Bharti Infratel's Rs 4,500 crore IPO launched: Should you subscribe?

Bharti Infratel's Rs 4,500 crore initial public offer - the biggest since 2010 when Coal India raised over Rs. 15,000 crore - opened for subscription on Tuesday. Bharti Infratel is the telecom tower arm of India's biggest mobile carrier Bharti Airtel.

The face value of shares is Rs. 10 and they are available in the price band of Rs. 210-240 per share. Subscribers will have to invest in lot sizes of 50 shares. The IPO closes on December 14.

The public offer comprises over 18.9 crore equity shares. Bharti Infratel is selling 14.62 crore new shares in the IPO, while four of its shareholders including arms of Singapore state investor Temasek and Goldman Sachs are selling 4.27 crore shares, according to a regulatory filing.

Profile: Bharti Infratel has over 33,000 towers across 18 states covering 11 telecom circles and also holds a 42 percent stake in Indus Towers -- the world's biggest tower firm -- which has around 1,10,000 towers.

Issue objectives: Installation of 4,813 new towers (Rs 1,087 crore), upgradation and replacement (Rs 1,214 crore), and green initiatives at tower sites (Rs 639 crore).

Grading: Crisil IPO grading of 4/5 indicating above average fundamentals.

Financials: Bharti Infra recorded revenue CAGR of 23 per cent over FY09-12. The company reported adjusted net profit of Rs 751 crore on sales of Rs 9,452 crore in 2011-12. For the first half of FY13, Bharti Infratel reported (adjusted) profit after tax of Rs 461 crore on sales of Rs 4,972 crore. The company's Earnings per Share (EPS) was Rs 4.31 for FY12 and Rs 2.64 for the first half of FY13.

Domestic brokerage Ambit expects Bharti's earnings to slow down, owing to a drop in tenancies and weak uptake in 3G/4G services and rising incidence of upgrades to existing 2G footprint (as opposed to fresh base station deployment), thereby reducing the need for new towers/tenancies.

Valuations: Bharti Infratel's revenue per tower per month is $1342 as compared to $7030 for American Towers. Its EBITDA margin - a key indicator of profitability- is at 58 per cent lower than global peers such as American Towers (74 per cent). International peers have substantially stronger capex productivity, with every dollar of capex resulting in 58cents of incremental revenues versus only 33cents of incremental revenues for Bharti Infratel.

"Bharti Infratel is likely to list at 10-12-times FY14 EV/EBITDA and 38-44-times FY14 P/E. These valuations appear expensive given the company’s poorer economics compared to global tower companies and given the lack of short-term growth opportunities for BIL," Ambit said in its note.

Risks: There is over-capacity in the industry which may lead to lower revenue growth. Bharti Infratel faces competition from BSNL and Power grid towers. There is high dependence on promoter companies. Bharti Infratel has consolidated net debt of Rs 2,000 crore.

What brokerages say:

Emkay, SBI Caps and IIFL have a "subscribe" call. Ambit has an "avoid" call on the issue.

"Bharti Airtel is a tenant at almost all of Bharti Infratel’s towers. At least one among Bharti Airtel, Vodafone and Idea Cellular is a tenant at almost all of Indus Towers’ towers. For FY 2012 and first half of FY 13, respectively, Bharti Airtel (together with Bharti Hexacom) accounted for 62.9 per cent and 62.1 per cent of BIL’s unconsolidated rental revenues. Thus, BIL enjoys revenue stickiness from its major clients who also happen to be its owners. This reduces business risk as well as confers competitive advantage," Enam said in a note.


Disclaimer: Investors are advised to make their own assessment before acting on the information.

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