What Bharti Infratel’s seemingly benign Q4 results conceal
- Consolidated revenues rose 1% in FY19. Despite the intense competition, operating profit dropped just 6%
- If one excludes exit penalties received from customers, Bharti Infratel's revenues will fall 4.4% in Q4, while operating profit will drop 12.6% from the year ago
At first glance, it looks like tower infrastructure services provider Bharti Infratel Ltd exited FY19 on a rather steady note. It reported a 1% rise in consolidated revenues. The brutal competition in the sector notwithstanding, operating profit dropped just 6% and net profit was flat for the full year ended March 2019. The March-quarter results seem alright as well, with revenues down 2% and operating profits falling around 4%.
But dig deeper into the results and the impact of the turbulence in the telecom sector is visible. The reported figures include exit penalties received from customers who discontinued their service contracts. These receipts are best treated as one-off incomes, according to analysts at Kotak Institutional Equities. Such penalties amounted to ₹99.7 crore in the last quarter.
Exclude this, and the revenues last quarter will fall by 4.4%. More importantly, operating profit will drop by 12.6% from the year ago, according to analysts at Kotak.
"Infratel's reported earnings print was weak and reflected the expected pain of tenancy exits for the first time," the analysts said in a note to clients.
The consolidation in the sector has hit tenancies and revenues, with companies such as Vodafone Idea Ltd getting rid of duplicate tower infrastructure. For Infratel, this meant that the sharing factor in the total tower base declined from 2.25 at the end of FY18 to 1.87 last fiscal (FY19). Total co-locations on the company’s towers dropped as much as 16% last quarter from the same period last year.
The impact of this will continue to be felt by Bharti Infratel. Several customer tenancies are in their notice period. Technically this lets Bharti Infratel to continue charge them. But such revenues will cease once the contracts end, further eroding Bharti Infratel’s earnings. “There were as many as 4,308 tenancies for which the company received exit notices, but were billed during 4QFY19. This is nearly 2.5% of the company's end-4QFY19 tenancy base. EBITDA could go down another 3-3.5% when billing on these tenancies stops,” analysts at Kotak added.
While investors were somewhat aware of these pressures, they were evidently surprised at the extent of the fall in profit. Infratel shares were trading down 5% today. The worry is that the pressure on Bharti Infratel’s earnings is likely to worsen. These concerns emerge from two fronts. One is continuing consolidation in the telecom sector. The Vodafone Idea Ltd combine continues to rationalise its telecom sites. After exiting the overlapping sites, the focus now is on reducing the presence in low-revenue generating sites.
The second is Reliance Jio’s plans to float its tower infrastructure business into a separate entity. Analysts fear such a move can curb incremental tenancies from Jio. The scenario can deteriorate if the new entity created by Jio is successful in finding external customers. This can exert pricing pressure, impacting Bharti Infratel’s prospects further.
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