Bharti Infratel Ltd’s stock has reacted positively to the Reliance Jio’s deal with the former for sharing tower infrastructure. The stock has risen 5.6% to Rs. 202.25 on BSE in the morning as the deal is likely to result in nearly 20% rise in Bharti Infratel’s absolute tenancy and nearly 11% to its expected annual operating profit once Reliance Jio fully rolls out its pan India services.
Reliance Jio Infocomm, a subsidiary of Reliance Industries (RIL) on Tuesday announced the signing of a Master Services Agreement for infrastructure sharing with Bharti Infratel.
Under the agreement, Reliance Jio would utilize the telecom tower infrastructure of Bharti Infratel to launch its services across the country.
This follows the earlier comprehensive telecom infrastructure sharing arrangement between Bharti Airtel and Reliance Jio Infocomm in December 2013 under which they would share the whole infrastructure created by both parties.
This deal is likely to benefit Bharti Infratel as its tenancy ratio or tower sharing factor would see significant improvement once Reliance Jio starts full fledged roll out of its 4G services.
Bharti Infratel that had an average sharing factor of 1.96x with 163,000 co-locations (as at end of Q3’FY14) across its 83,000 towers is likely to see its tenancy ratio rise to 2.3x once Reliance Jio rolls out its pan India services fully. That’s because Reliance Jio is likely to takes around 45,000-50,000 co-locations or sites from Bharti Infratel on a consolidated basis (including Indus Communications where Bharti Infratel owns 42% stake). This is likely to lead to incremental tenancies of around 30,000-32,000 on consolidated basis.
Tenancy ratio refers to the number of tenants or operators who have put up their active infrastructure on the towers.
The agreement mentions that the pricing would be at ?arm?s length,? based on prevailing market rates. Considering the average rental received by Bharti Infratel per operation per month of Rs 34,124 in third quarter of this fiscal, this would amount to Rs 1,100 crore of incremental annual revenue at full utilisation (45,000 towers) by Reliance Jio. This amounts to additional 10-11% revenues for the firm who’s expected consolidated revenue for fiscal 2014 is likely to come in at Rs 10,800 crore. The operating profit or EBITDA is also likely to rise by around Rs 500 crore considering Bharti Infratel’s last quarter EBITDA margin of 41%.
Some of the analysts had already factored the upside of Rs. 17-23 from this deal in December and so the upside for the stock remains restricted in near term. Kotak Institutional equities has a target price of one year forward Rs. 200 for the stock.
Reliance Jio that would likely require in all around 1 lakh towers for it pan India rollout already has a similar tower sharing agreement with Anil Ambani’s Reliance Infratel for 45,000 towers which is currently under delivery. In June 2013, Reliance Jio had signed deal with Reliance Communications (RCoM) to rent its towers across the country for Rs 12,000 crore.
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