Home >Markets >Mark To Market >Vodafone Idea’s miseries may take a further toll on the Bharti Infratel stock

In the past three years, the Bharti Infratel Ltd stock has waxed and (mostly) waned with the fortunes of Vodafone Idea Ltd. The last week was another rough one for the stock, with losses of about 8%. Business Standard on 10 July reported that Vodafone Idea has defaulted on rental and energy payments for June to telecom tower companies.

If true, this will impact Infratel’s financials further. Operating earnings, adjusted for the Ind-AS impact in FY20, declined 8.7% over the last two years, with Vodafone Idea exiting overlapping telecom sites. Total tenants on Infratel’s towers or co-locations declined 15% between FY18 and FY20. Similarly, the tenancy ratio dropped from 2.25 times at the end of March 2018 to 1.83 times in March 2020. The March quarter results provided an indication of the likely impact payment delays and defaults can have on Infratel’s finances. Operating profit during the quarter dropped 13% on a year-on-year basis as Infratel provided for some doubtful debts.

“During the quarter, we have provided for doubtful debts due to delayed payment from some operators, i.e., our customers, which is purely based on our accounting policy," Infratel’s management told analysts in April.

The management added it does not foresee elevated provisions. But if Vodafone Idea delays payments in April-June, then it should reflect in Infratel’s receivables. “These are provisions that are billed for delayed payments," Infratel’s management said in the April earnings call with analysts. “We do not expect provisions to go up, but yes, we are seeing a little bit increase in our account receivable."

Provision worries
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Provision worries

The situation at Vodafone Idea has turned even more precarious since then, with the Supreme Court insisting on a “reasonable" upfront payment of the adjusted gross revenue (AGR) dues. Many analysts cite the uncertainty about the final outcome and ramifications for Vodafone Idea as the primary reason behind Infratel extending the long stop gap date for the proposed merger with Indus Towers several times.

That said, analysts for now are not projecting a major payment default in Infratel’s earnings. Kotak Institutional Equities Research and Jefferies India Pvt. Ltd project 12-13% sequential growth in operating earnings in April-June, largely aided by a favourable base in the March quarter. Revenue is projected to be flat, reflecting muted tenancies. Covid-19 reportedly halted new site additions for several weeks.

“For Bharti Infratel, we see three key things to watch out for, which include trend in gross tenancy additions and exits and management commentary on the same. Secondly, an update on merger with Indus Towers, and finally, potential pockets of cost savings to support margins amidst revenue pressures," added analysts at Jefferies India.

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