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Bharti Infratel: Exceptional growth in profits
Nov 7, 2014 | Updated on Nov 8, 2014

Bharti Infratel has declared its results for the second quarter for the financial year 2014-15 (2QFY15). The company has reported a 9.2% YoY increase in revenues and a 67.7% YoY increase in net profits during the quarter. Here is our analysis of the results.

Performance summary
  • Consolidated sales grew by 9.2% YoY during the second quarter of the financial year 2014-15 (2QFY15).
  • The company's operating performance was better than its topline performance. The operating margin improved from 40% in 2QFY14 to 41.5% in 2QFY15. The operating profit for 2QFY15 increased by 13.3% YoY.
  • The higher operating profit, lower depreciation (as a percentage of sales) and a 42.8% YoY decline in interest costs contributed to an increase in the net profit by 67.7% YoY during the quarter.
  • Total towers on a consolidated basis stood at 84,303 at the end of the quarter. Total co-locations stood at 174,270. Average sharing factor improved by 6.2% YoY. Sharing revenue per tower increased by 6.3% YoY during the quarter

Consolidated financial performance snapshot
(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Sales 26,837 29,301 9.2% 53,057 57,728 8.8%
Expenditure 16,108 17,150 6.5% 31,865 33,787 6.0%
Operating profit (EBITDA) 10,729 12,151 13.3% 21,192 23,941 13.0%
Operating profit margin (%) 40.0% 41.5%   39.9% 41.5%  
Other income 569 1,137 99.8% 2,125 2,309 8.7%
Interest expense/(income) 1,335 764 -42.8% 2,379 1,548 -34.9%
Depreciation 5,326 5,420 1.8% 10,854 10,673 -1.7%
Exceptional items - -   - -  
Profit before tax 4,637 7,104 53.2% 10,084 14,029 39.1%
Tax 1,863 2,452 31.6% 3,734 4,749 27.2%
Profit after tax/(loss) 2,774 4,652 67.7% 6,350 9,280 46.1%
Net profit margin (%) 10.3% 15.9%   12.0% 16.1%  
No. of shares         1,890.3  
Diluted Earnings per share (Rs)*         9.6  
P/E ratio (x)*         29.0  
* On a trailing 12 months basis

What has driven performance in 2QFY15?
  • Bharti Infratel reported a revenue growth of 9.2% YoY during the quarter. This was achieved by the growth in number of towers as well as an improvement in the tenancy ratio during the quarter.

  • The average sharing factor (or tenancy ratio) improved to 2.05 in 2QFY15 as compared to 1.93 in 2QFY14. Even on a sequential basis, the factor saw an increase of 1.5% as it had stood at 2.02 in 1QFY15. The sharing revenue per tower increased by 6.3% YoY and the sharing revenue per customer increased by 0.1% YoY.

    Key Indicators (Consolidated)
      2QFY14 2QFY15 YoY Change 1QFY15 QoQ Change
    Total Towers (Nos.) 82,476 84,303 2.2% 83,778 0.6%
    Total Co-locations (Nos.) 159,997 174,270 8.9% 170,320 2.3%
    Average sharing factor 1.93 2.05 6.2% 2.02 1.5%
    Sharing revenue per tower per month (Rs) 65,608 69,740 6.3% 68,886 1.2%
    Sharing revenue per sharing operator (Rs) 33,996 34,016 0.1% 34,113 -0.3%

  • Bharti Infratel's operating margins stood at 41.5% during 2QFY15, which was higher than the 40% seen during the same period last year. This was largely on account of the savings in various cost heads like fuel, rent and employee costs which saw marginal decreases during the quarter (all as percentage of sales).

    Cost Breakdown
      2QFY14 As % of sales 2QFY15 As % of sales
    Power & fuel 10,415 38.8% 11,009 37.6%
    Rent 2,215 8.3% 2,319 7.9%
    Employee related expenses 928 3.5% 990 3.4%
    Repairs & maintenance 2,041 7.6% 2,215 7.6%
    SG&A 509 1.9% 617 2.1%
    Total expenses 16,108   17,150  

  • Net profits increased by 67.7% YoY during the quarter. The higher operating margins as well as lower depreciation (as a percentage of sales) and finance charges helped the growth at the bottom line level. The net margin improved from 10.3% in 2QFY14 to 15.9% in 2QFY15.
What to expect?
At the current price of Rs 278, the stock is trading at a multiple of 29 times its trailing twelve months earnings.

There were three key takeaways from the interaction with the management. The first being the use of the excess cash on the balance sheet. The management stated that as they have already maximized the dividend payout ratio; they would consider a buyback from the share premium account (about Rs 35-36 bn) created at the time of the IPO. However, this would require clarification from the Ministry of Corporate Affairs. The company has made a presentation about the same to the ministry but have not yet heard back.

The company is also considering taking over the towers of Vodafone and Idea Cellular in India as well as the parent company, Bharti Airtel's, towers in Sri Lanka. However, the management could not provide any further details as the talks are still at a preliminary stage. Bharti Infratel is also looking at possibly acquiring towers in Bangladesh however; regulatory issues are still to be sorted out on that front.

Secondly, the management has stated that the data services will remain the growth driver for the next few years as more tenants load their 3G infrastructure on the existing towers. While this could potentially have an impact on pricing the management has stated that they were not witnessing any pricing pressures as of now.

The last key take away from the concall was regarding regulations. The management of the company has met with the regulator to discuss the issue of license fee. The company has made its point clear to the regulator that the license fee can be applied only once i.e. to the telecom service provider. If it is applied to the tower company as well then it would be akin to a form of double taxation. The management is yet to hear back from the regulator about the same.

The long term fundamentals of Bharti Infratel remain strong. However, considering the risks the company faces on the regulatory front and keeping in mind the valuations, there is insufficient margin of safety for investors. We have updated the FY17 financial estimates for the company. We maintain our view that investors should not buy the stock at these levels.

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