Value Seeker My Assessment on bharti infratel. Posted on December 23,.2018September 2, 2021 by dhruvapandey Bharti Infratel Ltd. Part-1. First question always has to be why Bharti Infratel ? Thave 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. Wireless market share in terms of total subscribers in India 4% 1% 2% Bharti Airtel ‘Vodafone midea Reliance BSNL Aircel mTata mTelewings w= Sistema = Others Then Jio happened —Operator Industry Dynamics — 81% ‘Top 3 operators (post 224% sited Tata +Telenor® ocaahdaie ba se Relance Jo ‘91.0% Revenue cena Market Share (RMS) 9% 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.) play- ers market. Globally telecom service providers markets are oligopoly markets because economy of scale is a huge advantage ( unlike diagnostics businesses (https://dhruvapandey.wordpress.com/2018/04/02/are- you-overpaying-for-diagnostic-businesses/)). So, you will always end up with big 3 players eventu- ally 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 —2 Cort ag Average SUN Som ud India China $8.36 USA $38.09 Canada $49.84 * The current hyper competition has left India’s telecom service providers eed) to raise toriffs. 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 subsi- dize 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 , [don’t think users won’t mind paying Rs 7 extra per month, many won’t even notice but com- panies 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 (https://www.youtube.com/watch? y=lw_KmmSzAG4) “ 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 — Ilooked at the DATA the tower companies in U.S have outperformed significantly the Telecom ser- vice providers in last 20 years. AT&T has given -18% since 1998AT&T Inc. + Falon NYSE: T 30.57 usp 0.00 (0.00%) 29 Nov, 401 pm GMS Disclaimer 1dey Says month G months, «YTD. tear S years, «= Max © 0.70 (18.80%) $ Dec 20, 1997-Nov 23, 2018 1988 1993 1998 2003 2008 2013 2018 T-Mobile has given just 3x in 20 years — T-Mobile Us Inc | rdiow NASDAQ: TMUS 68.68 usp 0.00 (0.00%) 29Nov, 400 pm GMT» Disclaimer ‘day Sdays 1 morth 6 months. «YTD tyear —Syears. = Max 150 +51.26 (324.23%) Nov 27, 1998-Nov 23, 2018 100 50 2000 2004 2010 214 2018 Verizon has given just 2.6x in 20 years.Verizon Communications Inc. = roiaw: NYSE: VZ Eezan 59.45 usp 0.00 (0.00%) 29 Nov, 4:03 pm GMT-S * Disclaimer 1 day Sdays 1month months YTD tyear Bears Max 60 442.40 (201.08%) Oct 30, 1987-Nov 23, 2018 1988 1903 1998 2008 2008 2013 2018 Whereas tower companies in U.S has given 8-17x returns in last 20 years. ATC has given 8x in 20 years. American Tower Corp Folk NYSE: AMT [ere] 162.72 usp0.00 (0.00%) 29 Noy, 4:09 pm GMT Disclaimer ‘day Sdays 1 month © 6 monhs_ «YTD tyear Syears. Max 208 ++143,01 (822.64%) Feb 27, 1998-Now 23,2018 150 100 50 0 ; 2002 2006 2010 2018 2018 This company has give 11xCROWN CASTLE IN/SH SH cae NYSE: CCI eet] 113.00 usp 0.00 (0.00%) 29 Noy, 401 pm GMT : Disslaimer tday 5 days. month © @ months. «YTD. tyear Byars Max 150 +99:59 (1,189.84%) PiSep 4, 1998-Nov 23, 2018 100 50 2002 2008 2010 2014 2018 ‘This company has given 17x SBA Communications Corporation ¥ Folow NASDAQ: SBAC 168.55 usp +0.19 (0.11%) + 29 Nov. 4:00 pm GMT-5 - Dscaimer ee ee ee ee ee 206 $156.64 (1,740.47%) Alun 18, 1989-Nov 23, 2018 186 " 109 so ° 2002 2306 ato atta 20h 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 — Active and passive infeasteucture ‘Wireless networks comprise three components: active infrastructure, passive inffastmucture and backhaul. Active infrastructure consists of electronics that power a wireless network such as radio antennae, base transceiver station BIS"Vcell sites and cables, Typically, a wireless telecommunications network in a Circle consists of several mobile switching centies (*MSC3"), each of which is connected to eight to 10 base station controllers ("BSCS"), which are comected to 60 to 80 BTSs. The BTSs are installed contisuously to facilitate the handing over of signals from one BTS to another in a chain, The radins of each BTS varies from berween 500 metres to 10 kilometres ‘depending upon subscriber usage, topography, operative frequency and spectrum availability. “yore = % A Votoase BTS se eA K ets MS + Mobile Station | BSC : Base Station Control fibre cableOptical Optical fibre cable fibre cable Mobile 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 be- low- Indicative cell radius for 900 MHz and 1800 MET: spectrum Rz=~0.8 Ry for dense urban area Cell Radius in 900 Cell Radius in 1800 MHz Range MHz Range \Varistion in radius aecording to topology one (Source: Analysys Mason.)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 ” Spectrum auction ends, govt makes Rs65,789 crore, misses target Proceeds from spectrum auction a fraction ofthe Rs5.63trilion of ainvaves on offer no bids were received for 700 MH, 900 Mhzbands) —s because they were priced too high Airtel also said that the pricing of the 7o0MHz band spectrum needs to be addressed on a priority basis for the country to reap the digital dividend arising of this high quality spectrum band. “It made no economic ease for them (telcos) based on the high reserve prices,” the company said. Lower frequencies are better at passing through walls and travelling longer distances than higher frequencies, allowing carriers to set up fewer cell towers and save on costs. They're also usually more expensive to get. Source — hitps://www.livemint.com/Industry/xt5r4Zs5RmzjdwuLUdwJMUSpectrum-auction-ends-after- lukewarm-response-from-telcos.html (https://www.livemint.com/Industry/xt5r4Zs5RmzjdwuLUdwJMUSpectrum-auction-ends-after- lukewarm-response-from-telcos.htm!) 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, bat- tery 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 (“TTS”).ITs are erected on top of high-rise buildings and their height is typically 14 metres to 20 metres, The occupancy capacity of a shared RTT is typically 2 to 3 tenants, which can be increased to accommodate more tenants through adjustments and incurring additional capital expenditure. (Source: CRISIL.) Structure of a GBT Structure of a RTT. (Source: CRISIL.) So the companies like Bharti Infratel ( Tower companies ) provide passive infrastructure as explained below — Passive infrastmctare essentially consists of teiwersites ond complements the active network infrastmichars: whilelit GoSSInOUPLAYAMYAOLGINICAYANEANAEISSSSIRNALS it isa vital part of any wireless network as itis critical to ensure the active components are operational, \SEtWORRIIATNdia. Tower infrastructure includes components such as: ‘© Tower site, which is typically around 4,000 square feet of land for a GBT or on top of a high-rise/building in dhe case of a RTT; ‘© Steel tower on which active components such as antennae are mounted; ‘© Shelter room to house the equipment ‘© Power regulation equipment; © Battery bank: © Dest: © Airconditioner; ©) Fire extinguisher: and © Security cabin, The process of setting up a tower typically takes 45 to 90 days; however, the duration can vary signifi- cantly 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 ete ) 2. Tower companies. Turnkey service providers ‘Turkey service providers (“TSPs") such as GTL Limited, Nu Tek, HECL and Spanco offer tower infrastructure solutions on a tumkey basis to operators. This business model differs fom that of tower companies, @SSESRSIDMNE HESHEHO RANA SMLSEGUENUSANARNONENTOMNETOPEMALGR Thercafier. they provide operations and maintenance services to the operator depending upon the terms of the contract, In contrast. {OWSESMpARES ty PICAMPDUIGISIES for operators and the asset is recorded in their books; in return, they receive monthly rentals from the operators for SintioniNgETSSonAANSitES (Source: CRISIL.) 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 station- ing 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.) Bharti nffatel and Indus lease substantially all ofthe land anid property on which their towers are located. ‘in genetal, these lease arrangements are for periods of between! 10 and 15 years and grant Bharti Infatel, and Indus the right to use the Leased premises forthe purpose of carrying on their business) Cader their © 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 re- ceive 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 infra- structure 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 com- panies as they are able to generate incremental revenue while incurring insignificant incremental cap- ital expenditure. Number of telecom operators per tower is called tenancy ratio, As we have seen massive consolida- tion 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 in- crease in the tenancy ratio, which even in bad environment helped tower companies to grow. Trend in number of towers (historical) for 2G and 36 It is estimated that 2G base stations are currently installed on 376,000 towers. (Source: Analysys Mason.) ‘The curent coverage of 3G remains focused on select cities, but operators are expected to roll out 3G networks in ‘tier TT and tier TT cities in the next two years, and Analysys Mason expects that 3G coverage will reach villages with ‘ population of greater than 5,000 after a few years, amounting to about 19,000 villages in total. Telecom towers installed base and tenancy in India, fnancial year 2008 — financial year 2017 00 0 ono gsm 3 a0 soa 200 100 rauox Fy 2000 Fy 2010 FY 2E12 Fy2012 #20138 FY 20248 FY 2015 FY Done FY 2027 (me Teens Towers shaingratio As the umber of sharing operators on a tower increases, ESSERE TESOnOHSS STONES AIESSE ‘are ble fo generate neremental revenue while neting insignificant nexemental capital expense, 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 ex- penses 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 oper- ational efficiencies. Even the down side is limited — What happens when Telecom Operator want to exit early or dishonour the master service agreement 2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 ‘Sachin Salgaonkar - Bank of America - Mumbat ‘Thank you for the opportunity. | have two questions. First question fs on some of the comments what Akhil made which i this ‘Quarter we saw the impact from last of the small operators. So Akhil does that mean the impact from Tata's behind us or we may ‘ee some impact as and how Bharti and Tata close their merge, so thats question one. Cuestion two and lari itis peshaps 2 {00d thing to see that wile cosocalons decined the mpact on EBITDA isnot there, Ut aIsO remember N= Math Which YOUU al tere an pact m margin and my quesion = more on the tnes of ldea-Vodalone Cancetavon impact | rrnem ct te st call you guys menoned tsa 20000-25000 cancelaton lenaney pac. stat fat assume on hat number roughly 24 1 5 bercontage pontimpact on EBITDA margin coud be seen. Thank, Devender Singh Rawat - Managing Director and CEO - BhartInfratel Limited ‘This is D'S. Rawat tis side. First one from a number reporing standpoint, the Tata impact has been taken completely on the ‘numbers; however, Akhil del mention that there are sill some revenue paying co locations which aren service. So numbers that we ‘eport on colocation are basis nalices received and all the Tata numbers have been inchided as noticed recewed. However, thet {ermination dates have not come in yet, we continue fo recognize revenue that i getting paid against these 3s rentals. So the ‘number that Akhil mentioned inthe eal was closed to about 6000, those are the numbers for which the revenues are sill coming in ‘Your question on Voda-idea merger and the model sel, yes the model is that the higher we move up on tenancy ratos, EBITDA tends to mprove and the reverse ts also tue, but we did meniton that there are three corrections on the reverse step thal we get as ‘an alivartage, Fifst one of course being that you expect if two enfiies merge, a larger amount of electronic equipment deployed Junichi pacing, Number two, When ine third Operator moves out on these, the mcumbents the one and two, the rentals moves Bharti Infratel Limited First Quarter Ended June 30, 2018 Earnings Conference Call _upiike the way it slides when the third tenant comes in; the reverse happens there too, So those are some ofthe adjustments that happen to compensate for the revenue loss that happens. So there wil be an EBITDA mpact, but that in ihe with exact the runbe of tenancies interns of percentage, that might not be enbrey tue. On exact number on EBITDA mpact ti we dont have ‘exact site-se deals for an operator rol possible lo comment on that and secondly these as we have seen in the past have staggered over afaity larger tme and particulary Voda-idea merger which is te merger of two lage enttes, one needs to create ‘apabies before you can slat fo ee-up eleconic equipment and redeploy. We afe yet t see exact deployment plan rom our customers and once we have that hopeflly we vl beable to gel more eanty. The numbers that you sad were the numbers that hhave been given on a consolidated basis 20000 to 25000 on a cons level Overall summary on Business Model ~Business Model for Tower Companies Key characteristics (Source: CRISIL.) “The business model of the tower industry is characterised by the following factors: ‘High capital outtay Given the high capital investments required in the business, tower companies generally require high debt finding. Annuity driven business As a tower gets a tenant, it usually generates stable cash flow in the form of tower rentals from occupants over the term of the MSA between the two parties. Hence, there is a fair amount of certainty in the cash flow forecasts of a tower asset. High ineremental projitabitity Operating expenditure of @ tower such as site rentals, security and maintenance are largely fixed. Thus, each increment in tenancy is accompanied by a minimal increase in costs. This leads to a moze than proportionate increase in profits with an increase in tenancy. Low churn ‘Towers are am integral patt of the wireless service provider networks and shifting to another tower leasing company is quite inconvenient. The complexity in adjusting to a competitor's tower sites futher lowers the chum rate, in addition, most contracts between service providers and tower companies are long-term in nature thereby increasing the switching costs, Low risk of technology obsolescence ‘Tower companies provide tower infrastructure that tends to he technology agnostic. Wireless service providers own their active equipment and therefore bear the technology risk. Thus, tower companies face low risk due 10 technology obsolescence. Revenue (Source: Analysys Mason.) The key economic driver of a tower company business isthe tenancy rato. Tower companies incur significant capital expenditure for new towers but minimal capital expenditure for new tenants, resulting in an increase in EBITDA in line with an increase i tenants, SthnUMDETOH tenant ONE TEAST COMMIS ATEADIE ‘fo generate incremental revemie: while ineinring insignificant incremental capital expenditare, In vkition to tenancies, the key parameter detennining tower company revenues is the prising charged per slot to «tenant. The ‘market rentals charged by tower companies depend on three types of pricing models: sale and leaseback, a typical build-vs-lease pricing model where market rentals are determined based on the operator as well as the tower company meeting ther capital recovery requirements: co-location, where tenants vet their active equipment on a tower with an existing anchor tenant and get soune discounts on the original pricing: and bild-o-mut, where a tower is setup at a specific location based on reqhirements ofthe anchor tenant. with pic points substantially higher than the other modes. ‘With respect to tenancies, Analysys Mason believes that Indian telco-owned tower companies are well positioned to capture open market tenancies in light of incremental rural growth for 2G, and expected increases in 3G capacity and AG coverage. This is due to the benefit of captive tenancies and their limited exposure to new entrants. Analysys Mason also notes that there iniajabS16OnsoidatiOn! anions Tower COnpAniesTiniOrdHOREHIEVEISEAlE and {OTOpKNISE (PORToliONMIR 1 is expected that some of the tower companies that do not currently have right of first refusal ‘arrangements Will look to exit the market as they do not have access to, or the required presence, to serve the co- location or new build demands of operators that are investing ia the market. Such ower companies may be acquired by other tower companies which have a complementary portfolio and are striving fo gain seal.Cost Structure Capex ‘The tower business is highly capital intensive, requiring significant capital expenditure outlay for the building of towers. ‘The capital required to set up a tower depends upon the type of tower being constructed as well as its height. GENS ‘would involve capital expenditure of approximately @]SNOGMIINGR while RTTs typically require lower capital expenditure. (Source: CRISIL,) ‘The main capital expenditure heads are: © (GouseeKIONEMATOWERCASE which is typically around half of the capital cost for a GBT and around 20% fora RTT: + Cost of felated equipment such as sheles, CCORHOTES CEES WANES and SIRCHICAR (GOERS such as power interface units (“PTUs”), switched mode power supply and cabling charges; and + Other pre-operative expenditure such as GXPEHSESoOTNOCH POEs paN Ce pOSNSMAGHANOTS for gates and fences. Opex ‘The main components of operating expenditure inthe tower business are ‘© Repairs and maintenance such as preventive, conrective, and breakdown maintenance required to ‘keep a tower operational; + site renal: and + Security: insurance ad other miscellaneous expenditures + Pover consumption atthe tower sit, ineluding the cost of 88h required to operate DG ses dusing power breakdowns — these GOSSREISSIEUUPASSMOUSBIRNINATITS and folly reimbursed by operator tenants, althoush some operators are now adopting a fixed eneray model where tenants pay a fixed eneray charge pet month, calculated on the basis of the aumber of tenants on the tower and the operator's equipmeat instlled at the tower: + Employee costs; and ‘© Selling, general and administration expenses,Incremental operating costs incurred with the addition of new tenants are generally minimal, resulting in an significant increase ia operating margins with higher tenancy. Construction cost of ground based towers in urban areas sis - i E 5 on Boos =a i= o #0 * S00 ‘ a ae oe Se maternal (ource: Analysys Mason.) Construction cost of rooftop towers in urban areas 2000 a 120 ‘0 Ea Tower constuction cost (NR 000) 8 coo ee Ei 70 = ° =_ Tea! Tow Shona Oee Gwen earn SAP material work (Source: Analysys Mason.)Drivers of income / profitability (Source: CRISIL.) “Increasing tenancy per tower. ‘The tower business is capital-intensive with high operating leverage. An increase inthe average tenancy sate leads to an increase inthe profitability ofthe tower. Growth in the subscriber base is largely attributable to the rwal/semi-wban areas, where the incremental average revenue per user (“ARPU") is relatively lower. Network design and planning in rural areas is different from that in ‘urban areas, ven that the population in mural areas is widely dispersed, thereby increasing the tower requirements to cover the same number of subscribers vis-a-vis urban areas. Due to stiff competition and already stretched margins of the operators, it makes business sense for operators to rationalise their capital as weil as operating expenditure via Seiting up towers requires permissions from various regulatory and local authorities. Additionally, operators require considerable time to raise the funds required for setting up towers, Leasing tower infrastructure would assist new operators to roll-out their service at a faster pace. It will also enable significant savings on capital as well as operating expenditure ‘Reduction in operating expenditure to cushion falling margins Due to a considerable reduction in tariffs in the wake of competition, the ARPUs and sninutes of usage (MoU") of operators are declining, which has strained the operators” operating and net margins, (OWERiMaSHUCTARE!SUATIN® would enable the operators to significantly reduce network operating costs anl sustain profitability Why they earn very good ROC ? The cost of establishing a tower is generally a one-time expenditure and the incremental capital ex- penditure and operating costs required to provide for loading of equipment by additional sharing op- erators 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 ex- penses 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.Any failure in the implementation or operation of Bharti Infvatel’s information systems could disrupt its business operations and cause an unanticipated increase in costs. Bharti Infiatel has implemented various information systems to integrate all of its business functions through the automation of business processes. For further details, please see “Our Business—Towers Bnsiness” on page 154. Bhatillintatelentertintova stratezic outscurcing/agreementiwithiISMndia ‘Therefore, Bharti Inffatel's business operations are heavily dependent on the performance of IBM as a third party service provider. Any failure by IBM to perform its obligations in accordance with the terms of the agreement, or any delay in implementation or failure in the operation of Bharti Infratel’s information systems, could result in material adverse consequences, including disruption of Bharti Infratel’s operations, loss of information and an unanticipated increase in costs, which could have @ material adverse effect on Bharti Inffatel’s business, prospects, results of operations, cash flows and financial condition. Tt may also be difficult to identify and procure a reliable and qualified replacement service provider in the event of @ breach of the agreement by IBM, which may lead to a disruption of Bharti Infratel’s business and operations, 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 busin 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 com- pany 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 — ICRA also takes note that it is a subsidiary of Bharti Airtel Limited (Bharti; rated [(CRAJAA+ (Negativel/AL+) and enjovs healthy tenancies from Bharti, Vodafane-Idea Limited (VIL; merged entity]? and Reliance Jio Infocomm Limited (Rio) However, given the ongoing consolidation in the telecom industry, the weaker telecom operators (telcos) have exited The industry, which has resulted in loss of tenancies for tower companies, including BIL, The company had relatively limited exposure to weaker telcos, which helped to contain the tenancy losses faced by R Moreover, the tenancy losses ‘Targely occurred in Hz FY2018 and hence, the impact on revenues in FY2018 was limited, Its tenancy ratio stood at 2.20 times as on June 30, 2028 compared with 2.38 times as on June 30, 2017, OO 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 rev- enue loss but part of it they will be able to recover in terms of exit penalties as per master service agreement. VIL has also communicated to BIL its tenancy exit plans upen completion of the said merger, which stands at 27,447 tenancies on a consolidated basis This is 13.7% of the total consolidated tenancies of BIL as on June 30, 2018 and itis expected to result in consolidated service revenue loss of Rs. 60:65 crore per month. Nevertheless, BL is expected to recover some exit penalties from VIL as per the agreement to compensate for the revenue loss. Apart from revenue loss from tenancy exits, the ongoing pressure on revenue generation and profitability of the telecom sector and its efforts ‘towards cost optimisation can adversely impact the rentals charged by the tower companies. Given the high operating leverage of the business, adverse impact on the revenues can impact EBITDA. However, the business derives strength from inherent high client stickiness given the challenges in network reorganisation as well as ext penalty clauses wich are part of the master service agreements with the telcos. ICRA has taken note of the capital-intensive nature of operations, necessitating constant investment in the tower network for maintenance and improvements at established sites. 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 — You are all aware that a massive consoldation is currently underway inthe telecom services Industry following the heightened Compentwe itensty from Jo. For instance, Vodafone and Idea are inthe last legs of ther merger while Ae is nthe process of ‘Bharti Infratel Limited First Quarter Ended June 30, 2018 Earnings Conference Call, integrating its acqusstions made over the last year mainly Telenor, Tala and Tikona. Since ebviously with diferent network elements ‘coming, spectrums coming, the network planning based on the new ses added to an exstng running network with more spectrum ‘coming in, = a very complex and complicated time consuming exercise. As anticipated, these companies dd put the new co locations on held for the bme being and focused on adding 46 to ther existng sies in the meantme. As a result the new € locations forthe quater continued to be sot as reflected n detaled “Operating Hinhights” in the quartery report: however, we firmly baleve that tis is only a temporary phase since with ony tree big payers le that Airtel, Vodafone-ldea combined ahd io and only one puble sector payer, is absolutly imperaive that they rol out ther networks Soen, se has not to leave a huge compete advantage othe others. tn dune quarter, we reported chur in colocation of 5857, which represents he last ofthe smal operators to ent the Indian telecom Industy. Asa eonsenuence on June 30,2018 the consoldted tower base stood at 91,750 on a consoled ats wih > locals at over 200,000, deciing 8.1% year-on-year wil a codocationTaclor of 2:19 af losing | may port out that wiv We fecotd the chum on recept of ent nouce sf, m pracice, bing on some of bose sies doesnot discontinue meray. AS On “Tine 30,2018 on 2 onsoldated bass tere were 8672 such eo Jecatons on which bing was continuing But tower business is wonderful business, Why ? Despite all that cash flows are robust. ‘On many occasions, | have spoken of the robustness of the business model for ths tower Industy. am very pleased ta point out that ths rebusiness is Geary visible despie these major churns im the last few quarters and the temporary slowdown ef co locations, the fll in overall performance vis-d-vs corresponding period of last year is only marginal. EediistaneenagainSstNeTeO=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 ita value buy? Ihave put my perspective in the part — II (https://dhruvapandey.wordpress.com/2018/12/29/bhatri- THANKS Blogging is tough : your support will be appreciated UPI id : dhhruva.pandey@okhdfcbank 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@out1ook.com Twitter : bttps://twitter.com/Dhruvapandey (https://twitter.com/Dhruvapandey.), Twitter Handle : @Dhruvapandey 2 thoughts on “My Assessment on bharti infratel.” 1, Pingback: Bhatri Intratel — 1] | Value Seeker 2. Pingback: Indus Towers | Finance and InvestmentsI write because I want to learn not because I am an expert. RI ATE A FREE WI 17) RBI AT WORDPRE!