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Tuesday, December 4, 2012

Bharti Infratel IPO!


Bharti Infratel is coming out with a Mega IPO on Dec, 10 worth 4500 crores of Stock Sale. This is the largest IPO in past two years and is generating quite a buzz! At StockFundoo, we are always careful about mega IPOs and their associated buzz, because it’s often like a twin edged sword. Some of these Mega IPOs in the past have worked out well for investors whereas vast majority of them have been Mega Flops! It’s rightly said about IPOs: It’s Probably Overpriced. Please see our older post on IPO here.

Bharti Infratel is an tower infrastructure arm of Bharti and there is quite a bit of history attached with this unit. 
Between 1990s and 2000, Infratel was an internal unit within Airtel and was responsible for managing the Tower infrastructure of Bharti Airtel's telecom business. The unit’s role is to manage the 35,000+ Telecom Towers, the real-estate area of the tower site and the diesel generator sets to run the tower. Not a very exciting business to run on a daily basis, and very soon, the unit was spun out as a separate company called Bharti Infratel.

In July 2007, Bharti Infratel was spun off as a separate entity. This new separate tower company provides tower infrastructure services to various other telecom firms as well, thus earning additional revenues from existing Bharti tower setup.

Bharti Infratel also has 42% stake in Indus Towers, which is a Joint Venture created in 2007 between Bharti Infratel, Vodafone and Idea Cellular. Indus Towers has more than 1.1 Lakh towers and is the biggest tower infrastructure provider in the whole world.

Now a lot of buzz is being created about Infratel’s 42% holding in Indus Towers. But just a year back, Indus Towers’ partners were trying very hard to merge Indus Towers with Bharti Infratel before the Infratel IPO happens. This did not happen before this infratel IPO, so their frantic efforts didn’t not fructify. What was the hurry for the merger and why the merger did not happen?

Simply speaking, it’s very difficult to unlock value from Infratel’s 42% holding in Indus Towers once the IPO for Infratel happens on a standalone basis. Infratel might ask for total valuations for 80,000+ towers including their 42% stake in 1.1 Lakh towers of Indus, but as the towers belong to a separate firm, do the revenues accrue on a quarterly basis to Infratel shareholders? So, unlocking value from these 45,000 towers for Bharti Infratel is not a simple business and will further get entangled from this proposed IPO.

On a standalone basis, the number of towers that Bharti Infratel owns is just about 35,000. If one looks at global valuations per tower, it is fallen a staggering 90% from hefty peaks of 2007! In 2007, when all these Private Equity (PE) investors bought into Bharti Infratel, the valuation per tower was a staggering $600K per tower. Now it’s fallen to as low as $60,000 per tower, or just about Rs 30 Lakhs per tower. So total valuation for 35,000 towers of Infratel is only about 10,500 crores!

This is a staggering 23% of valuations offered by Bharti Infratel in this IPO, which is coming at a rich total listing value of 45,000 crores! Even if you include 45,000 towers from Indus, the total Enterprise Value for Bharti Infratel is only 24,000 crores, which is 53% of IPO price. Hence, looking from this angle the IPO seems to be richly priced!

If one looks at EPS and PE calculations, last three fiscals Infratel has an average EPS of Rs. 3.46. Annualized EPS for Infratel is Rs. 5.28 and hence at 240 Rs per share, the PE ratio is a staggering 45. This is definitely high for a telecom tower business as the whole telecom sector is reeling under regulatory hassles and tariff wars. Book Value is close to 82, hence IPO price is listing at approx 3 time the Book Value. Hence looking at financials as well, this is not a value bet for retail investors and is listing at quite a premium.

The biggest surprise element of this IPO is yet to come! Smart Private Equity (PE) funds invested in Bharti Infratel at the peak of 2007 valuations at a price of Rs 220 per share. The strategy of a typical PE investor is to invest in a pre-IPO private company at a valuation which they can double, triple or quadruple in 4-5 years and exit at lofty prices of IPO, thus making huge profits. In this case, their calculations failed miserably as they entered at peak valuations of 2007, and tower valuations have crashed 90% from then in last five years.

Now, the price band of Bharti Infratel IPO is Rs 210 to Rs 240 per share. At Rs 220 per share, PE investors are looking at a loss of Rs 10 per share if listing happens at lower band of Rs 210. Their only hope to be profitable after 5 years of wait is when the IPO lists at price of Rs 220 or better.

Now the simple animal of Dalal Street, the mighty Bear, knows that there is a big fault line here at Rs 220, where lots of prior investors are stuck. The retail investor is getting a discount of Rs 10 per share, hence retail public would be looking to make a quick buck of Rs 20-Rs 30 if post IPO listing the stock surges. The PE investors would be very happy to get Rs 10-Rs 20 profit if stock surges on IPO listing day. Hence the simple Bear of Street notices that everybody wants to exit fast and make a quick buck on listing day. What happens to a stock on a listing date, which everybody wants to exit and no one wants to hold?

That is a question that you need to ponder, before you think of investing in the biggest and the mightiest IPO on Dalal Street in past two years!

Wishing you all the best, thanks for reading this article and keep writing in to us.

2 comments:

  1. Thanks for detailed analysis. Throw some light on PC Jewelers (an upcoming IPO), and educate your readers.

    How do you estimate the tower value? The Govt (court) exercising radiation estimation of these towers, so it is probable that the efficiency of tower would be reduced in future, if the courts order to minimise radiation. How is it going to affect its valuation since the high power towers are already established?

    Can you cover importance of guar gum in chemical industry?

    ReplyDelete
  2. Hi Naren..Very insightful article ...hats off to you..i really like the way you write..Thanks..

    ReplyDelete

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