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Pain continues; Maintain Sell
* BHIN reported weak operational performance in Q4FY19, impacted mainly by higher-thanexpected tenancy exits. Rental revenues include Rs997mn of exit penalties. Adjusted for this, rental revenues stood at Rs20.1bn, down 8.1% yoy (3% below estimates).
* Net tenancy exits of 1,725 surprised negatively as exits from VIL continued to occur, while gross additions from Airtel and JIO remained muted and failed to offset these exits. Our estimates already factor in a rebound in gross additions.
* We believe that peak exits from VIL are behind us at current juncture, while continued market share loss could warrant additional exits in the next 12 months. We have cut our tenancy additions by 61% /23% to 4.1k/8.4k for FY20E/21E on a pro forma basis.
* We have aligned our forecasts after factoring in lower tenancies, higher energy reimbursements and rental/tower/month. Maintain Sell with a revised TP of Rs270 (8x FY21E pro-forma EV/EBITDA).
Tenancy exits higher than expected, yet again
Consolidated revenue stood at Rs36.0bn (-1% qoq, -1.7% yoy). Rental revenues stood at Rs20bn, down 8% yoy (3.4% below estimates). Energy reimbursements increased 1% yoy and was down 3.4% qoq (3% below estimates). Rental revenues for 3Q and 4Q are adjusted for exit penalties of Rs550mn and Rs997mn, respectively. Net tenancies, on a consolidated basis, declined by 1725 vs. 63 in the last quarter. Consolidated EBITDA was Rs14.9bn (-0.9% qoq, -6.4% yoy). EBITDA margin stood at 41.4% (-206bps yoy and +10bps qoq). Other expenses rose 4% yoy and 8% qoq after five quarters of consecutive declines.
Outlook and valuations
While management has been claiming that peak tenancy exits are behind the company, continued tenancy losses remain a cause of concern. Concerns still remain on the possibility of: 1) continued revenue market share loss of VIL putting pressure for more exits in the next 12 months; and 2) incremental tenancy growth in lieu of exit penalties. JIO has demerged its tower business into a separate SPV which could potentially increase the competition for incremental tenancies or lower incremental tenancies to BHIN as well. Continued hypercompetition in the sector, along with the aforementioned risk from JIO, restricts us from taking a constructive view on the name. Aggressive 4G capacity expansion with independent data sites could result in a conversion of loading into actual sites, and robust growth from JIO could pose upside risk to our revenue estimates. The dividend yield of 5.5% on CMP will restrict meaningful downside, while underperformance might continue till fundamentals improve. With stock price correction of ~14% since our formal EAP launch (1st April 2019) we have reduced our underweight in EAP now by 14bps to 24bps.
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