The Bharti Infratel stock has recouped most of its recent losses after the announcement of the June quarter results on Monday, thanks to better-than-expected margins and net profits and analysts' comments that there was little downside, given the attractive valuations and improved cash flows.
Most analysts believe the key trigger for the stock could be a spurt in data demand over the next one year. Kunal Vora and Kunal Patel of BNP Paribas say the the company is well positioned to benefit from data growth in India. "Indian telecom operators' data revenue is increasing at a healthy 20-25 per cent quarter-on-quarter and falling 3G data tariffs could boost volumes. Improvement in telecom operators' RPM (revenue per minute) and profitability would improve their ability to invest in networks which in turn would benefit Bharti Infratel," they add.
The scrip closed 1.17 per cent lower on Wednesday at Rs 147.40 on BSE, while the benchmark index, Sensex, closed flat at 19,345.70.
Most analysts have a 'buy' rating on the stock, which is trading at FY14 enterprise value (EV)/Ebidta (earnings before interest depreciation taxes and amortisation) of six times with target prices in the range of Rs 185-220. Harit Shah of Nirmal Bang has increased his price target for the stock to Rs 197 (Rs 192 earlier) due to improved cash flow. He believes with valuation at five times FY15 EV/Ebitda estimates, 10 per cent FY15 free cash flow yield and FY15 estimated cash/share of Rs 50 (34 per cent of current market capitalisation), there is a strong downside support to the stock.
Revenue growth muted, better margins
The June quarter results were impacted by the merger of Bharti Infratel Ventures, a subsidiary of Bharti Infratel, with Indus Towers. Due to this, revenues were lower by Rs 50 crore. Revenue growth for the company over the last two quarters has been a disappointment as tenancy and rentals have not seen much traction. Thanks to accounting changes and cost efficiencies, margins were up 255 basis points sequentially. Adjusted for the merger and due to lower rent and other expenses, margins were up 127 basis points to 40.2 per cent compared to the March 2013 quarter. Thanks to increased margins, adjusted net profit was higher by 12.3 per cent on a sequential basis.
Strong cash flow, cautious outlook
With companies cautious about adding new towers on the back of regulatory uncertainties, tenancy for the quarter continued to be steady at 1.91 times. Gross additions for the quarter were thus weak at 1,583 sites, compared with March quarter additions of 2,923 sites. While rentals for the quarter also remained flat, Bharti Infratel management has indicated it is not facing any downward pressure due to the tower sharing deal between Reliance Communications and Reliance Jio. Most analysts believe while revenue growth for FY14 could moderate a bit, operating cash flow will likely remain strong. The June quarter free cash flow of Rs 600 crore implies an annualised yield of nine per cent, say analysts at Standard Chartered Research. The Bharti Infratel management is pinning its hopes on the 20 per cent sequential growth in data usage reported by telecom operators and the fact that pricing power is coming back to operators.
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