Reliance Jio shadow on tower monetisation positives for Airtel, Idea

While debt reduction will help, some of the gains are offset by cash losses and higher rental outgo

The stock of Bharti Infratel was up 5.4 per cent in trade on Thursday on reports that it could be buying out the stake of its joint venture partners in Indus Tower. While Bharti Infratel and Vodafone have 42 per cent stake each in Indus, Idea has 11.15 per cent.

The Street perceives the deal to be a positive one for Bharti, as it allows the company to put its hoard to good use. The company had cash of Rs 4,400 crore at the end of June and generates about Rs 3,500 crore annually. The deal will help improve the return ratios, as the return on capital employed was pulled down by the cash pile. Analysts believe the stock could get re-rated, with even an 8.1 per cent increase in stake helping it to save on dividend tax (double taxation on dividends from Indus) and eliminate the holding company discount.

For the incumbent operators, facing intense competition from Reliance Jio, cutting of debt and investing in expansion of fourth-generation technology (4G) capability simultaneously has become imperative. Reports suggest Bharti Infratel will buy out the stake of its partners in Indus for about $5 billion and given Idea's 11.5 per cent stake (13,706 towers), the deal could fetch the latter company about $1.2 bn or Rs 8,000 crore. Coupled with valuations of another $500 million for standalone towers (9,984 of these), the total it could get after sale of all its towers will be about $1.7 bn or Rs 11,000 crore.

Idea's debt was Rs 53,925 crore at the end of June, with net debt to operating profit nearly 7.19 times. The development would help it. Debt reduction would be substantial at 19 per cent. The company needs to also invest in capital expenditure; with no cash profit for three quarters, this entails taking on more debt. After profit of Rs 91 crore in the September 2016 quarter, Idea has had losses totalling Rs 1,500 crore over the next three quarters. The loss for the September 2017 quarter is expected to be nearly Rs 1,200 crore, with operating profit falling by nearly half to an estimated Rs 1,400 crore, from Rs 2,838 crore a year before.

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 Rs 9,000 crore. Given its gross debt of over Rs 1 lakh crore and pressure on operations, reduction in debt would be small. If it were to sell its remaining stake in Infratel, this would at the current market capitalisation fetch it a sizable Rs 40,000 crore.

Overall, while the tower monetisation moves are positive for Bharti Airtel and Idea Cellular, reducing the annual interest outgo, this will be offset by the higher outgo from rentals (independent towers) and lack of dividends they get now as owners. Bharti 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 Rs 1 lakh crore, it will have the benefit of size (400 million subscribers) and synergy gains.