Notwithstanding drummed up market-hype, promoters’ penchant for external funds, perennial restructuring of group entities, poor distribution record, corporate governance issues, steep pricing when industry is in dumps, etc., etc. advise caution.

 

OFFER AT A GLANCE
Name	Bharti Infratel Ltd
Offer Quantity	Fresh issue of 14.62 cr shares of Rs 10 each and Offer for Sale of 4.27 cr shares
Offer % on Total Equity	10% on Rs 1888.64 cr
Offer Price	Between Rs 210 and Rs 240
Offer Amount	Between Rs 3967 cr and Rs 4534 cr
Application Quantity	50 & Multiples of 50
Bid/Offer Opens	December 11, 2012
Bid/Offer Closes	December 14, 2012
Lead Managers	13-member team led by DSP Merrill, J.P. Morgan, Standard Chartered and UBS Securities
Registrar	Karvy Computershare

 

The Offer

Public Issue of 18,89,00,000 equity shares consisting of a fresh issue of 14,62,34,112 shares and an Offer for Sale of 4,26,65,888 shares by Compassvale (30,046,400 shares), GS Strategic (60,09,280 shares), Anadale (36,05,568 shares) and Nomura (30,04,640 shares).

The offer is being made through book building route with a price band of Rs 210 to Rs 240 valued between Rs 3,967 cr and Rs 4,534 cr. Investors should apply for a minimum of 50 shares and multiples of 50 thereafter. A discount of Rs10 to the issue price is being offered to Retail Individual Bidders. Retail discount will not exceed 5% of the issue price.

Of the issue, 50% (9,44,50,000 shares) is available for QIBs. Not less than 15% (2,8335,000) is earmarked for Non-Institutional category and not less than 35% (6,61,15,000) is reserved for Retail Investors.

The equity offered through the IPO amounts to just 10% of the company’s post-issue capital of Rs 1888.64 cr. Interestingly the company’s issue advertisement misreads the post-issue capital as “more than Rs 40,000 million”! So much so is the accountability of the 13-member book running lead manager-team towards the investing public!  

 

Issue Object

The funds raised through the fresh issue (amounting to between Rs 3070 cr and Rs 3510 cr) are to be deployed as follows: Rs 1087 cr towards installation of 4,813 new towers; Rs 1214 cr on upgrading and replacement of existing towers; Rs 639 cr. on green initiatives at tower sites and the balance for  `general corporate purposes’.

 

Facts, figures and fiction that mar the reputation of India’s Telecom Czar

Bharti Infratel may have the distinction of floating the biggest IPO in two years. But, what about its disclosure-standard with regard to the history and track record of the promoter? The offer document does not reveal more than the following:

“The promoter of the Company is Bharti Airtel. The Promoter currently holds 1,500,000,000 Equity Shares, constituting approximately 86.09% of the pre-Issue issued, subscribed and paid-up capital of the Company and will continue to hold a majority of the post-Issue paid-up share capital of the Company.

The Promoter was incorporated as a public limited company under the Companies Act on July 7, 1995. The registered office of the Promoter is situated at Bharti Crescent, 1, Nelson Mandela Road, Vasant Kunj, Phase-II, New Delhi 110 070.

The Promoter is engaged in the business of providing telecommunication services. It offers mobile voice and data services, fixed line, high speed broadband, internet protocol television (IPTV), Digital TV services, ICT solutions for enterprises and national and international long distance services to carriers.

There has been no change in control or management of the Promoter in the last three years. The equity shares of the Promoter are presently listed on the BSE and the NSE.”

Do the management, investment bankers and market regulators think that the above disclosure is adequate and the history and track record of the promoter is not necessary in the offer document? The over-confident merchant bankers argue that since Bharti Airtel is a listed company and its details are already in the public domain they did not deem fit to include in the issue prospectus. But, do the novices presently occupying the merchant bankers’ chairs Know how many times did the promoters de-merge and re-arrange their businesses since they went public in 1986, and who benefited the most out of the perennial restructuring?    

For starters, Bharti Airtel did not go public in its present format. The company was listed in the first quarter of 2002 under its previous avatar Bharti Tele-Ventures (BTV). As a holding company, BTV tapped the market in January/February 2002 in order to fund its subsidiaries Bharti Cellular and Bharti Mobile. BTV offered Rs 10 paid-up shares at a price of Rs 45 a piece. The company had the audacity to state in the offer document that it will not distribute any cash dividend and those who wanted dividends should not apply for the issue!

After going public, the promoters once again played the re-arrangement game. Major subsidiaries’ operations were merged with the public company, the name was changed and face value of the share was split from Rs 10 to Rs 5. Post-consolidation, the company’s market capitalization zoomed to over Rs 2,18,000 cr in 2007.

Though reached its pinnacle through constant restructuring, the company could not sustain its position and the market cap started receding fast. As if to arrest the downtrend, the management broke its own promise of not paying dividend and paid a maiden dividend of 20% in 2009. Since then it has maintained the dividend. Bharti’s high standing in the telecom industry may be indisputable but, the group’s reputation is far from convincing to retain investors for long time.  Whereas companies like TCS, despite the IT slow down, has more than doubled its market cap (from Rs 1,10,000 cr to Rs 2,40,000 cr) in last five years, Bharti’s m-cap has crashed from Rs 2,18,000 cr to Rs 1,21,000 cr during the period. The uncertainties faced by the telecom sector may drag Bharti further in the foreseeable future.  

The promoters’ maiden public venture, Bharti Telecom Ltd (BTL), has a different story. Promoted in technical collaboration with Siemens AG of Germany, BTL went public for the first time in November 1986. Floated as “your hotline to the world of telecommunication”, the issue highlights read thus: “First private sector organisation to manufacture telephones; Low break-even at 28 per cent; No gestation period — commercial production to commence by December 1986; First year’s production already sold to Mahanagar Telephone Nigam Ltd & others; Dividend assured for first full year of production”; etc, etc.

BTL commenced commercial production in June 1987, six months behind schedule. But, what really stunned the shareholders was the time that the company took to reward its shareholders. As against the issue-promise of “dividend in the first full year”, it actually paid dividend after three years! And, the maiden dividend was followed by yet another public issue at a price of Rs 25 per share! One of the present lead managers of Bharti Infratel, Standard Chartered, was the lead manager of BTL issue in 1991.

Profit making and 18 per cent dividend paying company, earnings per share of Rs 8.48 and share being offered at Rs 25 against market price of Rs 52.50 — all these were good enough to sell a Rs 6.75 cr-issue in April 1991. The issue was sold solely on the performance highlights of 1989-90. BTL’s equity increased from Rs 1.65 cr to Rs 4.75 cr through the second public issue. But, the company’s bottom line dropped from Rs 1.40 cr (in March 1990) to just Rs 87 lakhs in March 1992! And, the “18 per cent dividend paying company” pruned down the dividend to 10 per cent. Interestingly, for the first half of 1992-93, BTL reported a remarkable jump in turnover and profits. Nevertheless, the “quantum jump” was followed by a rights issue at a price of Rs 30 per share January 1993!

In the aftermath of the Big Bull’s revelation, in order to refurbish its own image and also to sell the rights issue, BTL came out with catchy ads. One of the advertisements revealed the “facts, figures and fiction” that made BTL India’s premier telecom company. The advertisement, besides other things, read as follows: “Bharati Telecom is a company that has carved a niche in the telecom business with over a decade of excellence in the field. Over these years, the company has bagged several prestigious orders from DoT & MTNL through hard work and dedication. Bharti has pioneered telecom in India, by bringing world telecom know-how into the country, thus paving the way for others. Excellent after-sales service and the quality of its products have taken Bharti to the forefront of the Indian telecom market. Bharti Cellular’s bid for the cellular licences in India was so impressive that the tender evaluation committee recommended that the company be given the licences for all 4 metros. The facts and figures speak for themselves. Bharti Telecom is today a leading telecom company. See for yourselves. It’s no fiction”! As a matter of fact, the advertisement presented only one side of the “true story”.

After completing the rights issue, thereby enlarging the capital base from Rs 4.76 cr to over Rs 6.3 crores, BTL started reporting dismal performance and the scrip price fast receded. When the shares were languishing way below the par value, the promoters slowly accumulated almost all the floating stock at a throw away price and pocketed the company. Thus the assets created and licences obtained using the public company’s funds became the promoters’ own when they de-listed BTL from the exchanges. But, for Bharti’s management, the sagging past record seems to be outside the purview of their “facts, figures and fiction”. When “fiction” becomes “fact”, no wonder that facts are forgotten!

 

Status and Future of Bharti Infratel – an offshoot of Bharti Airtel

When the flagship Bharti Airtel’s prospects are sagging, its subsidiary Bharti Infratel (BIL) is now being used to raise funds. BIL was formed in November 2006 with the main object of setting up, operating and maintaining wireless communication towers. As per a “Scheme of Arrangement” between Bharti Airtel and BIL the former transferred its “telecom infrastructure undertaking” to the latter in January 2008. Bharti Airtel currently holds 150 cr equity Shares, constituting approximately 86.09% of BIL’s pre-issue paid-up capital.

Meanwhile BIL entered into a joint venture agreement in December 2007 with Bharti’s competitors Vodafone India and Idea Cellular to form an independent tower company (“Indus Towers Limited”) to provide passive telecom infrastructure services in certain specified telecom circles. The subsidiary, Indus and some of the Group Companies namely Africa Towers Service, Airtel Towers (Ghana), Airtel Towers (SL) Company, Burkina Faso Towers S.A., Congo RDC Towers S.P.R.L., Congo Towers S.A., Gabon Towers SA, Kenya Towers, Madagascar Towers S.A., Malawi Towers, Niger Towers S.A., Rwanda Towers, Tanzania Towers, Tchad Towers S.A., Towers Support Nigeria, Uganda Towers, Zambian Towers, Bharti Hexacom, Bharti Infratel Lanka and Bangladesh Infratel Networks are engaged in the business similar to that BIL

Even while operating “Telecom Infrastructure” business on its own, BIL made a `Scheme of Arrangement’ for transfer of passive telecom infrastructure undertaking in 12 telecom circles to a 100% subsidiary, Bharti Infratel Ventures Ltd (BIVL) retrospectively from April 1, 2009,  which was made effective in May 2011. Interestingly, on May 31, 2011, BIVL filed a scheme of merger before the Court whereby BIL’s subsidiary BIVL will merge with Indus Towers with effect from April 1, 2009! After this merger, what would be the equation between BIL and Indus Tower is not spelt out. When competitors and joint venture partners Vodafone and Idea have floated separate companies for passive telecom infrastructure, how secured is BIL’s future? The offer document does not throw any light on this.

 

Sagging business prospects

Besides the long term uncertainties BIL also faces some immediate problems. Notwithstanding the stringent penalty clause, the company may be unable to collect some or all of the termination fees from the telecommunications service providers who have terminated their co-locations as a result of cancellation of their 2G licenses pursuant to an order of the Supreme Court of India. The operations may also be affected by lower demand for new towers or co-locations at existing towers. Further, increasing competition in the tower industry and increasing tariff pressures on BIL’s and Indus’ customers may create pricing pressures that may adversely affect the company’s business, prospects, cash flows and financial condition.

 

Valuation 

Conveniently BIL’s offer document claims that there were no listed companies in India that can be directly comparable to BIL and hence no comparison with industry peers. However, the fact is, there is a listed company, GTL Infra, whose performance is pathetic.  BIL may not be comparable with GTL Infra but, can it be discounted more than its parent Bharti Airtel on whose prospects that the company is largely depending at present?  Bharti Airtel is currently discounted about 20 times its earnings. Compared to this, BIL is priced more than 48 times its earnings even at the lower end of the price band.

How Bharti Infratel compares with Parent & Peer
SCRIP	NOS.	M-CAP	P/E	P/BV	P/FV	P/R	P/NB	OPM	YLD	PRICE
(Unit)		(Rs Cr)	(X)					(%)		(Rs)
Bharti Airtel	1	122,432	19.5	2.5	64.5	2.9	3.0	34.0	0.3	322.40
GTL Infra	1	1,779	–	0.7	0.9	3.2	0.4	51.6	0	9.20
Market Composite	2,965	6,808,542	16.2	2.2	31.2	1.3
Bharti Infratel	High	45,327	55.7	2.9	24.0	4.4	2.5	37.4	0.6	240.00
	Low	39,661	48.7	2.6	21.0	3.8	2.2	37.4	0.7	210.00

 

Dividend Policy

The promoters who virtually dictated in 2002 that cash dividend-seekers should not apply for their issue have played tricky this time. BIL’s offer document reads: “During the quarter ended September 30, 2012, the company declared and paid `Interim Dividend’ for the financial year 2012-2013 at the rate of Rs 2.50 per equity share which includes Rs 1.50 per share aggregating to Rs 261.36 cr paid out of the accumulated profits earned up to March 2012 and Rs 1.00 per share aggregating to Rs174.24 cr paid out of the profits during the fiscal 2013.

Why should people who don’t believe in distributing cash dividend declare an unusual interim dividend and fleece the company to the tune of Rs 435 cr on the eve of the public issue? Well, by doing so, they have made it a dividend paying company without an obligation to pay full dividend to the public shareholders!