Bharti Infratel- Muted operational performance in 4QFY13; FY14 likely to be a better year than FY13; reiterate OW:: JPMorgan

Bharti Infratel reported a muted quarter with weak rental revenue growth and a
modest decline in core margins (ex energy & other reimbursements). We need to
see higher growth in rental revenues for better quality earnings. Growth in
reimbursements does not necessarily provide an indication of earnings strength.
Capex remained meaningfully higher than our expectations due to changes in
estimates of site restoration obligations. Though net tenancy increase was weak,
gross tenancy additions were healthy in 4QFY13. We think 4QFY13 rental
revenues remained weak partly due to exit/downscaling of operations by players
whose licences were cancelled in Feb-12. We believe these headwinds are behind
the company, and existing operators are likely to expand footprint to grow their
subscriber base/market share in a market where subscriber additions are
moderating. So, we expect FY14 to be a better year for Bharti Infratel than FY13.
 Rental revenue growth needs to pick up for convincing/sustainable revenue
growth. Bharti Infratel reported Q/Q revenue growth of 1.8% in 4QFY13, but
rental revenues increased merely 0.6% Q/Q. Revenue growth was primarily
driven by energy and other reimbursements. We need to see growth in rental
revenues pick up for sustainable and better quality earnings. We expect rental
revenue growth to accelerate in FY14 as tenancy losses are likely to be nominal
because the operators who were impacted due to licence cancellations have
already discontinued/downscaled their operations.
 Core EBITDA margins (ex energy & other reimbursements) declined
modestly Q/Q due to muted revenue growth. Due to significant operating
leverage in Bharti Infratel's business model, core EBITDA margins (ex energy
& other reimbursements) declined 50bps Q/Q to 58.2% because revenue growth
remained muted. We expect core margins to improve as rental revenue growth
picks up in FY14.
 Higher-than-expected capex remains a concern. Bharti Infratel reported
capex of INR 6.7 billion in 4QFY13, meaningfully higher than our estimate.
Management suggested that a INR 2.0 billion adjustment for changes in site
restoration obligation estimate caused the pick-up in capex.
 Dividend payout ratio of 71% surprised positively. Bharti Infratel approved
total dividend of INR 4 per share i.e. 71% dividend payout ratio, meaningfully
higher than stated dividend payout target/policy of 30-50% of consolidated EPS.
 Reiterate OW with Mar-14 PT of INR 215. Given attractive free cash flow
growth prospects, current valuation is undemanding (EV/EBITDA at 7.7x FY14
or 10.0x on FY14 adjusted free funds from operation excluding growth capex),
at ~60%+ discount to US-listed towers and ~40% to Indonesian players.

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