Reliance Jio's high capital expenditure boosts Bharti Infratel scrip

Expected to get a big share of former's tenancy additions

The stock of Bharti Infratel, which manages telecom towers and communication structures for various mobile telephony operators, gained seven per cent over the past week. That was after brokerages upgraded it on expectation of higher orders from the Reliance Jio rollout, besides investor preference for companies with a stable revenue model.

Nomura, which has increased its target price by 20 per cent to Rs 396 for the scrip, said in a report earlier this month that it expected the company to garner a sizeable share of the rapid tenancy roll-out by Jio over the next few quarters. Which, it said, would make up for the merger/acquisition or slowing in network capital expenditure by other telecom companies.

The key overhang on the stock had been the estimated loss of tenancies by industry consolidation, both from the exit of weaker players and from mergers such as the one announced by Vodafone and Idea Cellular. The earnings' dent from tenancy loss (due to merger/consolidation) is expected to be negated by related termination charges to be received in FY20-21, say analysts. The mega merger is expected to come through by FY19.

Analysts at IDFC Securities also upgraded the stock this week, with a target price of Rs 420. They believe the 30 per cent up-move for the stock from recent lows is because of exit penalties, staggered re-allocation of tenancies, and strong tenancy additions (led by Jio), partly allaying investor concerns.

The key near-term trigger appears to demand for its towers. The company could achieve its highest net tenancy additions in the current financial year, as it looks at getting a large share of the 100,000 sites Jio said it would roll out over some quarters starting this year. Coupled with Bharti Airtel’s rollout of cell sites to enhance its network capacity and coverage. Trigger for the rollout remains the rapid growth of data volumes and potential, given the lower penetration of broadband and smartphones.

Even in the June quarter, while parent Bharti Airtel and Idea are expected to report a fall in revenues, the eight per cent revenue growth for Bharti Infratel will be led by tenancy growth from Jio’s aggressive capex. Vivekanand Subbaraman of Ambit Capital expects tenancies to increase 2.38 times in the quarter, as against 2.2 times in the year-ago period. As tower rollouts are minimal and growth is tenancy-led, free cash flow generation will remain healthy in the quarter at Rs 1,000 crore, he adds.

The Street will also keep an eye on the controlling stake sale by Bharti Airtel, leading to higher valuations and a possible re-rating as it removes the overhang of conflict of interest and improves liquidity. The company sold 10.3 per cent stake in March to KKR and Canadian pension fund manager CPPIB for Rs 6,194 crore. Its stake after the deal in Bharti Infratel is 61.65 per cent.

The other factor is Bharti Infratel buying out Indus Towers. IDFC analysts believe there is higher visibility about Bharti utilising its right of first refusal and balance sheet strength to increase its stake in Indus. Full control of Indus would ensure Bharti Infratel becomes a direct beneficiary of all future network rollout by the top incumbents in India, beside improving its capital structure. Bharti Infratel has a 42 per cent stake in Indus.

The stock is currently trading at 10 times its FY18 estimated enterprise value to operating profit ratio, and could be bought on dips.