Bharti Infratel, the Telecom tower arm of the Bharti Airtel in India reported a mixed quarter, with weak rental revenue growth and tower additions, but much improved cash flows and a slightly improved tenancy ratio while sustaining margins. Bharti Infratel Ltd (BIL) added 156 towers (+2.3%yoy) in 2Q, while total tenancies increased by 1,959 (+3.7%yoy). The tenancy ratio, which we believe is the most important margin (and growth) driver for a tower company, increased from 1.91 to 1.93. This trend is helping the company realize the inherent operating leverage in the business.
Management suggests that Bharti Infratel will look for inorganic growth opportunities in India and the Indian sub-continent. Importantly, the company expressed a reluctance to purchase Bharti Airtel’s towers in Africa. This likely comes as a relief to investors who were worried about this possibility.
The Management believes the high spectrum reserve price in recent auctions and regulatory uncertainty are partially responsible for weak tenancy growth, as they discourage the entry of new players, while incumbents preserve cash for
spectrum renewal. Affordable spectrum prices, resulting in successful auctions, will act as a catalyst for growth, as they would set off operator capex. However, a higher quantum of spectrum with operators might reduce (albeit modestly) their need to add more sites (fewer sites are required for coverage/quality of service if more spectrum is available), which is a risk to Bharti Infratel. Relatively stringent rollout obligations will incentivize operators to increase their footprints relatively aggressively.
BIL owns and operates towers directly as well as holds a 42% stake in Indus Towers, which itself is a tower company. Bharti Infratel owned and operated 35,119 tower sites in 11 telecom circles, while Indus operated 111,819 tower sites in 15 telecom circles.