– Decline in both rental/energy EBITDA: Bharti Infratel’s (BHIN) second-quarter performance was below our expectations. On a pre-Ind-AS 116 basis, pro forma consol. revenue/EBITDA declined by 1.9%/1.4% QoQ to INR35.6b/INR14.8b (3%/3.5% miss). Rental and energy revenue dropped 4.4% and 3.6% QoQ to INR21.6b and INR14b, respectively. Further, rental EBITDA declined 1.4% QoQ to INR14.8b, with the margin contracting 40bp QoQ to 67.7%. Energy EBITDA turned into a loss of INR45m with a margin contraction of 570bp QoQ to -0.3%. Overall, EBITDA margin improved 20bp QoQ to 41.5%, led by a favorable mix of rental EBITDA. PAT rose 14.6% QoQ to INR9.7b led by lower tax rates.
– Concall highlights: (a) BHIN has still not received approval from the DoT for the merger with Indus. The company has scheduled a board meeting on 24th Oct’19 to take a decision on the way forward. (b) Revenue for tenancy exit charges contributed INR1b (4% of revenue) and would be received until the next 2.5-3 years. (c) Energy margin shrank due to the seasonality factor and renewals of some contracts. On a full-year basis, it should be in the range of 0% to 3%.
– Growth outlook still blurred: Despite management’s confidence on future opportunities in additional streams such as IoT, small cell and data centers, we remain cautious about the growth prospects given the consolidation in the industry and the increasing reach of competitors like RJio. We have largely maintained our EBITDA estimates and built in EBITDA growth of 1.2%/6.2% to INR60.8b/INR64.5b for FY20/F21.
– Valuation view: We maintain our Neutral rating with a TP of INR280 (prior: INR275), implying EV/tenancy of INR2.9m and EV/EBITDA of 8x for FY21. However, the stock trades at 7x FY20/21E EBITDA with ~6% dividend yield, which should provide a floor for any material downside risk.
(BHIN IN, Mkt Cap USD6.7b, CMP INR259, TP INR280, 8% Upside, Neutral)