My Assessment on bharti infratel.

Bharti Infratel Ltd.

Part – 1.

 

First question always has to be why Bharti Infratel ?

I have been studying telecom space from months now because of the following reason –

How marketshare used to look couple of years ago, when “Jio” was still an “ Idea “ on Ambani’s table.

Then Jio happened –

Clearly there is massive consolidation has happened in telecom space and out of 10 -11 players ,now we are now left with only 3 + 1(Tax payers nightmare BSNL incurring loss of 8000 CR per year.) players market.

Globally telecom service providers markets are oligopoly markets because economy of scale is a huge advantage ( unlike diagnostics businesses). So, you will always end up with big 3 players eventually who can use their scale to survive and compete effectively.

How EOS works for telecom businesses ?

The telecom operators buy spectrum from government, Spectrums are nothing but some frequency band in the space that belongs to nation and Government can monetize them by auctioning it to the telecom operators.

Some fun facts –

1. After Tax revenue government earns most of its revenue by selling these spectrums.

2. 10% INCREASE IN BROADBAND LEADS TO 3-4% INCREASE IN GDP (how we keep growing 7% despite all our Government efforts).

These spectrums are like Roads and operators focus is to use it to its limits without degrading user experience. So, a big operator will always be able to let’s say put millions of users in its spectrum band vs a small local operator who got only 100,000 customers, a big operator will always be able to subsidise the cost among the million vs the small operator and eventually the small operator will have to shut down its shop (Thats what happened since JIO entry).

Since now we are left with 3 decent size telecom service providers around 30% market share each, all of them should be able to compete effectively and another thing is as Jio has achieved its EOS it will eventually start raising tariff, this will eventually end the pain of tariff was among the service providers.

Another factor that led to look at telecom players is this –

Clearly the margins are now at a point that it couldn’t go any lower and we have seen that after a continued decline in tariffs post JIO entry they kind of stabilized today. Moreover JIO cannot subsidize users forever as it’s doing its expansion out of debt, it has to pay it back someday.

This is an old data now ARPU has declined to as low as $1.1 around Rs 78 /- and what i think is it should not be very hard for telecom operators to increase tariffs by say 10% (of Rs 78) i.e, by 7 rupees yoy , I don’t think users won’t mind paying Rs 7 extra per month, many won’t even notice but companies will be able to improve their margins by 10% yoy which is significant.

All this quick thinking made me more curious about taking deep dive into the telecom operators businesses but i think those are too hard to figure out for me.

Mainly the reasons are –

  1. What JIO will do ?
  2. What Gov of india will do ?
  3. What TRAI will do ?
  4. Balance Sheets are too stressed ( look at Idea Voda, will they survive ? or another suzlon ?)
  5. The revenue share model for Spectrums – too complex to understand for me.
  6. More importantly – will they ever earn respectable ROC ?

So, finally i had to put it into “ My too hard pile “ along with Pharma related stuff.

But while reading about telecom i came to realize the tower businesses in this sector are wonderful businesses to own.

“ These are good business with wonderful economic moat “

Furthermore what interested me more towards tower businesses is this data –

I looked at the DATA the tower companies in U.S have outperformed significantly the Telecom service providers in last 20 years.

AT&T has given -18% since 1998

T -Mobile has given just 3x in 20 years –

Verizon has given just 2.6x in 20 years.

Whereas tower companies in U.S has given 8-17x returns in last 20 years.

ATC has given 8x in 20 years.

This company has give 11x

This company has given 17x

If you add up the dividends which might be in range of 3-5% , these tower companies have given wonderful returns to the shareholders.

Let’s try to understand why they are such good businesses.

What Role Tower Company Play ?

As shown in the pic below when you call from MS ( Mobile station -> ur cell phone) to another MS, The signals will go through multiple BTS ( Base Transceiver Stations) that’s what tower companies instal and maintain.

In technical terms –

Optical fibers are used to connect one BTS eventually to another BTS and that’s where companies like sterlite technologies comes into the play.

Backhaul refers to the backbone that connects the active infrastructure at the tower site with the BSC and MSC. In India, traditionally, wireless operators used microwave as backhaul. However, they are progressively moving to optic-fibre-based links.

Why we need BTS ( in simple terms Towers ) ?

All the waves can carry information effectively upto some distance, Larger the wavelength ( smaller the frequency ) longer it will be able transmit messages, that’s the reason why spectrum with lower frequency band 900 MHz sells at much higher cost in comparison to let’s say 3500 Mhz as shown below –

So, to be able to communicate outside these circle you will require towers (BTS) that’s where our tower companies come into picture.

Key takeaway –

So, higher the auction of high frequency band more the number of towers will be needed “ 5G will require lot more BTS then have today, will be another growth driver for tower companies.

And occasionally our Gov price (700 -900Mhz) so high that no one bids for them – “ Good for tower companies “

Source –

https://www.livemint.com/Industry/xt5r4Zs5RmzjdwuLUdwJMI/Spectrum-auction-ends-after-lukewarm-response-from-telcos.html

Now what tower companies like Bharti Infratel do ?

Tower companies provide the entire range of tower infrastructure that is required by wireless telecommunications service providers.

Tower infrastructure refers to equipment such as towers, shelters, power regulation equipment, battery banks, diesel generator sets (“DG sets”), air conditioners, fire extinguishers and a security cabin, required at a site where such towers are installed.

There are generally two types of towers –

  1. Ground Based Towers (“GBTs”)
  2. Roof Top Towers (“RTTs”).

So the companies like Bharti Infratel ( Tower companies ) provide passive infrastructure as explained below –

The process of setting up a tower typically takes 45 to 90 days; however, the duration can vary significantly from case-to-case. Once the construction steps are completed and a site is ready to be handed over to an operator, a site is said to be “ready for installation” or “RFI”, which means wireless service providers can install their active components and make the network operational.

What is the business model ?

There are two types of business model –

1. Turnkey service providers TSPs – ( all are in verge of bankruptcy GTL infra, HFCL etc )

2. Tower companies.

As explained above TSPs build the site and hand it over to the operators and provides the operation and maintenance services, whereas the tower companies builds the site for operators and the assets belong to the tower companies in return they receive the monthly rentals from the operators stationing BTSs on their sites.

So, the business model is pretty simple –

The telecom service provides (TSVs) approach them saying “

-Hey we need to put a BTS in this circle “

Tower company – Sure, give us 45-90 days to –

  • Find the suitable location within this circle – includes negotiating deal with land / building owner (mostly rental.)

  • To get the necessary approvals from Government bodies.
  • Then installing the passive infrastructure like tower , generator etc.

Once its up the telecom service providers install their cells on it and in return Tower companies receive fixed monthly rental from them as per master service agreement (MSA).

Now this same passive infrastructure (Tower etc) can be used by other operators to deploy their cells, This kind of sharing creates win win condition for everyone.

Suppose cost of deploying tower in one location is 1 lac per month for an operator.

Airtel decides to put up a tower and gives the contract to an tower company. Now suppose later on Jio also wants to put up its cells in that locality then it makes sense for Jio to share the passive infrastructure with Airtel as this will bring the cost down everyone. So, now if Jio joins in the net cost for each will be 75K i.e, total rental for tower company 1.5 lacs per month vs 1 lac with only Anchor tenant.

This kind of sharing creates win win for all in the ecosystem and this acts as beautiful network effect type MOAT for the tower companies.

How network effect works – once they have one tenant they most likely to get 2nd and it makes more sense for 3rd one to join in.

As the number of sharing operators on a tower increases, it results in better economics for tower companies as they are able to generate incremental revenue while incurring insignificant incremental capital expenditure.

Number of telecom operators per tower is called tenancy ratio, As we have seen massive consolidation to only 3 operators, the optimum tenancy ratio should be around 2 to 3 (3 is the max).

Before 2008 the tower sharing was not allowed by regulation, Post 2008 we have seen the constant increase in the tenancy ratio, which even in bad environment helped tower companies to grow.

If more and more consolidation happens in tower industry better for the company as usage per tower will go high.

Some notes from DRHP –

Tower sharing good for the industry –

The wireless telecommunications service providers are under pressure to reduce their operating expenses and capital expenditure. Consequently, sharing space on towers owned and operated by third parties makes more economic sense to the customers of Bharti Infratel and Indus than building and operating their own telecommunications towers. The sharing of towers, thereby enhancing their operational efficiencies.

Even the down side is limited –

What happens when Telecom Operator want to exit early or dishonour the master service agreement ?

Not only they have to pay exit penalty but the rental for other two tenants go up. So, they don’t see much of EBITA loss, As discussed in below conf call –

Overall summary on Business Model –

Why they earn very good ROC ?

The cost of establishing a tower is generally a one-time expenditure and the incremental capital expenditure and operating costs required to provide for loading of equipment by additional sharing operators at a tower are relatively low.

In light of this, each additional sharing operator at a tower generally has a positive effect on margins. ( Why sharing is good )

We believe that this will also be attractive to existing customers at these sites, asadditional sharing operators will result in reduced individual rental costs for them as well as sharing of operating expenses such as fuel and energy costs. At the same time, additional sharing operators will increase Bharti Infratel and Indus’ revenues and margins at these sites.

In addition, there exists the possibility of offering transmission backhaul through optical fibre connectivity.

Most of its IT related stuff has been outsourced to IBM.

The they lease the land and outsource the IT / Maintenance work “ Truly asset light 😉

——————

Overall tower business has following strength –

  1. MOAT – Network Effect works in favour of business.
  2. Very asset light requires no capital to grow.
  3. As Indus/Bharti infratel owned by Airtel / Voda-idea – They don’t have to worry about customer acquisition.
  4. Some level of regulatory entry barrier.
  5. Long term contract (10-15 years) provides good revenue visibility.
  6. The cost to the customer of moving equipment from one tower to another is likely to discourage relocation.

This kind of speaks about why tower businesses massively outperformed the telecom service providers in U.S, They enjoy much better business economics then their customers 🙂

Lets learn a bit about Bharti Infratel LTD –

BIL and Indus are in the process of merging their operations, which will create the largest tower company in India with pan-India coverage and a sizeable tower portfolio of over 163,000 towers (as on March 31, 2018).

Further, the business has steady outlook over the longer term with rising data usage expected to drive demand for tower infrastructure. This should translate into steady cashflow generation.

Where we are in terms of business cycle ? ( we want to invest in the bottom of business cycle )

To me looks like we are at the bottom of it –

They have taken a hit on tenancy from Fy17 2.38 to Fy18 2.20.

Due to the merger of Vodaphone Idea, The Vodaphone or Idea going to exit in circles where they were competing / sharing the towers. This will bring down the tenancy ratio and will result in revenue loss but part of it they will be able to recover in terms of exit penalties as per master service agreement.

What is the current state of business ?

Pretty bad !

Lots of telecom operators folded their business – so, business from them went away ( didn’t affect much Bharti Infratel & Indus )

Due to Idea – Voda merger they going to rationalize their co- locations hence loss of some business for tower companies.

Here is the crisp story of consolidation from the Bharti Infratel management itself –

But tower business is wonderful business, Why ? Despite all that cash flows are robust.

What is the hope ?

Ultimately growth will come when telecom operators will start densifying their network, means they start investing in to building more co – locations.

Why will they do that is million dollar question but they will have to do that.

As 5G requires more and more BTS and all BTS needs to be connected via fiber they will require to do lots of lots of Capex but the balance sheet is not at all in condition to do it.

So, should we wait it out and see ? Or should we jump in as

  1. It’s an stable business ( We may not lose much )
  2. Upside is certainly there whenever the business cycle will turn.
  3. 5G brings in lots of promise – but when will it happen ?
  4. Margins should improve over time as power infrastructure improves in india ( Diesel cost).

 

Is it a value buy?

I have put my perspective in the part – II.

 

THANKS

BLOGS ARE NOT A RECOMMENDATION SERVICE – These are my personal views about the Business Quality, Management Quality, Business Execution & Performance.

Thanks,

Dhruva Pandey 

Email : dhruva.pandey@outlook.com

Twitter : https://twitter.com/Dhruvapandey
Twitter Handle : @Dhruvapandey
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