Bharti Infratel IPO - Analysis - Indian IPO Blog

Monday, December 10, 2012

Bharti Infratel IPO - Analysis

Bharti Infratel is entering the capital markets with an IPO of 18.89 crore equity shares of Rs.10 each, comprising of an offer for sale of 4.27 crore shares by 4 PE investors and balance shares consisting of fresh issue. The IPO would open for subscription from December 11, 2012 and would close for subscription for QIB investors on December 13, 2012 and for other investors on December 14, 2012.

The shares are offered in a price band of Rs.210/- to Rs.240/- per equity share. The Retail Investors and eligible employees would be entitled to a discount of Rs.10/- per share

Company Profile:

Bharti Infratel is one of the world's largest telecom tower infrastructure providers which deploys, owns and manages telecom towers and communication structures for all wireless operators. The business of Bharti Infratel and Indus is to acquire, build, own and operate tower and related infrastructure.

Bharti Infratel and Indus currently provide access to their towers primarily to wireless telecommunications service providers. Bharti Infratel's and Indus's three largest customers are Bharti Airtel (together with Bharti Hexacom), Vodafone India and Idea Cellular. They are the three leading wireless telecommunications service providers in India by wireless revenue. Bharti Infratel, having presence in all 22 telecom circle in India, enjoys 23% market share in terms of tenancies, as of March 2012. The promoter of the company is Bharti Airtel

IPO Rating:
CRISIL has assigned a CRISIL IPO Grade "4/5" (pronounced "four on five") to the proposed initial public offer (IPO) of Bharti Infratel Ltd (Bharti Infratel). This grade indicates that the fundamentals of the IPO are ‘above average’ relative to the other listed equity securities in India. CRISIL assigns IPO grading on a scale of IPO Grade 5 to IPO Grade 1, with IPO Grade 5 indicating strong fundamentals and IPO Grade 1 indicating poor fundamentals. According to the grading document from CRISIL, the assigned grade also reflects the strong and stable operating cash flows resulting from long-term contracts.

The company’s robust back-end processes, which ensure higher reliability of network uptime for its clients, support the grade. However, low return on capital employed (RoCE) is a concern. Since tower infrastructure is a business with high operating leverage, RoCE is expected to improve in line with an increase in the tenancy ratio albeit from a lower base. The grade is not an opinion on whether the issue price is appropriate in relation to the issue fundamentals. The grade is not a recommendation to buy, sell or hold the graded instrument, or a comment on the graded instrument’s future market price or its suitability for a particular investor.

Key Strengths:
  • The company stands to gain from the increase in penetration of voice and data services, which is expected to drive the telecom companies' demand for base transceiver stations (BTS) and additional towers.
  • Bharti Infratel and Indus Towers will benefit from any expansion of the network by India’s leading telcos - Bharti Airtel, Vodafone and Idea Cellular Ltd - as they are the preferred players for passive infrastructure requirements of the three telcos. 
  • Large-scale operations, first-mover advantage and pool sharing arrangement among the top three telcos have resulted in better-than-industry tenancy ratio for Bharti Infratel. It is expected to improve further leading to high operating leverage and improvement in profitability

Risks and Concerns:
  • Tower infrastructure is a business with high operating leverage. Low asset turnover and minimal use of leverage in a capital intensive industry have resulted in low return on equity (RoE) for Bharti Infratel over the past three years, which can increase if the leverage is corrected
  • The overcapacity in the industry is expected to limit the demand for rollout of new towers. Further, regulatory changes and the resultant uncertainty pose a risk to telecom players as their network rollout plans could be hampered.

Concluding Remarks:

The company has sound operating model in place. At the upper band of Price Band of Rs. 210 to Rs. 240 per share, shares are being issued at a PE that is undoubtedly expensive. Such higher price may be justified considering the long term story of the company, but investors may want to exercise caution before jumping into the ship, particularly if they are seeking listing gains, which seem unlikely

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