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Telcos may do better in Q4, but there were no gains for Bharti Infratel

Bharti Infratel Ltd shares fell 8.5% on Friday after the company reported weaker-than-expected performance for the March quarter.

Excluding the impact of the accounting change (Indian Accounting Standard 116), revenues of the telecom towers provider declined 1% from a year ago, marking the sixth consecutive quarter of decline. Operating earnings fell at a sharper pace of 13% as customer exits hit profitability.

The closing sharing factor, which represents the average customer occupancies per telecom tower, fell from 1.88 times in the year-ago period and 1.85 in the December quarter to 1.84.

Operating profit margin dropped five percentage points from a year ago to 37.5%. It is down 3.9 percentage points from Q3. “The Ebitda margin shrank on decline in rental Ebitda,” said Motilal Oswal Financial Services Ltd in a note. Ebitda is earnings before interest, tax, depreciation and amortization.

The performance is in variation to the surge in telecom traffic since the lockdown in Q4. Operators have also raised tariffs in December, and have been expanding their 4G footprint. But Bharti Infratel is yet to see the benefits.

The company’s footprint, measured by its tower base, rose 1% sequentially. But total co-locations or sum total of sharing operators per tower increased just 0.2%. This indicated low demand and customer additions. Net co-location increased 431 last quarter, down from 744 sequential additions in Q3.

With Vodafone Idea Ltd, a large customer, strategically focusing on network densification instead of linear expansion (which would have required more tower infrastructure), the scope for occupancy expansion is low. This can suppress Bharti Infratel’s profitability, weighing on return ratios.

“With Bharti Airtel present on most of Bharti Infratel’s existing towers, incremental roll outs by Bharti Airtel need Bharti Infratel to construct new towers, which in turn is driving their tower growth. However, rising tower growth along with weak tenancy growth will drag tenancy ratios, margins and RoCEs,” said Jefferies India Pvt. Ltd analysts in a note on Friday. ROCE is Return on capital employed.

Profit margins have progressively fallen from 44.2% in FY16 to 40.9% in FY20. Consequently, ROCE also eased triggering correction in the stock.

The stock has almost halved in the last one year. At the current price, it is trading at an attractive dividend yield of 6%.

But as analysts at Jefferies India warned, sustainability of the payouts is uncertain, especially if the company’s towers continue to see low utilization levels. “While the company’s 10.5/share dividend in FY20 implies a healthy yield of 6%, its sustainability heavily depends on the fate of Vodafone Idea,” they added.

Bharti Infratel also extended the long stop date of merger with Indus Towers Ltd to 24 June. With business prospects reducing considerably from the initial agreement, the company has to now seek new terms of merger.


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