Bharti Infratel is entering the capital market on 11^th December 2012, through a public issue of 18.89 crore equity shares of Rs.10 each, comprising of an offer for sale of 4.27 crore shares by 4 PE investors (Compassvale / Temasek, Goldman Sachs, Anadale, Nomura) and balance 14.62 crore shares, through fresh issue. The issue, priced between Rs. 210 to Rs. 240 per share, offers Rs. 10 discount to retail investors. The issue represents 10% of the company’s fully diluted post issue paid-up capital and will raise Rs. 3,901 crore and Rs. 4,467 crore at the lower and upper price band, respectively. It closes on 13^th December for QIBs and on 14^th December for retail and HNI category.

Bharti Infratel, 86.09% subsidiary of Bharti Airtel, has economic interest in 80,656 telecom towers in India, as of 30^th September 2012 – 34,220 towers through its wholly owned subsidiary Bharti Infratel Ventures and balance through 42% equity stake in Indus Towers (42:42:16 JV between Bharti Airtel, Vodafone India and Idea Cellular) which owns and operates 1,10,561 telecom towers.  Bharti Infratel, having presence in all 22 telecom circle in India, enjoys 23% market share in terms of tenancies, as of March 2012.

For FY12, company’s consolidated revenues stood at Rs. 9,452 crore, with EBITDA of Rs. 3,684 crore and net profit of Rs. 751 crore, resulting in EBITDA margin and net margin of 39.0% and 7.9% respectively. Thanks to the tenancy ratio of 1.90 for H1FY13, up from 1.85 in FY12, its revenues rose to Rs. 4,972 crore, on a consolidated basis, for 6 months ended 30^th September 2012, while EBITDA improved to Rs.1,963 crore, with net profit of Rs. 461 crore. This leads to EBITDA margin and net margin of 39.5% and 9.3% respectively for the first half of the fiscal, and EPS of Rs. 2.64, on current equity of Rs. 1,742 crore, after accounting for 2:1 bonus given in August 2012. EPS for FY12 was Rs. 4.31.

As of 30^th September 2012, company’s networth stood at Rs. 14,305 crore, resulting in BVPS of Rs. 82. It has net debt of Rs. 2,917 crore. Post-listing, Bharti Airtel’s stake will reduce to 79.42% while the existing PE investors (including 4 making part exit via IPO) will own 10.6%, with balance 10% with public investors.

At the upper end of price band of 240, Rs. 3,458 crore will flow into the company’s books through fresh issue of shares, which will be used for the following objects during FY14 to FY16:

1. Installation of 4,813 new towers with an investment of Rs. 1,087 crore
2. Upgradation and replacement of existing towers for Rs. 1,214 crore
3. Green initiatives (such as solar power generation) at 12,500 tower sites, for Rs. 639 crore
4. Balance, close to Rs. 500 crore will go towards general corporate purposes

The company has declared and paid its maiden (interim) dividend of Rs. 2.50 per share in September 2012, entailing total outgo of Rs. 572 crore (including dividend distribution tax of Rs. 136 crore) to existing shareholders. If cash is such a pressing need (reason for IPO), then what is the rationale for dividend payment just before the public fund raising?

Moreover, the company, on a standalone basis, generates annual cash profit in excess of Rs. 1,200 crore (H1FY13 PAT Rs. 664 crore plus Rs. 582 crore depreciation for half year). The objects of the issue will deploy cash of about Rs. 1,300 in FY14, Rs.1 ,200 crore in FY15 and Rs. 400 crore in FY16 (excluding Rs. 500 crore general corporate purposes). Thus, annual cash accruals will suffice the capex needs. Which leads us to the question – why the IPO now? Is it more of a value unlocking exercise for parent Bharti Airtel? Even the 4 PE investors making a part exit via the IPO are not gaining too much, as average cost of acquisition for all of them stands at Rs. 219.38 per share.

Rural telecom penetration is improving in the country, which will benefit the company, as all of Bharti Infratel’s towers (excluding Indus) are located in Category B and C circles. Coupled with higher data usage, tenancy ratio will move towards the developed market average of 2.1 and above, from current 1.9. Such incremental revenues will largely get added to the company’s bottomline. With new spectrum allocation being done in 1800 MHz band, where more towers are required vis-à-vis the current 900 MHz band, which spells good news for tower companies in the longer run. In addition, anchor tenants (Bharti, Vodafone and Idea) and promoter credentials will act as a strong positive for the stock.

Company is seeking a market cap of Rs. 45,327 crore and EV of Rs. 48,245 crore (EV per tower of 60 lakh), assuming upper end of the price band. At 240 per share, Bharti Airtel’s 79.42% stake will be valued at Rs. 36,000 crore.

At the lower and upper band of Rs. 210 and Rs. 240 per shares, shares are being issued to public at EV/EBITDA multiple of 10.8x and 12.3x, based on FY13E (annualized half year) earnings, respectively. On a PE multiple basis, the ratio is 40x and 45x, respectively, which is quite expensive, given the current market conditions. Although, there are no domestic listed peers, international comparison (EV/EBITDA multiple of 16x-18x) is not like-to-like as the dynamics and economies differ. However, in such a case, the Rs. 10 retail discount is positive.

Had the price band been lower in the range of Rs. 210-220, the issue would have been more promising. One can apply at the lower end of the price band. Listing gains should be ruled out and one should apply with 6 months time horizon, considering pedigree and investor friendly record of the promoters.