ALPHAIDEAS 20-20 MEET

Why Bharti Infratel could be an interesting play on the data

consumption theme in India

Gordon DSouza
July 28, 2018
Introduction
• Private equity investment professional (11+ years)
• Individual investor in Indian capital markets for 14+ years

Disclosures

• I am NOT a SEBI registered Investment Analyst

• Do not construe this presentation, either spoken or printed / digital copy (collectively “Material”) to
be investment advice. Any decisions made with reference to this Material is at your own risk
• I bear no obligation to inform consumers of this Material when I change my view
• While best efforts have been made to present factual / accurate data and quote sources wherever
possible, I cannot vouch for accuracy of sources
• My family and / or I own the stock

2
 Key Questions

Why is this interesting? Operators will have to invest in infrastructure soon:

• Networks are already choked
• Data usage set to rapidly increase as smartphone penetration
increases
• Operator options are limited – mobile broadband likely to be priority

Is this a fair valuation? Growth is not priced in:

• Current valuation takes a very short term view and implies no
growth for the long term

Downside is limited, rather there is some margin of safety

• Valuations in line with forced sales of relatively weaker assets

Are growth assumptions reasonable? Infratel likely to get disproportionate share of new tenancies:
• Limited options due to Tower Co consolidation
• RoFR with 2/3 relevant operators

Key risks:
• Jio’s strategy
• Reduction in rentals / renewals
• Solvency issues for Voda-Idea
• Regulatory (Active Infrastructure Sharing) 3
 Towers are good cash flow and ROCE business

 Rentals: Rs 30-35k Base Fee / site / month +

additional charges for maintaining 2nd network
 All other costs are passed on to telecom operator*
 Capex: Rs 15-18 lakhs / tower for RTT-GBT resp
Single
 Maintenance capex: Rs ~40k per annum
Tower
Economics  EBITDA: 50-75% of rental or 35-45% of Pass
through revenue**
 Payback: 3 years with co-location of 2x
 Tower level ROCE: 38-45% (GBT-RTT
respectively)

Key  Operating cost > Agreed as per MSA***

risks  Solvency of tenant & ability to honour MSA

Telecom operator owns all the “active”
equipment: Radio, antenna, Cables, BTS
Tower Co owns the “passive” infra: Tower
structure, shed, battery, generator, etc
 Geographical advantage. New towers within an
Comp existing towers coverage radius will not be able
advantage to match rates without sacrificing economics
 Single tenant / captive tower is not capital
efficient or viable for an operator

*Some TowerCos like Infratel have a cost plus model and hence make a spread
** Pass through revenue includes rentals for high rental sites or power / fuel beyond agreed terms
4
*** MSA: Master Services Agreement agreed between Telecom Operator and Tower Company
 Infratel and Indus have announced a merger
Key shareholders
 Bharti Airtel (53%)
 Public (46%)
Key shareholders
 Bharti Infratel (42%)
 Vodafone (42%)
 Idea (11%)
 Providence (5%)
Pre-merger Post-merger
Bharti Infratel
Shareholding Pattern*
 Bharti Airtel (34% - 37%)
 Vodafone (27% - 29%)
Indus Towers
42%  Idea (0% - 7%)
 Providence (1% - 3%)
 Public (29% - 32%)
Indus Towers
* Shareholding will depend on whether certain
shareholders (mainly Idea and Providence) take cash or
shares as part of the merger
5
 Solid Balance Sheet, Strong Cash Flow, Attractive Dividend Yield

Pre-merger Post-merger
w/Indus Tower  Pan-India coverage across all circles
Towers 91,451 163,162
 Largest tower company in the world
Tenancies 205,596 367,073 outside China

Tenancy ratio 2.24x 2.25x  ~38% market share by towers; ~46% by

tenancies
Revenues Rs crs 14,489 25,360
 Airtel, Voda-Idea, R-Jio are key tenants
EBITDA Rs crs 6,427 10,901 (~93% of tenancies)
Capex Rs crs 2,160 3,595

Net Debt Rs crs (5,170) 5,595 Debt/EBITDA <0.5

Market Cap Rs crs 53,084 76,420*

Merger valued Indus at 9.3x EV/EBITDA in
EV/EBITDA 7.4x 7.5x April 2018

FCF/EV 9.2% 8.9% FCF Yield > G-Sec Yield

ROCE 34% ~34% Despite industry challenges generates high

return on capital
Div Yield 4.8% Attractive Dividend Yield

*Post‐merger, based on certain shareholders electing to settle with cash vs shares 6
 Key Questions

Why is this interesting? Operators will have to invest in infrastructure soon:

• Networks are already choked
• Data usage set to rapidly increase as smartphone penetration
increases
• Operator options are limited – mobile broadband likely to be priority

Is this a fair valuation? Growth is not priced in:

• Current valuation takes a very short term view and implies no
growth for the long term

Downside is limited, rather there is some margin of safety

• Valuations in line with forced sales of relatively weaker assets

Are growth assumptions reasonable? Infratel likely to get disproportionate share of new tenancies:
• Limited options due to Tower Co consolidation
• RoFR with 2/3 relevant operators

Key risks:
• Jio’s strategy
• Reduction in rentals / renewals
• Solvency issues for Voda-Idea
• Regulatory (Active Infrastructure Sharing) 7
India has one of the slowest telecom networks in the world

How did we get here?

8
 Operator Consolidation from 10 to 3 relevant players

R-Jio’s aggressive Industry ARPU*

Multiple Weak balance
market share -33%
players sheets
strategy Post Jio launch

Subscriber Market Share (Dec-15) Subscriber Market Share (May-18)

Subscribers (mn) Subscribers (mn)

39% Subscriber share (%)
Subscriber share (%)
24% 437 33%

19% 372
28 Tata
17% Idea 214

11% 18%
243 8%
8% 345
194 6% 10%
172 5%
222 206
109 1%
86 83 116
61 51
14 0
R-Jio
Airtel

Idea

Com+Sistema

Tata
Vodafone

BSNL / MTNL
Aircel

Others
Telenor

Airtel

R-Jio

BSNL / MTNL
Voda+Idea
R-

Operator consolidation is almost complete

9
 Operator consolidation triggered Tower Co consolidation: From 11 to 2 relevant cos

Sale of non-core Co-location loss

High
assets by due to operator Sub-scale
leverage
operators consolidation

Dec ‘15 2.3x June ‘18 Industry Towers: 419,000

Industry Towers: 371,000
Industry Tenancies: 621,000 Industry Tenancies: 759,000
375
Ratio 1.9x

Co-locations 285
(‘000)
1.8x 1.0x 1.3x 1.9x 1.9x 2.0x

143 70 86 53 15 12
1.1x Captives
Towers 1.5x 163
2.2x Potential M&A 
(‘000) 62
146 78 1.0x 1.6x candidates
91 1.9x 1.4x
1.4x 1.2x 1.5x
18 24 78
20 13 70 66
59 13 9 9
52
40 28
18 15 11 9 9 8 6
7 6

Infratel / Indus

ATC

R-Com+R-Jio

GTL
BSNL

Ascend
TowerVision
ATC

Idea

Vodafone
R-Com

GTL
Infratel /

BSNL

Viom

TowerVisio

Ascend
Aircel
Indus

Tower Co consolidation in final stages 10

 Network capacity is already choked! …

Data usage: GB/sub/month Data usage by network 2017:

GB/sub/month
6x growth in data usage for Airtel & Idea subs Averages hide the real story …
All India avg at 3.9 GB 4G user’s usage is significantly higher!

11.0

6.3

5.0

3.9
3.0
2.4
0.3
1.1
0.79 0.85 0.84 4G 3G 2G

Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18

Source: Bharti Infratel Source: Nokia MBiT 2017

Current Network Capacity at 6-7 GB/sub/month*

4G compatible phones (2017): 218 million
*Based on industry discussions (prior to operator consolidation) 11
Sub = subscriber
 … And will need an urgent upgrade

Smartphone sales (Mn) Data Traffic / smartphone

and % penetration GB/month 2017 2023E
North America 7.2 49.0
Data usage will increase
Latin America 2.5 15.0
with more smartphones
and 4G phones Western Europe 4.0 25.0
40% C&E Europe 3.8 18.0
North East Asia 2.6 14.0
491
China 2.3 12.0
30% South East Asia 2.7 14.0
26%
337 India 5.7 13.0
291 MENA 2.0 12.0
Sub-saharan Africa 1.4 6.9
Source: Ericsson Mobility Report (June 2018)

Indian 4G subs data usage on par with global

norms
2017 2018P 2022P
Average data usage can be far higher than
projected
Source: Internet & Mobile Association of 
India (IAMAI)

What are the options for operators? 12

 FTTH (Fibre) is capital intensive and will take time to deploy …

• Globally conversion ratio of fibre

1 Cost of deploying FTTH between $300-500 per household customers to infrastructure laid out
is 20%
700 VDSL-CO pass • Wire ~250 mn households for
Cost per premises (USD)

600 50 mn customers
VDSL-CO connect
500
• India households ~267 mn
FTTC/VDSL pass
400 FTTB/dp/VDSL pass • Above plan will technically cost
300
FTTx/VDSL connect $100 bn
200
FTTB/LAN pass • Cost of FTTH ($300-
100
FTTB/LAN connect 500/household)
0
FTTH/GPON pass • Cost escalates significantly
2012
2013
2014
2015
2016
2017
2018
2019

for wiring last 10% of

FTTH/GPON connect
customers
Source: Analyses Mason • Cost of content not included

Potential implications:
Right of Way (RoW), managing multiple local permissions  Less aggressive and select Fibre
2 Roll-Out
and infrastructure management issues
 Priority to Mobile

Fixed-Mobile Convergence (FMC) in India is some time away

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 … Which will lead operators to prioritise mobile capex

Operators are significantly leveraged Likely priority of Airtel, Voda-Idea

Consolidated Debt FY18 (Rs crs)  Defend subscriber market share
x.x Debt/EBITDA  Complete investment in 4G coverage
3.7x
 Additional sites
1,11,332  Small cells
7.7x 8.9x  Enhance 4G capacity
60,000 57,158  Fibrisation of towers
 MIMO
 Pare down debt (Specific to Voda-Idea)
 Roll out FTTH
Airtel Vodafone Idea

Reliance Jio investment

(Rs cr) Likely priority of R-Jio

1,40,000
As data usage
 Gain subscriber market share increases, tower
coverage
 Enhance 4G capacity
reduces by ~20-
 Roll out FTTH 25%
50,000

Mobile broadband FTTH (announced)

14
Mobile broadband has grown faster than fixed broadband (Fibre) even in developed
telecom markets

15
 Key Questions

Why is this interesting? Operators will have to invest in infrastructure soon:

• Networks are already choked
• Data usage set to rapidly increase as smartphone penetration
increases
• Operator options are limited – mobile broadband likely to be priority

Is this a fair valuation? Growth is not priced in:

• Current valuation takes a very short term view and implies no
growth for the long term

Downside is limited, rather there is some margin of safety

• Valuations in line with forced sales of relatively weaker assets

Are growth assumptions reasonable? Infratel likely to get disproportionate share of new tenancies:
• Limited options due to Tower Co consolidation
• RoFR with 2/3 relevant operators

Key risks:
• Jio’s strategy
• Reduction in rentals / renewals
• Solvency issues for Voda-Idea
• Regulatory (Active Infrastructure Sharing) 16
 Despite a fairly reasonable financial performance in a consolidating sector …

Least impacted during

FY16 FY17 FY18 CAGR consolidation due to tenant
profile; other Tower Cos
Total Towers # 88,808 90,646 91,451 1.5% have lost ~20-40%
Total Tenancies # 1,95,035 2,10,606 2,05,596 2.7% tenancies
Tenancy ratio x 2.2 2.3 2.2
Revenue/tower/month Rs 74,513 78,318 82,094 5.0% Highest rentals in the
Revenue/tenancy/month Rs 34,499 34,648 35,918 2.0% industry

Revenue Rs cr 12,313 13,437 14,489 8.5%

EBITDA Rs cr 5,447 5,942 6,472 9.0%
PAT Rs cr 2,247 2,747 2,493 5.3%
Capex Rs cr 2,124 2,178 2,182

Operating Cash Flow Rs cr 3,288 3,721 4,202 13.0%

AFFO Rs cr 4,937 5,395 5,867 9.0% Strong cash flow metrics
Net Debt Rs cr -6,041 -3,512 -5,171 -7.5%

EBITDA % % 44% 44% 45%

PAT % % 18% 20% 17%
ROCE % % 27% 30% 34% Very healthy return on
ROE % % 20% 25% 26% capital

AFFO is Adjusted Fund Flow from Operations (ie Cash Flow adjusted for Maintenance capex) 17
 ... Negative perception of sector has adversely impacted stock price …

Sector consolidation starts

for operators & tower cos

At CMP, Consolidated Infratel trades at 7.5x EV/TTM EBITDA

Which is a 20% discount to the 9.3x EV/TTM EBITDA multiple ascribed for Indus (Apr-18) as part of merger
EV / Tenancy is at Rs 25 lakh which is a 10% discount to comparable M&A transactions

18
 … As also have certain technical issues

Holding Company Discount • Previously Indus was a 42% subsidiary of Infratel

• This should go away now that the company has been merged

Independence of operations • Independent tower cos get higher multiples vs captives

• Despite being Airtel controlled (ie captive), Infratel has better
financial metrics including highest Average Revenue per Tenancy
in the industry

Overhang of Airtel’s and • Airtel has been monetising its stake to raise capital for debt
other shareholders stake retirement / fighting Jio
• Post merger, other shareholders are also likely to sell / monetise

19
 Growth is not priced in this valuation …

Single Tower DCF Results

Avg revenue / 35,400 EV / Single Tenancy Rs 25.6 lakhs

tenant / month
EV / Single Tower Rs 59 lakhs
Escalation 2.6%
EV / TTM EBITDA 7.6x
Spread on
1,000
other services
--- x 2.3 tenancies --- EV for 3.67 lakh Rs 93,971 cr -13.6%
Cash Flow / tenancies*
61,065 discount
tower / month Implied Market Cap** Rs 88,412 cr
Maintenance 4,000
capex
EV for 1.63 lakh Rs 96,254 cr -15.7%
FCF (post tax) towers
discount
/ tower / 51,765 Implied Market Cap** Rs 90,695 cr
month

Discount rate 13% Current Market Cap Rs 76,420 cr

Terminal 2.6%
growth

Note: DCF assumes that Infratel will deploy FCF at the discount rate – however Infratel has
maintained a 30%+ ROCE, ROCE on incremental capex is higher

* EV / Tenancy x Tenancies
** Enterprise Value (EV) less Net Debt 20
 … And is in line with recent forced sales of far lower quality

EV/ EV/
Buyer Seller Date Towers Tenancies EBITDA Tenancies

TTM x Rs lakhs

May-18 ~43,600 ~40,000* ~40x* ~22 Forced seller

May-18 ~20,000 ~27,000* ~13x* ~29 Forced seller

2nd innings
Mar-17 ~89,800 ~198,000 ~10x ~33
for KKR

Strategic
Oct-15 ~40,000 ~97,000 ~11x ~23
investor

Each of the above is a $1B + transaction

* Post tenancy losses / clean-up for exiting operators 21

 Key Questions

Why is this interesting? Operators will have to invest in infrastructure soon:

• Networks are already choked
• Data usage set to rapidly increase as smartphone penetration
increases
• Operator options are limited – mobile broadband likely to be priority

Is this a fair valuation? Growth is not priced in:

• Current valuation takes a very short term view and implies no
growth for the long term

Downside is limited, rather there is some margin of safety

• Valuations in line with forced sales of relatively weaker assets

Are growth assumptions reasonable? Infratel likely to get disproportionate share of new tenancies:
• Limited options due to Tower Co consolidation
• RoFR with 2/3 relevant operators

Key risks:
• Jio’s strategy
• Reduction in rentals / renewals
• Solvency issues for Voda-Idea
• Regulatory (Active Infrastructure Sharing) 22
 Quick Re-cap
4G user using 11GB/month today

Avg data per smartphone ~3x in 5 years

7.5 lakh tenancies in industry

(pre-Voda-Idea rationalisation)
Only 2 relevant players left

23
Each operator will need ~4-5 lakh sites in 5 years to adequately provide 4G

Coverage Capacity

Tower coverage shrinks with 4G usage Capacity enhancements required PER

180k additional sites needed in next 2 years OPERATOR to support data growth till FY23

Additional
Sites Sites 70-100k 440-500k
4G sites
required for required for Current
required 70-100k
2G coverage 4G coverage 4G sites
for
per operator per operator 70-100k
coverage
230k
Airtel 180k 50k
Voda- 180k 230k 170k 60k
Idea

R-Jio 160k 70k

510k 180k Base 4G + Sectors / MIMO Small cell FY23 site

Total coverage site coverage

Translates into 12-15 lakh site requirement for all 3 operators by FY23

24
Infratel/Indus can get ~66% share of new tenancies in an oligopolistic market

300k 1230k
15% tenancy
volume CAGR
950k
-200k 180k

-50k

700k in FY19
4G coverage
consolidation

4G capacity

FY23 sites
Voda-Idea

Voda-Idea
Loss Pre-

losses
Pre-

R-Jio tenancies will be split between Indus/Infratel, ATC and others smaller players
25
There is significant scope of telecom infrastructure management beyond 2023

Telecom Network Evolution

Source: Indus Towers

Smart Cities, Fibre Management, 5G network roll-outs

26
 At what points should we re-evaluate our thesis (1/2)

• Jio’s strategy  Jio has stated 50% market share target

 Continued aggressive strategy could force Airtel, Voda-Idea to de-prioritise
roll-outs

Current View:
 Incremental Jio customers are going to have higher acquisition costs
 $10 bn FTTH plan could cause revision of 50% plan to ~30%
 May in reality target 30% share (another 6-9 months) before stabilizing
ARPU

• Reduction in rentals  Jio’s strategy, financial pressure could force Airtel / Voda-Idea to drive
/ renewals hard bargains on renewals

Current View:
 Operators don’t have choice due to tower co consolidation, RoFR
 Infratel remains Airtel’s / Vodafones last valuable and monetisable asset
for funding 4G and later 5G rollout

27
 At what points should we re-evaluate our thesis (2/2)

• Solvency Issues • Stretched balance sheet, network quality behind R-Jio & Airtel, Vodafone
wrt Voda-Idea non-commital
• Voda-Idea could lag network roll-outs or shut down resulting in India
becoming a 2 player market

Current View:
• No large market in the world is a two player market
• In worst case, Voda-Idea could be acquired. Though there is a risk that roll-
outs could be slower

• Regulatory changes • Active Infrastructure sharing (sharing of radio and antenna capacity) if
wrt Tower Cos introduced could free up significant capacity

Current View:
• Operators especially the market leader is unlikely to support such a move
as it will affect them most

28
 Idea execution

• Risk of being early in the trade, decent probability of no significant triggers playing out in next 6-9 months

• Voda-Idea overlap of tenancies will resolve as integration is undertaken, could keep stock price depressed

• Airtel and other shareholders (Vodafone, Idea, Providence) are likely to keep diluting stake to fund 4G, 5G,
FTTH roll-outs. Could have an overhang on stock price

• Better to spread initial buying over few quarters and track tenancy growth before increasing position size

• Patience to hold over 4 years

--- END ---

29
@gordonmax

gdsouza@gmail.com