value 32,601 FCF CAGR over FY15E - FY22E 24.3 PV of Bharti Infatel (Standalone) 44,564 Terminal Growth 4.0 Exhibit 32: DCF valuation of Indus (100%) ( Crore) FY14 FY15E FY16E FY17E FY18E FY19E FY20E FY21E FY22E EBITDA 5, , , , , , , , ,134.1 Depreciation 2, , , , , , , , ,136.5 Tax , , , , , , , ,399.2 NOPAT 2, , , , , , , , ,598.4 Capital Expenditure 1, , , , , , , , ,215.4 Change in Working Capital Free Cash Flow 2, , , , , , , , ,245.2 DCF Valuation Crore Assumptions % PV of Cash flow till FY22E 31,373 WACC 10.3 PV of Terminal Value 84,344 FCF CAGR over FY15E - FY22E 20.5 PV of Indus (100%) 115,717 Terminal Growth 4.0 Page 21

22 Annexure-1- Types of telecom towers A glimpse into the kinds of tower sharing infrastructure provided and the kinds of towers will enable a deeper understanding of the business model. Telecom towers basically consist of two kinds of tower infrastructure: 1) Active infrastructure: Radio antenna, BTS/cell site and cables that are owned by telecom operators and 2) Passive infrastructure: steel tower, shelter room, DG set, power regulation equipment, battery bank and security cabin that support active infrastructure. The towers are built in two different layout- roof top based (RTT) and ground based towers (GBT). The table below summarises the specifications of both towers. Exhibit 33: Specifications of different tower layouts GBT RTT Space Requirement 4,000 Sq. Ft. Roof Top Height (m) Occupancy Capacity 3-5 co-location 2-3 co-location Source: Quarterly Report- Company, ICICIdirect.com Research Exhibit 34: Roof top based tower Exhibit 35: Ground based towers The average investment required for a GBT tower is higher at 25 lakh vs. an average investment of lakh in case of an RTT based tower. Though the investments are higher in the case of a GBT tower, the higher tenancy accommodation ability for GBT makes it equally viable. Page 22

23 Financial Summary Exhibit 36: Income statement (Year-end March) FY14 FY15E FY16E FY17E Total operating Income 10, , , ,296.6 Growth (%) Other Income Total Revenue 11, , , ,776.6 Rent , ,048.9 Employee Expenses Power and Fuel 4, , , ,167.7 Other Expenses 1, Repairs & Maintenance Total Operating Expenditure 6, , , ,893.7 EBITDA 4, , , ,402.9 Growth (%) Depreciation 2, , , ,407.8 Interest Other Income PBT 2, , , ,179.9 MI / Profit from associates Total Tax , ,421.2 PAT 1, , , ,758.7 Growth (%) EPS ( ) Exhibit 37: Balance sheet (Year-end March) FY14 FY15E FY16E FY17E Liabilities Equity Capital 1, , , ,889.3 Reserve and Surplus 16, , , ,906.7 Total Shareholders funds 18, , , ,796.0 Total Debt 2, , , ,683.6 Deferred Tax Liability 1, , , ,124.9 Others Total Liabilities 23, , , ,203.9 Assets Gross Block 26, , , ,489.8 Accumulated Depreciation 11, , , ,223.0 Net Block 15, , , ,266.8 Capital WIP Total Fixed Assets 15, , , ,419.5 Investments 7, , , ,480.3 Inventory Debtors Loans and Advances 1, , , ,521.9 Other Current Assets ,015.7 Cash , ,872.2 Total Current Assets 3, , , ,815.9 Creditors Provisions 2, , , ,716.7 Other Current Liabilities 2, , , ,886.0 Total Current Liabilities 5, , , ,852.7 Net Current Assets -2, , , ,036.8 Others Assets 2, , , ,341.0 Application of Funds 23, , , ,203.9 Page 23

24 Exhibit 38: Cash flow statement (Year-end March) FY14 FY15E FY16E FY17E Profit after Tax 1, , , ,758.7 Add: Depreciation 2, , , ,407.8 Add: Interest Paid (Inc)/dec in Current Assets 2, Inc/(dec) in CL and Provisions CF from operating activities 7, , , ,738.1 (Inc)/dec in Investments -3, (Inc)/dec in Fixed Assets -1, Others , , ,952.9 CF from investing activities -5, , , ,270.3 Issue/(Buy back) of Equity Inc/(dec) in loan funds Dividend paid & dividend tax , , ,098.0 Add: Interest Paid Inc/(dec) in Sec. premium Others CF from financing activities -1, , , ,693.2 Net Cash flow Opening Cash ,097.6 Closing Cash , ,872.2 Source: ICICIdirect.com Research Exhibit 39: Ratio analysis (Year-end March) FY14 FY15E FY16E FY17E Per share data ( ) EPS Cash EPS BV DPS Cash Per Share Operating Ratios EBITDA Margin (%) PAT Margin (%) Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio Page 24

25 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai research@icicidirect.com Page 25