No upside triggers for Bharti Infratel

Stretched balance sheet of telcos, higher competitive pressure to impact revenues

The Bharti Infratel stock was down nearly 7 per cent over the last week on worries that tenancy exits because of the Vodafone-Idea merger, lower orders from Reliance Jio, and uncertainty on upsides from fibre rollouts would limit revenue gains for the company.

Given the consolidation in the sector, revenues of Bharti Infratel — which offers tower infrastructure to telecom service providers — have been severely impacted. This is why the stock has declined 44 per cent since its highs last year. The near-term outlook, too, is cloudy given that pricing pressures in the telecom sector continues to be intense.

Recently, the firm announced that Vodafone Idea would be exiting about 27,447 tenancies in Bharti Infratel and Indus Towers. The company indicated the exits would cost it ~7.2-7.8 billion annually.

Analysts had expected a lower figure for the tenancy loss (at 25,000) after the merger of Vodafone and Idea.

While Vodafone Idea’s exits from Bharti Infratel towers will be effective from September 1, analysts at ICICI Securities say the impact on Q1FY19 financials would have been 9-11 per cent on the revenue and operating profit, respectively, if the same were to be applied to the June quarter. Analysts have cut operating profit estimates for Bharti Infratel by 5 per cent over the FY1921 period.

The other worry is the uncertainty on capex of Vodafone Idea, given the competitive intensity in the sector as well as time taken for Vodafone to monetise its stake in Indus. Moreover, Jio is banking on its own towers more than Bharti Infratel’s, to increase its tower count to 260,000 from 180,000.

Further, with Bharti Airtel moving its fibre assets to subsidiary Telesonic, analysts at IIFL Institutional Equities believe that upsides for the Infratel-Indus entity will be limited.

Given the aggressive broadband rollout plans of telcos, brokerages had earlier estimated that the opportunity for players such as Bharti Infratel would be large, but that does not seem to be the case. Despite the benefits of size, Bharti Infratel faces a tough time ahead. The trigger for the stock will be an easing of competitive pressures or high tenancies on its towers, from aggressive capex by Jio and other telcos.