Bharti Infratel IPO: Should Investors Buy Into It?

Three new public issues are simultaneously hitting the market. P C Jewellers, CARE (Credit Analysis and Research Limited) and Bharti Infratel are to be listed on the bourses in the coming weeks. With approximately Rs 4000 crore being raised, Bharti Infratel (BIL) would be the biggest IPO to hit the markets in the last two years after Coal India. Should investors buy into it? Here is what you should be knowing before you take that vital decision.

The Telecom Industry

The growth story of the Indian telecommunication sector has been bright indeed. Over the years, there has been a tremendous growth in the subscriber base which has made India the world’s second largest in terms of telecom subscribers only next to China with 906.62 million wireless subscriptions as on September 30, 2012. Telecom service providers and telecom infrastructure companies have directly benefited out of this.

Under-penetration in rural India, growing data usage and introduction of 3G and 4G services are expected to drive the next phase of growth making sure these companies continue growing in terms of revenues and subscribers.

The Tower Business

Tower companies like Bharti Infratel provide the infrastructure needed by telecom service providers, by building Ground Based Towers (GBT) and Roof Top Towers (RTT). These towers are used by service providers and often shared amongst themselves due to the capital intensive nature of the business and due to the ability of these towers to be shared by more than one operator. The number of towers is increased with the increase in penetration. Moreover, an increase in 3G and 4G usage would require installation of additional capacities on existing towers as the cell radius reduces with an increase in frequency. These factors are expected to spur demand for towers in the coming years.

Bharti Infratel (BIL)

BIL is a subsidiary company of Bharti Airtel which holds an 86.09% stake in the company. BIL has presence in 11 telecom circles and has a market share of 8.78% in the Indian tower business. As of September 30, 2012, the company owned and operated 34220 towers. 

Moreover, BIL has a 42% stake in Indus Towers (jointly held by Bharti Infratel, Vodafone India and Idea Cellular), which is the market leader with a 28.99% market share. As a result 80% of Bharti Infratel’s revenues come from Bharti Airtel, Vodafone India and Ideal Cellular.

The Public Issue

BIL plans to list its shares on the BSE and the NSE through a book building issue and has determined a price band of Rs 210 to Rs 240 per share for this. It would issue 18.89 crore shares thus raising Rs 3966.9 crore to Rs 4533.6 crore at the lower and upper band.

Currently, the top 10 shareholders hold a 99.47% stake in BIL. Of these, Compassvale, GS Strategic, Anadale and Nomura are looking to reduce their holding in the company by selling a cumulative 4.27 crore shares (22.60% of the issue size). These companies are offloading 20% to 33.33% of their existing shareholding thus retaining a majority of their holding and indicating a long term perspective in their investment rationale. Additionally, the company is issuing fresh equity of 14.62 crore shares (77.40% of the issue). Thus taking the total size of the issue to 18.89 crore shares.

Proceeds of the Issue

The amount received from the proceeds would be used towards

1. Installation of 4813 new towers
2. Upgradation and replacement of existing towers
3. Green initiatives at tower sites
4. General corporate purposes

Categorisation of installation of new towers

Performance of Bharti Infratel

The financials of BIL have been robust. Between FY09 and FY12 its revenues and profits have seen a CAGR of 23.23% and 56.67% respectively. During the same period the company has seen an improvement in its EBITDA and net profit margin of 2166 bps and 587 bps respectively. It is currently operating at an EBITDA and net profit margin of 38.98% and 7.94% respectively.

Future Prospects

BIL is poised to grow considering the in-house demand that is likely to be generated, the increasing number of subscribers, growth of 3G and 4G services and the growth potential of the tenancy ratio. The industry offers good prospects and the company will continue performing well. This trend is more likely, particularly considering the fact that data usage, smartphone penetration, overall penetration and tenancy ratio are drastically lower in India as compared to the global average. Moreover, the company is a market leader and is well positioned to make the most of the opportunity. This is also validated by the fact that institutions offloading their stake in the public issue are retaining a majority of their holdings.

We are extremely bullish on the company’s prospects in the long term due to a cumulative of all the above factors. However, we think BIL is expensively priced in the band of Rs 210 to Rs 240 per share. With an EPS of 4.31 in FY12, the company seems to be highly overvalued at a PE of between 48.74x and 55.70x. We thus recommend investors with a larger risk appetite and with a long term investment horizon to invest in this scrip. At the same time, low-risk investors can take a limited exposure in the counter with a long term perspective.