Bharti Infratel Rating: Hold; Merger with Indus to boost EPS/RoE

Post its merger, Bharti Infratel has reconstituted its board, but remains a telco-controlled towerco. While leverage levels have gone up, capital structure remains sub-optimal. While we see limited synergies, the merger is EPS/ROE accretive. While the extraordinary dividend of Rs 18/sh and VIL’s potential fundraise should support the stock, we see limited upsides. We revise our estimates to factor in the merger and maintain Hold with revised PT of Rs 220.

Merger with Indus complete: Bharti Infratel has announced the completion of its merger with Indus Towers. As part of the merger, Bharti Infratel has issued 758m and 88m shares to Vodafone Plc and Providence Partners for their 42% and 4.85% stake in Indus Towers. With Vodafone Idea (VI) opting for the cash option, it will receive Rs 37.6 bn for its 11.15% stake in Indus towers. Post-merger, Bharti Airtel and Vodafone Plc’s stakes in Bharti Infratel have reduced to 36.7% and 28.1%, respectively.

A telco-controlled tower co: Given the new shareholding, the company has also reconstituted the board of directors with four directors affliated with Bharti group and three to Vodafone group and four independent directors. With seven of the 11 directors either affiliated to Bharti or Vodafone group, the company remains a telco-controlled towerco. It has appointed Bimal Dayal, erstwhile CEO of Indus Towers, as its CEO and Manish Dawar, erstwhile CFO of Vodafone India, as its CFO.

Limited synergies, but merger set to boost EPS and ROE: Given the limited overlap in the operations of Bharti Infratel and Indus Towers, synergies from the merger are likely to be limited to savings on administrative overheads. While the merger will raise leverage levels from 0.8-0.9x Ebitda to 1.3-1.4x Ebitda, the capital structure remains subpar with leverage of global towercos at 3-4x Ebitda. Given interest costs, while ROA has fallen by 120-130bps, higher debt, as well as negative capital reserve created during the merger, will boost ROEs by 360-430bps. The merger is EPS-accretive, boosting EPS by 5-7%, due to the favourable share swap ratio.

Implied valuations of Indus at a discount: Our calculations suggest that the effective price for share issuance was Rs 187/sh, given that Vodafone Idea was paid Rs 37.6 bn in lieu of 201m shares that would have been issued to it had it opted for stock rather than cash. Using this price, the effective consideration paid by Bharti Infratel for taking over 58% stake in Indus Towers was Rs196 bn, implying an equity valuation of Rs 337 bn. This is at a 20% discount to the valuation of Indus Towers at our target multiple of 6x EV/Ebitda.

Recent upward move leaves limited upside: Infratel will declare an extraordinary dividend of Rs 48 bn (Rs 18/share) within three months, which could support the stock in the near term. Furthermore, positive news flow around VI’s fundraise could also improve its tenancy outlook in the near term. That said, we see limited upside from current levels. We revise estimates to factor in the merger and boost our TP to Rs 220/share, based on 6x EV/Ebitda. Maintain Hold.