Why Morgan Stanley Sees 34% Upside Potential In Bharti Infratel
Valuations are cheap and Bharti Infratel may be getting close to the buy zone, says Morgan Stanley.
Mobile tower company Bharti Infratel Ltd. is best set to cash in on the boom in the telecom sector, amid consolidation and shutdowns, according to Morgan Stanley.
The impact of tower additions by Reliance Jio Infocomm Ltd. on its own and reduction of dependency on Bharti Infratel’s towers by various operators can have limited impact on the stock, the global brokerage said in a report.
Valuations are cheap and Bharti Infratel may be getting close to the buy zone.Morgan Stanley Report
The brokerage indicates a potential upside of 34 percent for the stock from the current levels. Based on the valuations given in the report, the target price comes to Rs 447. Only two out of the top 20 analysts tracking Bharti Infratel have a ‘Buy’ rating on the stock, according to Bloomberg data. The stock has under-performed the S&P BSE Sensex Index by 28 percent since October 2017.
The next two to three quarters will see the full impact of deletion of tenancy—the number of operators who have put up their antennae and other active infrastructure on the towers—on the back of ongoing consolidation in the telecom space, the report said. Also, Reliance Jio’s tenancy additions on Bharti Infratel have slowed down as the new player adds more of its own towers, it added.
While the stock price is fully reflecting risks emanating from tenancy deletions, there are limited catalysts. Smaller operators such as Aircel Ltd., Tata Telecom Ltd., and Telenor Communications Pvt., who are reducing/shutting down their operations, now constitute nearly 5 percent of overall Bharti Infratel tenancies, and hence present a far lesser risk than earlier, the report said.
Risks
- Higher churn or price erosion from Reliance Jio’s 4G feature phone launch.
- Pressure on the company's free cash flow from high capital expenditure.
- Low profitability.
Sector Outlook
Telecom companies are unlikely to engage themselves in further price wars in the near term, aiding their operating performance. “With Jio also focused on showing consistent improvement in average revenues from each user and margins/profitability, we see an upgrade cycle in these revenues kicking-in beyond the next fiscal (financial year 2019),” Morgan Stanley said.