Has Bharti Infratel Now Become A Dividend Play?

There are now more tower companies in India than there are telecom service providers. And that’s telling on the country’s largest tower player.

In the last six quarters, India’s largest telecom tower company, Bharti Infratel Ltd., lost more than 47,300 tenancies, bringing down total tenancies on its network to the lowest in the last five years.

The company’s tenancy ratio dropped below 2 in the three months ended December 2018—the first time in 19 quarters. At the end of March 2019, the ratio showed no improvement.

As a result, the tower major’s stock price dropped 16 percent in April. This comes on the back of an 18 percent fall over three years ending March 31, 2019—a time when the benchmark index Nifty 50 rose 50 percent.

The writing’s on the wall for the tower company and its investors. Growth may be a thing of the past.

“For the time being, Bharti Infratel is an annuity play rather than a growth play. Also, there is a risk attached to this annuity model which is further consolidation in the telecom industry,” Rajiv Sharma, co-head of institutional research equities at SBICAP Securities, told BloombergQuint.

First the 2G license scam and then the price war launched by Mukesh Ambani-led Reliance Jio Infocomm Ltd. forced consolidation in the telecom sector, bringing down the number of operators from 10 to three in just three years—Vodafone Idea Ltd., Bharti Airtel Ltd. and Reliance Jio. Each has a tower company and there’s American Tower Corporation and GTL Infrastructure Ltd. too. With no new operators and hence few new tenancies, growth opportunities look slim, hinging on telecom operators themselves returning to financial health, and new technology such as the move to 5G.

For the medium term, the growth would depend on 4G and 5G along with tenancy additions, said Himanshu Shah, telecom analyst at HDFC Securities. Improvement in mobile operators’ financials is inevitable for tenancy addition to accelerate and rental renegotiation is a medium- to long-term risk, he said.

There’s consolidation pending in the tower business too as Bharti Infratel prepares to merge with Indus Towers Ltd., a joint venture between the Bharti Group and Vodafone Idea. But that may not help the situation much.

The fall in tenancies is expected to continue.

Vodafone Idea continues to rationalise its towers, as more than 4,300 tenancies (2.5 percent of the total tenants) remain in notice period. If tariffs don’t rise, the financial pressure on Vodafone Idea, despite recent fund raising via a mega rights issue, may force the country’s largest operator by subscriber base to further prune towers.

Reliance Jio is currently in the process of transferring most of its tower and fibre infrastructure to an infrastructure trust that it intends to do an initial public offer for and list. Chances are its tower additions will be done via the InvIT.

An InvIT generally earns revenue from rentals and is characterised by limited growth but high free cash flows. Unit holders benefit from dividends rather than price appreciation of units.

The decision to move assets to a trust structure suggests that Jio’s parent, Reliance Industries Ltd., expects a business lifecycle shift for telecom infra companies from high growth and free cash flows to low growth and high free cash flows.

This fall in tenancies, which would mean lower growth for tower companies, will make stocks of tower companies like Bharti Infratel a good dividend play, at least for the near-to-medium term, said Shah.

Luckily for its shareholders, Bharti Infratel has a strong record here.

In the last three years, the company’s dividend ratio topped 100 percent on average. This was possible on the back of free cash flow generation and no debt. Post its merger with Indus Towers, Bharti Infratel will have debt on its book, but it’s also likely to save over Rs 500-550 crore annually due to lower dividend distribution tax. The merger will eliminate dual incidence of dividend distribution tax for the company.

However, this good dividend payout track record could come under risk going forward, said Sameer Kalra, the founder of Target Investing.

So far the dividend payout from Bharti Infratel has been good. But, this could come under pressure as the business of the company has been facing issues. High dividend payout will strain company’s balance sheet. If one has to buy a stock for dividend play, I would suggest to buy cash-rich PSUs.―Bloomberg Quint