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India’s richest man disrupted the Indian telecom market two years ago when his company, Reliance Jio, began offering free voice and data services to everyone for an initial three-month period. This offer was subsequently extended by another three months and Reliance Jio has since been offering the cheapest data plans in the industry and taking significant market share. Many telecom operators went bankrupt or were acquired and this has created some interesting investment opportunities in the Indian telecom sector, one of which is Bharti Infratel.
Bharti Infratel is a telecom tower operator in India. Its core business is building and operating telecom towers, which it leases to the three largest telecom operators in India, namely Bharti Airtel, Reliance Jio and Vodafone Idea. Reliance Jio’s entry decimated the Indian telecom sector, from more than ten operators in 2016 to only three major operators remaining. The demand for telecom towers has been severely reduced in the short term but with the merger of Vodafone India and Idea Cellular finally complete, the worst should now be behind Bharti Infratel and tenancies should begin to increase again.
We have identified Bharti Infratel as being a defensive investment with long term growth opportunities and have invested in it for these main reasons:
- Continued rollout of 4G – Mobile data usage has skyrocketed in India since the rollout of 4G in 2016, increasing by more than twenty times over a two-year period. In order to maintain a high level of service as well as increase 4G coverage, the telecom services providers will all need to lease additional telecom towers.
- Long-term growth – China and India both have three major telecom operators and a similar population size. However, India has less than half a million telecom towers while China has around two million telecom towers, which suggests significant long-term growth potential.
- Merger – Bharti Infratel is currently in the process of merging with Indus Towers, the largest telecom tower operator in India. Post-merger, the combined company will have more than 160,000 telecom towers and about 50% market share in terms of tenancies.
- Cheap valuation and strong balance sheet – Bharti Infratel is currently trading on a very attractive valuation having fallen more than 40% from its high in late 2017. Bharti Infratel also has no debt and a more than 4% dividend yield.
- Takeover target – KKR and the Canada Pension Plan Investment Board own 10.3% of Bharti and they have been rumoured to make a bid post-merger. Both Bharti Airtel and Vodafone have appeared keen to dispose their stakes in order to fund their network investment and a deal should be forthcoming as long as the price is right.
This stock is currently held by our International Fund.
This report has been prepared by Pengana Investment Management Ltd (ABN 69 063 081 612), Australian Financial Services Licence No. 219462) (“Pengana”). This report does not contain any investment recommendation or investment advice and has been prepared without taking account of any person’s objectives, financial situation or needs. Therefore, before acting on the information in this report a person should consider the appropriateness of the information, having regard to their objectives, financial situation and needs.
Pengana Capital Ltd (ABN 30 103 800 568, Australian financial services license number 226566) is the issuer of units in the Pengana International Equities Fund (ARSN 610 351 641) (“the Fund”). A Product Disclosure Statement for the Fund (“PDS”) is available and can be obtained by contacting Pengana on (02) 8524 9900. A person who is considering investing in the Fund should obtain the relevant PDS and should consider the PDS carefully and consult with their financial adviser to determine whether the Fund is appropriate for them before deciding whether to invest in, or to continue to hold, units in the Fund.
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