Bharti Infratel Q3FY17 Concall Summary

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Financial Highlights

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  • Consolidated revenues for the quarter were at Rs.3,400 Crores, a year-on-year growth of 10% and the EBITDA for the quarter was just under Rs.1 ,500 Crores again a growth of 9% year-on-year. 
  • Profit after tax for the quarter was at Rs.620 Crores which witnessed a 25% year -on -year growth. The profit is lower due to Ind-As were now mutual funds have to mark-to-market & other investments which company makes. 
  • Profit after tax for 9 months was Rs 2150 crores showing 41% growth y-o-y
  • At consolidated level the company has recorded Rs 3400 crore revenue & Rs 620 crores net profit during the quarter. 

Interest income

  • The bond yield is on decline. Interest income is down which is because of Ind-AS mark to market gains coming into P&L in the respective quarter. The interest rates have been sliding down, but if one looks at the underlying one of the benchmarks say 2025 Government of India paper the decline in that paper in the last quarter was higher than the decline of that paper in this quarter. While company has got MTM gains apart from accruals on the coupons, the decline being higher in the last quarter had a strong positive quarter versus this quarter.
  • Interest rates are coming down, all fixed income portfolios do adjust their durations & with the marginal expectation of interest rates to go down reducing, duration gets adjusted slightly on the shorter sides. As a result ,some bit of MTM accrual which has happened over and above the regular coupons, is slightly lower versus last quarter, but overall the yield is over 10%.

Key Business Highlights

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  • Q3FY17 saw a significant resurgence of the network rollouts with the completion of spectrum auctions in early October. Both Infratel & Indus witnessed strong colocation addition during the quarter with highest ever new colocations of over 3000 & 7400 at Infratel & Indus respectively. These are the highest in last 5 years. 
  • The company crossed the coveted 200,000 tenancy mark on a consolidated basis. The total consolidated co-locations as on December 31, were at 204,934 just under 205,000 with a co-location factor of 2.27 at closing
  • Consolidated tower base stood at 90,255, a y-o-y growth of 2.5%, whereas the colocation growth was at 6.8% & this quarter the company ended with almost 2,05,000 co-locations with the sharing factor, which went up sharply from 2.18 in December 2015 to 2.27 in December 2016.
  • In terms of co-locations the company has got tenancies in this quarter & from next quarter one will get to see the impact. The company believes that Jio’s free services is short lived & therefore it will be business as usual & with the growth the company is clearly not under pressure. Operators who have significant revenue share & number of customers have set up more data networks that rollout the networks quickly
  • The quarter has witnessed highest colocations ever added since the IPO of over Rs 6000. The company has crossed the 200,000 tenancy mark at a tenancy ratio of 2.27. Demand for new towers remains in the range of 2% to 3% while co-locations grew faster by 7%.
  • The operating leverage still continues out here. Ideally margin should be seen on a yearly basis & not quarter on quarter basis. The model is mostly based on rental revenue which has been progressing & that is already at pretty decent level which is running into about 66%.

Industry Update

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  • The company continues to be bullish on the prospects of mobile broadband in the country with hugely increasing data usage
  • Rental freeze started from April 1st itself, so post that it actually no change & its impact will be to the tune of 120 crores.
  • The top 3 telecom players are rolling out meaningfully, so a large part of companies tenancies contributed by them, but jio as a new entrant is doing a catch up
  • The company always maintained that tower industry anywhere in the world does not need tens or twelve operators, 3 or 4 strong passionate able operators who have ability to invest in taking the network deep down into the country. It would not want to comment on the prospects of any merger between large operators. 
  • With increase in data usage it is seeking more capacity apart from spectrum which needs experience & capacity. This is kind of positive for tower companies that while there may be short term ups & downs, reallocate, redeploy but capacity is certainly needed with the kind of data surge the operators are seeing.
  • Operators are continuously making a shift from 3G to 4G & there is escalation rate of 2.5% 
     
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Legal and Regulaotry Issues

  • 2 key development on the legal front during this quarter on legal front. 
    o    The first is the matter of entry tax where Supreme Court held that power of imposition of entry tax by states, they have upheld at par provided they are non-discriminatory basis. This had been long outstanding matter. This judgment not only affects telecom but every industry in the country.
    o    The second judgment again was by the Honorable Supreme Court where it was held that towers were buildings for the purpose of imposition of property tax on mobile towers. This was also long outstanding where every state had been doing ad hoc charging on the towers. The whole industry has filed review petition & await further developments on both these matters.
  • In the absence of clarity on these two points, the company is unable to estimate an impact  but expects the overall end result to be materially adverse to it
  • The TRAI has come out with floating a quote for buildings, which says non discriminatory access to in building infrastructure. This is positive for the company & great for infrastructure companies. The move by TRAI is very mature move especially for in-building where repeated permissions cannot be given by the landlords & so it is right step. 
  • The Supreme Court has come up with caveats on Entry tax. It mentions that it has to be non discriminatory vis a vis what those states charge for goods produced, similar goods produced in their own state & so on. So there are intricate legal matters involved & the company is confident that it will start grappling with the lawyers to solve it on state to state basis. Entry tax if imposed will only be on the capital goods & therefore that would have to be capitalized whatever the amount be & subject to depreciation.

Tenancy rates

  • The tenancy growth is healthy on account of all operators. It is seeing 4G rollout from top 3 operators. The company is not expecting any tower addition & requirement of tower to come down. Colocation is important & not new towers & company is happy if colocation is increasingre
  • There is 2.5% rate escalation applicable across all the tenancies that company is starting to get in. The company continues to engage operators to either choose any 2 option, whether to accept a freeze & extend the tenancies for full duration or stay on existing contract. A good 74% on consolidated basis have moved to new contract
  • Rent escalation is done only after 3-5 years & at the rate of 3% depending upon as & when the renewal is coming. The escalation is 10-15% for every 3 years which averages to 3-5%. The company gets tenancy on an existing site too which is small rent increase that is given to landlord. 

Smart City Project

  • The company has, along with its consortium partners, signed concession agreement for Bhopal Smart cities with the authorities & thereby have become the first company in telecom & tower infrastructure industry to do so.
  • Its fully owned subsidiary Smartx applied for & has secured unified license with NLD & ISP category. The company is best placed to play key role in Digital India Initiative by sharing vital infrastructure solution with all customers on a non discriminatory basis. 
  • The company is looking to lay approximately 200 km of fiber. The Capex has not started yet as the company has just signed the consortium agreement last quarter. 
  • There is a 12-month window in which first part of deployment takes place & revenues are generated after a year of that deployment.
  • The company is working towards successful project delivery & expects that Bhopal smart city will serve as model for the smart cities initiative & expects other state government to follow this by way of RFP or Request for proposal. For the company this project will open a new avenue of business for the company & believes that it can replicate the benefits of the shared infrastructure model in this segment.
  • Revenue model for smart cities- 
    o    State gives the company free right of way and access to the government poles with the requirement to put a certain amount of Wi-Fi spots or hotspots.
    o     The first 20 minutes or so are given for free for customers and a certain megabits of data  in a month is to be given free. 
    o    The model is based on creating a white labeled Wi-Fi for all operator customers to be able to seamlessly use better quality WiFi services if they are present in those area 

Strategy

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  • The company keeps looking at opportunities but given the scale & size it enjoys 40% roughly the tower footprint, there are no tower company which it can look for acquisition. 
  • Energy margin do improve mainly in the 3rd & 4th quarter. A 3% increase is the fair number on a full year basis. 
  • Airtel is not planning to sell stake in Inftratel but has formed a committee to evaluate still
  • For Fiber rollout the Smart Cities are first initiative. The rollout will be next quarter. It is still in discussion with various operators to see if Fiber can be rolled out in non-smart cities. 
  • The company has created a few pilot sites in cities where data demand is increasing quite rapidly. These are mainly in government buildings & other locations where traditional acquisition is not possible.

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