Bharti subsidiary IPO prospectus details; remain Neutral
What's changed
Bharti’s subsidiary Bharti Infratel filed a DRHP on September 14, proposing
to raise funds via new equity shares. It plans to sell 188.9 mn shares,
comprising a new issue of 146.23 mn shares and the sale of 42.67 mn
shares by existing private equity investors. The DRHP states proceeds
would be used for the 1) installation of 4,813 new towers; 2) upgrading/
replacement of existing towers; and 3) green initiatives on tower sites. The
DRHP states that the company has a funding requirement of at least Rs29.4
bn while the media (e.g. ET, Business Standard, Sep 15) have reported that
it is looking to raise Rs50 bn. Risks stated in DRHP: 1) Risks related to the
execution of the proposed transfer of towers to Indus; 2) strategic risks
associated with the JV structure.
Implications
Bharti Infratel’s FY12 net debt/EBITDA was 0.8X and net debt/equity was
21% vs. its parent’s FY12 net debt/EBITDA of 2.8X and debt/equity of 129%.
Based on this, we believe Bharti Infratel is not as geared as its parent
company and hence does not need funds to reduce gearing. Given the
proceeds would be earmarked for capex and not for deleveraging, we
believe gearing may remain high at the consolidated level (Bharti
consolidates Infratel earnings). Post the proposed IPO, Bharti’s holding in
Infratel would fall to 79.42% from 86.09% currently. While the IPO may
lead to a market-based valuation of its towers business, we expect Bharti
Airtel’s key driver to remain its cellular business, which is currently facing
regulatory and competitive headwinds.
Valuation
We remain Neutral on Bharti Airtel as its core business fundamentals
remain weak given heightened competition and regulatory overhang. Our
12-month SOTP-based target price is unchanged.
Key risks
Risks to Bharti Airtel: Lower competition; high regulatory payments
INVESTMENT LIST MEMBERSHIP
Neutral
Coverage View: Neutral
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