Investor's Eye
[December 11, 2013] | | |
| Summary of Contents
SECTOR UPDATE Telecommunications Bharti and Reliance join hand for collaborative infrastructure sharing The event: Bharti Airtel and Reliance Jio enter into an agreement to share infrastructure -
Bharti Airtel Limited (Bharti) and Reliance Jio Infocomm Limited (Reliance Jio) have announced a comprehensive telecom infrastructure sharing arrangement under which they will share the infrastructure created by both parties. This will include the optic fibre network ie inter and intra city, submarine cable networks, towers and internet broadband services and other such opportunities identified in the future. -
The arrangement could, in the future, be extended to roaming on 2G, 3G and 4G services, and any other mutually benefiting areas related to telecommunication, including (but not limited to) jointly laying optic fiber or other forms of infrastructure services. -
On the pricing front, it would be at 'arm's length', based on the prevailing market rates. The implications -
Bharti Airtel: The infrastructure sharing agreement enables Bharti to sweat its assets, and earn rentals on the same (wholesale carrier, submarine assets and tower rentals from the Bharti Infratel), the benefits to flow in the financials in the form of higher margin and hence higher returns. -
Reliance Industries (Reliance Jio): The telecom subsidiary of Reliance Industries, Reliance Jio (which is yet to launch any of its services) gets an access to the wide infrastructure created by Bharti over the years, and thus reduces its time to market the 4G services. -
Bharti Infratel to benefit: Bharti Infratel, apart from Indus (which is a joint venture between Bharti, Vodafone and Idea), also holds over 35,000 independent towers with an average tenancy of 1.82x (as on Q2FY2014), and receives a per operator per month revenue yield of about Rs37,500. With this arrangement now in place, we believe that the tenancy ratio would witness a sharp jump, once Reliance Jio starts its 4G rollout. Given the scale and the size of Reliance, we believe that Reliance Jio has a very ambitious plan for its 4G rollout, entailing a maximum reach that would require a higher infrastructure share. Thus, the incremental and sustainable rental would flow to Bharti Infratel. Based on our preliminary and conservative analysis, we believe that by FY2016 around Rs1,100 crore of additional revenue should flow to Bharti Infratel, discounted to the present value, and putting 5x to the enterprise value/ earnings before interest, tax, depreciation and amortisation (EV/EBITDA) would entail a per share upside of Rs17 for Bharti Infratel. Positive for the industry; collaboration the way; rationality to be maintained: We believe that the agreement and the signing of infrastructure sharing deal displays that rationality is likely to be maintained going forward. Further, the agreement is positive in a sense that unlike in the past when Reliance launched its voice services in a disruptive manner, this time around there seems to be more understanding between the incumbent player and the new entrant. According to us, this also reduces the probability that Reliance Jio would enter the voice market (by buying spectrum in the upcoming 2G auction to be held in January 2014), with a disruptive pricing strategy that would hurt all the players and itself in the industry.
VIEWPOINT Tribhovandas Bhimji Zaveri All eyes on the wedding demand; regulatory stringency persists We met Mr Prem Hinduja, CEO of Tribhovandas Bhimji Zaveri (TBZ) to get an insight of their business, expansion plans and outlook for the future. The following are the takeaways from the meeting.
Muted festive demand, all eyes are now on the marriage season: The management stated that the industry has witnessed a subdued festive demand (starting from Dhanteras to Diwali) and has declined by 30% on a festive to festive basis. While for TBZ the decline was capped at 20%, of which 16% of the decline came on account of coins and bars, the balance was owing to the genuine decline in jewellery sales. Going forward the management sounded positive on the marriage season demand that has just begun (TBZ's 65% revenue comprises of the marriage jewellery segment). It further mentioned that the coming year has the highest marriage dates and is one of the longest marriage season for the decade, which starts in the beginning of December would continue up till June 10, 2014. The early demand is encouraging but not very robust as he believes that consumers would have preponed their purchases at the time of the decline seen in gold prices in the months of April and May 2013 (the volumes had surged by 40-50% year on year [YoY]). TBZ being a wedding player is expected to post a good performance in the current quarter.
FY2014 revenue to witness growth; but profitability under pressure: The management stated that a strong brand presence as a wedding jeweller compared to other organised retailers augurs well for the company as wedding jewellery is a compulsion buying activity and comprises of stable fixed budget purchases by customers. Thus, it is likely to exceed its last years revenue mark, but change in the product mix (led by high gold sales) and substantial increase in financing cost averaging at 10-11% as against sub 5% earlier would compress the profitability.
Valuations-significant de-rating results in undemanding valuation; but better consumption stories available: At the current price of Rs128, the stock is trading at 10-11x and 8-9x its FY2014 and FY2015 consensus estimates; discount of 50% to Titan which is justified. Though the valuations are not aggressive, the muted demand scenario coupled with regulatory stringency would continue to keep the stock on sidelines. Any positive development with respect to restoration of gold on lease model or relaxation of 80:20 rule on imports would be positive for the company and the sector. We have a neutral view on the sector and do not see sense in playing on consumer demand from the regulations hit business segment.
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Regards,
The Sharekhan Research Team | |
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