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Indus merger to accentuate earnings pressure
Bharti Infratel hosted an analyst meet to discuss its merger with Indus and the way forward. Reiterating that its dominance in the tower space will continue post-merger, the company plans to focus on multiple new growth avenues. But, our discussions with peers and other market participants raised concerns on a new entrant’s ‘go solo’ strategy, prominence of in-building solutions (IBS), small cells and expansion of American Tower Corporation (ATC), which could be severely detrimental to the merged entity’s future growth prospects.
* Merger rationale: The merger will improve capital structure, ROE, EPS, remove holding company discount to Indus and drive group level operational synergies.
* Management believes that earnings have bottomed out and majority of site cancellations are behind; focus will now shift to new growth avenues. Management indicated that growth opportunities remain strong in macro site requirements, apart from new avenues like fiber sharing, small cells, IBS, wifi hotspot and smart cities.
* Focus on shareholder returns: All new growth avenues will be tapped provided they are not ROE dilutive, else the company will return excess cash to shareholders with an outer limit of 3x net debt to EBITDA.
* Weakening competitive position: Earlier, Right of First Refusal (ROFR) in all 23 circles from Vodafone-Idea stayed with Bharti Infratel. But, due to the sale of Vodafone and Idea’s independent towers to ATC and ROFR in seven out of 23 circles shifting to ATC, competitive position of BHIN-Indus will be diluted.
* Pressure on business to continue: Our meetings with industry participants indicated that site cancellations from Vodafone Idea are far from over, while RJio’s ‘go solo’ strategy will further weaken independent tower companies. Even IBS and small cells are largely deployed by Telcos directly.
* Expect BHIN consol. EBITDA/PAT de-growth of 10%/12% in FY20. Our proforma (incl. 100% Indus) EBITDA/PAT is likely to de-grow 14%/27% in FY20, assuming IDEA and Providence’s stake buyout. We remain Neutral with a TP of INR275, given the reducing competitive position and earnings visibility.
* Management optimistic about outlook
Management indicated that site cancellations have largely been concluded and the huge data growth is likely to drive the need for high network investment. This would be seen in macro site requirements, as telcos will need to make the network dense, besides building other layers of the network like fiber sharing, small cells, IBS, WiFi hotspot and other managed services. But Bharti Infratel does not plan to build ahead of telcos’ requirements. The company will wait for demand to pick up until it sees substantial interest in alternate avenues. It will continue to return cash to shareholders and operate on a lean balance sheet and healthy ROE.
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