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ALPHAIDEAS 20-20 MEET

Why Bharti Infratel could be an interesting play on the data


consumption theme in India

Gordon DSouza
July 28, 2018
Introduction
• Private equity investment professional (11+ years)
• Individual investor in Indian capital markets for 14+ years

Disclosures

• I am NOT a SEBI registered Investment Analyst


• Do not construe this presentation, either spoken or printed / digital copy (collectively “Material”) to
be investment advice. Any decisions made with reference to this Material is at your own risk
• I bear no obligation to inform consumers of this Material when I change my view
• While best efforts have been made to present factual / accurate data and quote sources wherever
possible, I cannot vouch for accuracy of sources
• My family and / or I own the stock

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Key Questions

Why is this interesting? Operators will have to invest in infrastructure soon:


• Networks are already choked
• Data usage set to rapidly increase as smartphone penetration
increases
• Operator options are limited – mobile broadband likely to be priority

Is this a fair valuation? Growth is not priced in:


• Current valuation takes a very short term view and implies no
growth for the long term

Downside is limited, rather there is some margin of safety


• Valuations in line with forced sales of relatively weaker assets

Are growth assumptions reasonable? Infratel likely to get disproportionate share of new tenancies:
• Limited options due to Tower Co consolidation
• RoFR with 2/3 relevant operators

Key risks:
• Jio’s strategy
• Reduction in rentals / renewals
• Solvency issues for Voda-Idea
• Regulatory (Active Infrastructure Sharing) 3
Towers are good cash flow and ROCE business

 Rentals: Rs 30-35k Base Fee / site / month +


additional charges for maintaining 2nd network
 All other costs are passed on to telecom operator*
 Capex: Rs 15-18 lakhs / tower for RTT-GBT resp
Single
 Maintenance capex: Rs ~40k per annum
Tower
Economics  EBITDA: 50-75% of rental or 35-45% of Pass
through revenue**
 Payback: 3 years with co-location of 2x
 Tower level ROCE: 38-45% (GBT-RTT
respectively)

Key  Operating cost > Agreed as per MSA***


risks  Solvency of tenant & ability to honour MSA

Telecom operator owns all the “active”  Geographical advantage. New towers within an
equipment: Radio, antenna, Cables, BTS Comp existing towers coverage radius will not be able
advantage to match rates without sacrificing economics
Tower Co owns the “passive” infra: Tower  Single tenant / captive tower is not capital
structure, shed, battery, generator, etc
efficient or viable for an operator

*Some TowerCos like Infratel have a cost plus model and hence make a spread
** Pass through revenue includes rentals for high rental sites or power / fuel beyond agreed terms
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*** MSA: Master Services Agreement agreed between Telecom Operator and Tower Company
Infratel and Indus have announced a merger

Pre-merger Post-merger

Key shareholders
 Bharti Airtel (53%) Bharti Infratel
 Public (46%)
Shareholding Pattern*
 Bharti Airtel (34% - 37%)
 Vodafone (27% - 29%)
Indus Towers
42%  Idea (0% - 7%)
 Providence (1% - 3%)
 Public (29% - 32%)
Key shareholders
 Bharti Infratel (42%)
 Vodafone (42%) Indus Towers
 Idea (11%)
 Providence (5%)

* Shareholding will depend on whether certain


shareholders (mainly Idea and Providence) take cash or
shares as part of the merger
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Solid Balance Sheet, Strong Cash Flow, Attractive Dividend Yield

Pre-merger Post-merger
w/Indus Tower  Pan-India coverage across all circles
Towers 91,451 163,162
 Largest tower company in the world
Tenancies 205,596 367,073 outside China

Tenancy ratio 2.24x 2.25x  ~38% market share by towers; ~46% by


tenancies
Revenues Rs crs 14,489 25,360
 Airtel, Voda-Idea, R-Jio are key tenants
EBITDA Rs crs 6,427 10,901 (~93% of tenancies)
Capex Rs crs 2,160 3,595

Net Debt Rs crs (5,170) 5,595 Debt/EBITDA <0.5

Market Cap Rs crs 53,084 76,420*


Merger valued Indus at 9.3x EV/EBITDA in
EV/EBITDA 7.4x 7.5x April 2018

FCF/EV 9.2% 8.9% FCF Yield > G-Sec Yield

ROCE 34% ~34% Despite industry challenges generates high


return on capital
Div Yield 4.8% Attractive Dividend Yield

*Post‐merger, based on certain shareholders electing to settle with cash vs shares 6
Key Questions

Why is this interesting? Operators will have to invest in infrastructure soon:


• Networks are already choked
• Data usage set to rapidly increase as smartphone penetration
increases
• Operator options are limited – mobile broadband likely to be priority

Is this a fair valuation? Growth is not priced in:


• Current valuation takes a very short term view and implies no
growth for the long term

Downside is limited, rather there is some margin of safety


• Valuations in line with forced sales of relatively weaker assets

Are growth assumptions reasonable? Infratel likely to get disproportionate share of new tenancies:
• Limited options due to Tower Co consolidation
• RoFR with 2/3 relevant operators

Key risks:
• Jio’s strategy
• Reduction in rentals / renewals
• Solvency issues for Voda-Idea
• Regulatory (Active Infrastructure Sharing) 7
India has one of the slowest telecom networks in the world

How did we get here?


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Operator Consolidation from 10 to 3 relevant players

R-Jio’s aggressive Industry ARPU*


Multiple Weak balance
market share -33%
players sheets
strategy Post Jio launch

Subscriber Market Share (Dec-15) Subscriber Market Share (May-18)

Subscribers (mn) Subscribers (mn)


39% Subscriber share (%)
Subscriber share (%)
24% 437 33%

19% 372
28 Tata
17% Idea 214

11% 18%
243 8%
8% 345
194 6% 10%
172 5%
222 206
109 1%
86 83 116
61 51
14 0
R-Jio
Airtel

Idea

Com+Sistema

Tata
Vodafone

BSNL / MTNL
Aircel

Others
Telenor

Airtel

R-Jio

BSNL / MTNL
Voda+Idea
R-

Operator consolidation is almost complete


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Operator consolidation triggered Tower Co consolidation: From 11 to 2 relevant cos

Sale of non-core Co-location loss


High
assets by due to operator Sub-scale
leverage
operators consolidation

Dec ‘15 2.3x June ‘18 Industry Towers: 419,000


Industry Towers: 371,000
Industry Tenancies: 621,000 Industry Tenancies: 759,000
375
Ratio 1.9x

Co-locations 285
(‘000)
1.8x 1.0x 1.3x 1.9x 1.9x 2.0x

143 70 86 53 15 12
1.1x Captives
Towers 1.5x 163
2.2x Potential M&A 
(‘000) 62
146 78 1.0x 1.6x candidates
91 1.9x 1.4x
1.4x 1.2x 1.5x
18 24 78
20 13 70 66
59 13 9 9
52
40 28
18 15 11 9 9 8 6
7 6

Infratel / Indus

ATC

R-Com+R-Jio

GTL
BSNL

Ascend
TowerVision
ATC

Idea

Vodafone
R-Com

GTL
Infratel /

BSNL

Viom

TowerVisio

Ascend
Aircel
Indus

Tower Co consolidation in final stages 10


Network capacity is already choked! …

Data usage: GB/sub/month Data usage by network 2017:


GB/sub/month
6x growth in data usage for Airtel & Idea subs Averages hide the real story …
All India avg at 3.9 GB 4G user’s usage is significantly higher!

11.0

6.3

5.0

3.9
3.0
2.4
0.3
1.1
0.79 0.85 0.84 4G 3G 2G

Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18

Source: Bharti Infratel Source: Nokia MBiT 2017

Current Network Capacity at 6-7 GB/sub/month*


4G compatible phones (2017): 218 million
*Based on industry discussions (prior to operator consolidation) 11
Sub = subscriber
… And will need an urgent upgrade

Smartphone sales (Mn) Data Traffic / smartphone


and % penetration GB/month 2017 2023E
North America 7.2 49.0
Data usage will increase
Latin America 2.5 15.0
with more smartphones
and 4G phones Western Europe 4.0 25.0
40% C&E Europe 3.8 18.0
North East Asia 2.6 14.0
491
China 2.3 12.0
30% South East Asia 2.7 14.0
26%
337 India 5.7 13.0
291 MENA 2.0 12.0
Sub-saharan Africa 1.4 6.9
Source: Ericsson Mobility Report (June 2018)

Indian 4G subs data usage on par with global


norms
2017 2018P 2022P
Average data usage can be far higher than
projected
Source: Internet & Mobile Association of 
India (IAMAI)

What are the options for operators? 12


FTTH (Fibre) is capital intensive and will take time to deploy …

• Globally conversion ratio of fibre


1 Cost of deploying FTTH between $300-500 per household customers to infrastructure laid out
is 20%
700 VDSL-CO pass • Wire ~250 mn households for
Cost per premises (USD)

600 50 mn customers
VDSL-CO connect
500
• India households ~267 mn
FTTC/VDSL pass
400 FTTB/dp/VDSL pass • Above plan will technically cost
300
FTTx/VDSL connect $100 bn
200
FTTB/LAN pass • Cost of FTTH ($300-
100
FTTB/LAN connect 500/household)
0
FTTH/GPON pass • Cost escalates significantly
2012
2013
2014
2015
2016
2017
2018
2019

for wiring last 10% of


FTTH/GPON connect
customers
Source: Analyses Mason • Cost of content not included

Potential implications:
Right of Way (RoW), managing multiple local permissions  Less aggressive and select Fibre
2 Roll-Out
and infrastructure management issues
 Priority to Mobile

Fixed-Mobile Convergence (FMC) in India is some time away


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… Which will lead operators to prioritise mobile capex

Operators are significantly leveraged Likely priority of Airtel, Voda-Idea


Consolidated Debt FY18 (Rs crs)  Defend subscriber market share
x.x Debt/EBITDA  Complete investment in 4G coverage
3.7x
 Additional sites
1,11,332  Small cells
7.7x 8.9x  Enhance 4G capacity
60,000 57,158  Fibrisation of towers
 MIMO
 Pare down debt (Specific to Voda-Idea)
 Roll out FTTH
Airtel Vodafone Idea

Reliance Jio investment


(Rs cr) Likely priority of R-Jio

1,40,000
As data usage
 Gain subscriber market share increases, tower
coverage
 Enhance 4G capacity
reduces by ~20-
 Roll out FTTH 25%
50,000

Mobile broadband FTTH (announced)


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Mobile broadband has grown faster than fixed broadband (Fibre) even in developed
telecom markets

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Key Questions

Why is this interesting? Operators will have to invest in infrastructure soon:


• Networks are already choked
• Data usage set to rapidly increase as smartphone penetration
increases
• Operator options are limited – mobile broadband likely to be priority

Is this a fair valuation? Growth is not priced in:


• Current valuation takes a very short term view and implies no
growth for the long term

Downside is limited, rather there is some margin of safety


• Valuations in line with forced sales of relatively weaker assets

Are growth assumptions reasonable? Infratel likely to get disproportionate share of new tenancies:
• Limited options due to Tower Co consolidation
• RoFR with 2/3 relevant operators

Key risks:
• Jio’s strategy
• Reduction in rentals / renewals
• Solvency issues for Voda-Idea
• Regulatory (Active Infrastructure Sharing) 16
Despite a fairly reasonable financial performance in a consolidating sector …

Least impacted during


FY16 FY17 FY18 CAGR consolidation due to tenant
profile; other Tower Cos
Total Towers # 88,808 90,646 91,451 1.5% have lost ~20-40%
Total Tenancies # 1,95,035 2,10,606 2,05,596 2.7% tenancies
Tenancy ratio x 2.2 2.3 2.2
Revenue/tower/month Rs 74,513 78,318 82,094 5.0% Highest rentals in the
Revenue/tenancy/month Rs 34,499 34,648 35,918 2.0% industry

Revenue Rs cr 12,313 13,437 14,489 8.5%


EBITDA Rs cr 5,447 5,942 6,472 9.0%
PAT Rs cr 2,247 2,747 2,493 5.3%
Capex Rs cr 2,124 2,178 2,182

Operating Cash Flow Rs cr 3,288 3,721 4,202 13.0%


AFFO Rs cr 4,937 5,395 5,867 9.0% Strong cash flow metrics
Net Debt Rs cr -6,041 -3,512 -5,171 -7.5%

EBITDA % % 44% 44% 45%


PAT % % 18% 20% 17%
ROCE % % 27% 30% 34% Very healthy return on
ROE % % 20% 25% 26% capital

AFFO is Adjusted Fund Flow from Operations (ie Cash Flow adjusted for Maintenance capex) 17
... Negative perception of sector has adversely impacted stock price …

Sector consolidation starts


for operators & tower cos

At CMP, Consolidated Infratel trades at 7.5x EV/TTM EBITDA


Which is a 20% discount to the 9.3x EV/TTM EBITDA multiple ascribed for Indus (Apr-18) as part of merger
EV / Tenancy is at Rs 25 lakh which is a 10% discount to comparable M&A transactions

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… As also have certain technical issues

Holding Company Discount • Previously Indus was a 42% subsidiary of Infratel


• This should go away now that the company has been merged

Independence of operations • Independent tower cos get higher multiples vs captives


• Despite being Airtel controlled (ie captive), Infratel has better
financial metrics including highest Average Revenue per Tenancy
in the industry

Overhang of Airtel’s and • Airtel has been monetising its stake to raise capital for debt
other shareholders stake retirement / fighting Jio
• Post merger, other shareholders are also likely to sell / monetise

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Growth is not priced in this valuation …

Single Tower DCF Results

Avg revenue / 35,400 EV / Single Tenancy Rs 25.6 lakhs


tenant / month
EV / Single Tower Rs 59 lakhs
Escalation 2.6%
EV / TTM EBITDA 7.6x
Spread on
1,000
other services
--- x 2.3 tenancies --- EV for 3.67 lakh Rs 93,971 cr -13.6%
Cash Flow / tenancies*
61,065 discount
tower / month Implied Market Cap** Rs 88,412 cr
Maintenance 4,000
capex
EV for 1.63 lakh Rs 96,254 cr -15.7%
FCF (post tax) towers
discount
/ tower / 51,765 Implied Market Cap** Rs 90,695 cr
month

Discount rate 13% Current Market Cap Rs 76,420 cr


Terminal 2.6%
growth

Note: DCF assumes that Infratel will deploy FCF at the discount rate – however Infratel has
maintained a 30%+ ROCE, ROCE on incremental capex is higher

* EV / Tenancy x Tenancies
** Enterprise Value (EV) less Net Debt 20
… And is in line with recent forced sales of far lower quality

EV/ EV/
Buyer Seller Date Towers Tenancies EBITDA Tenancies

TTM x Rs lakhs

May-18 ~43,600 ~40,000* ~40x* ~22 Forced seller

May-18 ~20,000 ~27,000* ~13x* ~29 Forced seller

2nd innings
Mar-17 ~89,800 ~198,000 ~10x ~33
for KKR

Strategic
Oct-15 ~40,000 ~97,000 ~11x ~23
investor

Each of the above is a $1B + transaction

* Post tenancy losses / clean-up for exiting operators 21


Key Questions

Why is this interesting? Operators will have to invest in infrastructure soon:


• Networks are already choked
• Data usage set to rapidly increase as smartphone penetration
increases
• Operator options are limited – mobile broadband likely to be priority

Is this a fair valuation? Growth is not priced in:


• Current valuation takes a very short term view and implies no
growth for the long term

Downside is limited, rather there is some margin of safety


• Valuations in line with forced sales of relatively weaker assets

Are growth assumptions reasonable? Infratel likely to get disproportionate share of new tenancies:
• Limited options due to Tower Co consolidation
• RoFR with 2/3 relevant operators

Key risks:
• Jio’s strategy
• Reduction in rentals / renewals
• Solvency issues for Voda-Idea
• Regulatory (Active Infrastructure Sharing) 22
Quick Re-cap
4G user using 11GB/month today

Avg data per smartphone ~3x in 5 years

7.5 lakh tenancies in industry


(pre-Voda-Idea rationalisation)
Only 2 relevant players left

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Each operator will need ~4-5 lakh sites in 5 years to adequately provide 4G

Coverage Capacity

Tower coverage shrinks with 4G usage Capacity enhancements required PER


180k additional sites needed in next 2 years OPERATOR to support data growth till FY23

Additional
Sites Sites 70-100k 440-500k
4G sites
required for required for Current
required 70-100k
2G coverage 4G coverage 4G sites
for
per operator per operator 70-100k
coverage
230k
Airtel 180k 50k
Voda- 180k 230k 170k 60k
Idea

R-Jio 160k 70k

510k 180k Base 4G + Sectors / MIMO Small cell FY23 site


Total coverage site coverage

Translates into 12-15 lakh site requirement for all 3 operators by FY23

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Infratel/Indus can get ~66% share of new tenancies in an oligopolistic market

300k 1230k
15% tenancy
volume CAGR
950k
-200k 180k

-50k

700k in FY19
4G coverage
consolidation

4G capacity

FY23 sites
Voda-Idea

Voda-Idea
Loss Pre-

losses
Pre-

R-Jio tenancies will be split between Indus/Infratel, ATC and others smaller players
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There is significant scope of telecom infrastructure management beyond 2023

Telecom Network Evolution

Source: Indus Towers

Smart Cities, Fibre Management, 5G network roll-outs

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At what points should we re-evaluate our thesis (1/2)

• Jio’s strategy  Jio has stated 50% market share target


 Continued aggressive strategy could force Airtel, Voda-Idea to de-prioritise
roll-outs

Current View:
 Incremental Jio customers are going to have higher acquisition costs
 $10 bn FTTH plan could cause revision of 50% plan to ~30%
 May in reality target 30% share (another 6-9 months) before stabilizing
ARPU

• Reduction in rentals  Jio’s strategy, financial pressure could force Airtel / Voda-Idea to drive
/ renewals hard bargains on renewals

Current View:
 Operators don’t have choice due to tower co consolidation, RoFR
 Infratel remains Airtel’s / Vodafones last valuable and monetisable asset
for funding 4G and later 5G rollout

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At what points should we re-evaluate our thesis (2/2)

• Solvency Issues • Stretched balance sheet, network quality behind R-Jio & Airtel, Vodafone
wrt Voda-Idea non-commital
• Voda-Idea could lag network roll-outs or shut down resulting in India
becoming a 2 player market

Current View:
• No large market in the world is a two player market
• In worst case, Voda-Idea could be acquired. Though there is a risk that roll-
outs could be slower

• Regulatory changes • Active Infrastructure sharing (sharing of radio and antenna capacity) if
wrt Tower Cos introduced could free up significant capacity

Current View:
• Operators especially the market leader is unlikely to support such a move
as it will affect them most

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Idea execution

• Risk of being early in the trade, decent probability of no significant triggers playing out in next 6-9 months

• Voda-Idea overlap of tenancies will resolve as integration is undertaken, could keep stock price depressed

• Airtel and other shareholders (Vodafone, Idea, Providence) are likely to keep diluting stake to fund 4G, 5G,
FTTH roll-outs. Could have an overhang on stock price

• Better to spread initial buying over few quarters and track tenancy growth before increasing position size

• Patience to hold over 4 years

--- END ---


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@gordonmax

gdsouza@gmail.com