Bharti Infratel - Reliance Jio: A win-win deal

The markets gave a thumbs-up to the development with Bharti Infratel gaining over 4% to Rs 185 in intra-day deals

Sunil Mittal owned Bharti Infratel and Mukesh Ambani controlled Reliance Jio Infocomm have agreed to share telecom infrastructure that includes sharing of inter-and intra-city fibre-optic networks, submarine cable networks, towers and internet broadband services. Going ahead, the arrangement could be extended to roaming on 2G, 3G and 4G and any other mutually benefiting areas.

The markets gave a thumbs-up to the development with Bharti Infratel gaining over 4% to Rs 185, while Bharti Airtel moved up a marginal 0.3% to Rs 336 levels in intra-day deals.

Post this deal, Reliance Jio and Bharti Airtel will now have cellular networks across all the 22 circles in India. While Bharti Airtel subscribers will be able to access 4G services in all 22 circles, Reliance Jio users could access other network bands like 2G and 3G as well.

Earlier in April, the companies had signed an agreement that gave the Mukesh Ambani-owned form an exclusive right to use Bharti’s 3,100-km submarine cable i2i connecting Chennai and Singapore.

Win-win deal

Analysts suggest that the deal is a win–win for both companies. While Reliance’s fibre-optic network will be useful for Bharti Airtel, the latter’s massive tower network will benefit the former.

“This deal seems to be beneficial for both companies. Investment in setting up new infra will be lowered. Bharti Airtel also stands to gain as it will improve the utilisation rate of the assets owned by the company and, in turn will aid in improving the cash flows going ahead,” says an Angel Broking report.

Points out Shobit Khare, an analyst tracking the sector with Motilal Oswal: “Though there is not much information available on how much many towers will be shared and no concrete agreement on the quantity, assuming that Reliance Jio takes 40,000 cell sites (10,000 from Bharti Infratel standalone and 30,000 from Indus), it will lead to incremental revenue of Rs 930 crore.”

“As regards Reliance Jio, they are getting access to extensive network of Bharti. Our back-of-the-envelope calculation suggests incremental revenue of Rs 920 crore for Bharti Infratel. We have a buy call on Bharti Airtel with a price target of Rs 465,” says an analyst with a domestic brokerage.

Gaurav Dua, head of research with Sharekhan suggests that the environment in the telecom space is turning favourable with a reduction in the competitive intensity and the benefits of consolidation flowing to the incumbent players. The same has been visible in the improving performance indicators of the leading players over the past three quarters (viz improving revenue per minute, expanding margins and high data growth).

“The Q2FY2014 performance of the telecom operators further vindicates our stance that the overall domestic business environment continues to improve, with data as the next driver of growth in both revenues and margins. The benign competitive environment, relatively soft regulatory hurdles and attractive valuations make us continue with our positive stance on this sector. Our top pick in the sector is Bharti Airtel,” he says.