Today's Top Gainer
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India is emerging to be the fastest growing economy in the world. As per Indian Monetary Fund, in the upcoming 10-15 years, India will be one of the top three economies in power held by strong democracy and partnerships. The estimated GDP growth for FY 2018 stands at 7.3%.
There were some major domestic policy developments in 2017 first being the new taxation regime i.e. implementation of Goods and Services Tax which incorporates all the indirect taxes and ceases into one. Secondly, bank recapitalization worth Rs 2.11 Lakh Crore along with Insolvency and Bankruptcy Code, announced to face twin balance sheet problem in India.
The Union Budget for 2018-19 focuses on upliftment of rural economy and agricultural sector. It also includes provisions related to improvement of healthcare facilities for the underprivileged, creation of infrastructure and improvement in quality of education.
According to IMF, global growth is expected to rise by 3.7% in 2018 leading to a boost in Indias exports. The reform measures taken in the previous year are expected to get better in FY19 leading to a better growth momentum. Various initiatives like Bharat Net and Digital India have been introduced to convert India into a digital economy.
In the coming years, India expects a potential growth to achieve the upper middle class income status with the help of digitization, reforms in practice along with the recovering global economic conditions.
Indian Telecom Industry overview
India is currently the worlds second-largest telecommunications market with a wireless subscriber base of 1.18 Bn Subscribers (as of Mar 31, 2018, source TRAI) along with being the fourth largest app economy in the world. Strong customer demand has led to a rapid growth in telecom sector. Easy access to telecom equipment and regulatory framework has ensured telecom services to customers at reasonable prices.
In 2017-18, the device ecosystem of 3G, 4G and VOLTE devices improved. According to Nokias India Mobile Broadband Index 2017, overall data traffic grew 144% in 2017, driven by surge in 3G and 4G data consumption. 4G data traffic grew exponentially due to cheaper data traffic and availability of locally relevant content. 4G traffic captured 82% share of total data traffic in December 2017. The gap between 3G and 4G coverage declined significantly. Increase in data traffic was accompanied by increase in data consumption with 4G usage at about 11GB/ user/month. Due to availability of affordable handsets, 3G and 4G device base grew. With 162 million VOLTE capable devices, there was 74% of LTE capable device base in 2017.
Key industry developments during the year:
1) Consolidation gathered pace with Bharti Airtels acquisition of Tata, Telenor and Tikona. Vodafone-Idea merger has also received all approvals except for DoT. RCOM announced it was shutting down wireless operations and its merger with Aircel has been called off along with sale of tower assets to Brookfield. Reliance Jio later announced that it has inked a definitive agreement with Reliance Communications (RCom) for the acquisition of wireless assets including spectrum, towers, fiber, etc. Aircel filed an application undertaking corporate insolvency resolution process under the Insolvency and Bankruptcy Code (2016)
2) National Telecom Policy 2018 was announced to enhance technological advancement in the sector
3) ATC Telecom Infrastructure Private Limited, which is a subsidiary of American Tower Corporation announced plans of acquiring Idea and Vodafones standalone towers for an enterprise value of Rs 7,850 crore.
4) Equity infusion at Idea with promoters infusing Rs 3,250 crores followed by a Qualified Institutional Placement of H3,500 crores aiming to reduce the Companys net-debt before the merger with Vodafone. The same amount is expected to be raised by Vodafone.
5) Nokia, along with Bharti & BSNL plan to work on development of 5G technology and creating an ecosystem for 5G
The Government of India, with the Digital India Program, plans to connect rural and remote regions in the country with principle of more usage and less payment because of new tariff structure. The Government also plans to auction the 5G spectrum in bands of 3300 MHz and 3400 MHz to promote Internet of Things along with Smart Cities Initiative.
Highlights of the Year
Foreign ownership touched an all-time high of 43.09% as on March 31, 2018 as compared to 8.65% at the time of IPO in December 2012.
Bharti Infratel was announced as the winner under the category Telecom Infrastructure Development by Dun & Bradstreet Infra Awards 2017. It facilitates exemplary performances, under various verticals of infrastructure.
Bharti Infratel has successfully qualified for the certification of ISO 9001:2015. This audit involved detailed assessment of methodology, documentation and on ground implementation. The company has achieved this in a record time of 3 months.
Regulatory changes in the sector
National Telecom Policy 2018
Department of Telecommunications has released consultative paper seeking inputs from all stakeholders and industry bodies on the draft National Telecom Policy 2018. TRAI has set objectives which will align with the governments agenda of rising up the ranks in ease of doing business in the telecom sector. The paper stated that these goals can be achieved by various initiatives like review of license fee, USOF levy, and spectrum usage charge, by declaring roadmap for availability and auction of spectrum in different bands.
DoT guidelines for common fiber corridor
DoT has issued guidelines to create a common OFC corridor along with all National Highways/ State Highways/District Roads/ Municipal Roads, which can be used by Telecom Service providers, Telecom Infrastructure Providers, Government telecom agencies, etc. This would increase optical fiber density in the country.
Right of Way Rules
Department of Telecommunications (DoT) Right of Way Rules, 2016 - Telecom Regulatory Authority of India (TRAI) has now formally recommended to DoT Secretary to revisit the Right of Way Rules released in November 2016 and include Infrastructure Providers-I in the same
TRAI recommendations on IBS
TRAI has responded to DoT that telecom operators and tower companies should be mandated to share in-building solutions (IBS) inside residential, commercial complexes and large public places such as malls, hotels and airports, to pre-empt any exclusive contracts, boost quality of indoor mobile coverage and minimize call drops
TRAI recommendations on approach towards sustainable telecommunications.
Following are the key recommendations:
a. Reduction in targets for carbon footprint reduction - the target for reduction in Carbon Emission be set as 30% by year 2019 - 20 taking base year as 2011 - 12 and 40% by the year 2022-23.
b. No targets for Renewable Energy Technology (RET) induction; Telecom Service Providers (TSPs) to voluntary adopt RET solutions, energy efficient equipment and high capacity fast charging storage solutions etc. to meet the reduction of carbon footprint.
c. No independent third party audit has been recommended and the report on carbon footprint reduction are required to be submitted annually.
d. TRAI has recommended that the government should pass all possible benefits related to deployment of RET power to the Service Providers as per extant government schemes.
Opportunities & Threats
High QoS demand by Government
The Indian wireless market is experiencing a rapid increase in demand for wireless broadband services, driven by Indias strong demographics and availability of wide variety of affordable handsets. The growth in wireless broadband has also been fuelled by virtual non-existence of fixed line broadband networks. There has been a multiplication effect in data usage as the number of users are increasing through increased smartphone penetration and per user data usage is also increasing with proliferation of relevant applications and rich content.
Operators have spent approx Rs 3,600 bn on the spectrum licenses since 2010 and are now intensely focused on growing the data story. During the recent times, leading operators have acquired spectrum to offer data services through 3G or 4G across all telecom circles. The strategy has been to acquire this additional spectrum through auctions or through spectrum trading deals. The leading operators have also increased their spectrum holding in select circles.
The expansion of 3G and 4G network services will require service providers to install additional active transmission equipment at the towers where they currently operate. In addition to this, we expect that the increasing proliferation of such services and the higher tower density required will lead to fresh demand for new towers and tenancies from customers. We are already witnessing demand for data only tenancies on account of densification requirements of the networks in Metros and Tier 1 cities.
New Revenue Streams
Considering the proliferation of data services through expansion of 3G / 4G network and infrastructure expansion across cities, we expect a likely surge in demand for small cells, fiberized backhaul, WiFi and In-building solutions (IBS) which are new revenue opportunities for tower companies. These will also be key to the Smart Cities - Digital India project which is one of the biggest focus areas of the Government of India.
Development of Smart Cities is a key initiative under the Digital India Program and the Government has already announced the creation of 100 Smart Cities. During the year, Bharti Infratel has been implementing the Bhopal Smart City project while our Joint Venture Indus won the bids for Smart city project of Vadodara and New Delhi Municipal Corporation area. For both the Companies, these projects will open a new avenue of business and we believe we can replicate the benefits of the shared infrastructure model in this segment as well. We shall assess all the available opportunities and businesses that are in accordance with the Companies philosophies and are value accretive. All such businesses will be taken up in consultation with the respective Board of Directors.
Brief update on the potential new revenue streams for the Company:
Fiber While wireless backhaul solutions such as microwave and millimeter wave remain significant for telecom networks, multi-fold increase in data-driven traffic warrant the need for further investments in fiber. Currently, we are evaluating various opportunities in this segment including offering of fiber connected towers to our customers;
IBS installations - In-building deployments are capacity solutions and are rolled out to create more bandwidth in a small area. These solutions are particularly helpful in Rsigh foot fall areas like Airports, Malls, Hospitals and Hotels etc. These solutions not only improve the user experience in the area but also free up macro network for street level coverage. We are deploying IBS network installations for our customers at high footfall locations;
Wi-Fi Hotspots - The Company is looking to foray into rollout of Wi-Fi hotspots and offer B2B Wi-Fi to all the operators on a non-discriminatory basis.
Low Rural Penetration Levels
Indian telecom market has a huge untapped potential in the rural areas. With wireless rural tele-density still at 58.7% (as of Mar 31, 2018, Source TRAI), there is significant headroom for growth in voice services currently and in data services over time in these untapped areas. The high cost of providing services and the ability to quickly deploy state of the art networks will translate into growth opportunities for the Company. Already, Bharti Infratel has a wide footprint in the Category B and C circles enabling the expansion of networks in rural markets.
The Indian telecom market has been witnessing operator consolidation with the number of operators reducing from 14 at its peak to <8 in the last year. Vodafone-Idea, Airtel-Telenor, Airtel-Tata, Airtel-Tikona, Reliance Jio-RCOM asset deals and Aircel, RCOM, MTS exits were among the notable events during FY2018. We believe potential consolidation amongst operators is positive for the industry in the long run because it would lead to financially-healthier larger operators vs. multiple smaller operators. While some of these transactions have led to rationalization in tenancies and are expected to continue to do so in the short-term, we believe any reduction in revenue on account of the overlaps will be more than offset by the exit charges as well as the incremental revenue on account of rapid rollouts by all operators.
Financial Health of Wireless Service Providers
During the year 2017-18, industry wireless revenues declined for the first time by 20% on a year-on-year basis, driven by entry of new operators and intense price competition. Bharti Infratels business and growth prospects mainly depend on demand from wireless telecommunications service providers in India and any deterioration in their financial health due to increased competition, adverse regulatory regime, general economic conditions, policy changes etc. can affect their ability to pay for infrastructure services and which in turn could adversely affect Bharti Infratels and Indus revenues and financial condition.
General Economic Conditions in India
The Indian economy witnessed slow growth over the last several years that hurt investor sentiment and the industry had postponed capex investment. The Government has assured to take all the necessary steps to revive the investment sentiment in the country. We are already witnessing initial positive signs; recent GDP growth fiscal discipline and steps towards inclusive growth; all are positive indicators.
EMF Radiation Norms
EMF radiations are the invisible electric and magnetic forces arising from the active infrastructure installed at telecom towers. In the recent past some people have raised concerns around the radiations and its ill effects due to which securing a site for new tower addition has become difficult in few pockets. This might affect tower company business adversely if proper information is not disseminated to general public. The EMF radiation norms in India are even tougher than Europe and non-adherence can invite hefty fines from the regulator. The Department of telecom (DoT) presented before the Honble Supreme Court of India that a small percentage of towers were exceeding radiation limits and were fined penalties. DoT has referenced on WHO report as well as 25,000 articles in the past 30 years to say that there was no confirmation of "any health consequences from exposure to low level electromagnetic fields."
Financial Results & Operations
On a consolidated basis the Company added 805 towers during the year, however net co-locations declined by 5,010 due to exits as a result of operator consolidation. As on March 31, 2018, average sharing factor stood at 2.30 times, on a consolidated basis (with a closing sharing factor of 2.25).
The Consolidated revenues for the year, at Rs 144,896 mn grew by 8% over the corresponding period last year. Our consolidated revenue comprises of primarily revenues from co-locations of Bharti Infratel and 42% economic Interest in Indus Towers and their energy billings.
As on March 31, 2018, Bharti Infratel and Indus Towers had average sharing factors of 2.29 (with closing sharing factor of 2.24) and 2.30 (with closing sharing factor of 2.25) per tower, respectively.
Consolidated EBITDA improved to Rs 64,272 mn up 8% Y-o-Y, representing an operating margin of 44.4%. Consolidated EBIT improved to Rs 40,339 mn up 11% Y-o-Y. The Operating Free Cash Flow grew by 13% Y-o-Y to Rs 42,021 mn for the year. The net profit for the year was Rs 24,937 mn.
The financial statements of the Company have been prepared to comply in all material respects with the Indian Accounting Standard (Ind AS) notified under section 133 of the Companies Act, 2013, read together with Rule 3 of the Companies (Indian
Accounting Standards) Rules, 2015 and Companies (Indian Accounting Standards) Amendment Rules, 2016 issues by the Ministry of Corporate Affairs.
Risks & Concerns
The following section discusses the various aspects of enterprise-wide risk management. Readers are cautioned that the risk related information outlined here is not exhaustive and is for information purpose only.
Bharti Infratel believes that risk management and internal control are fundamental to effective corporate governance and development of a sustainable business. Bharti Infratel has a robust process to identify key risks across its operations and prioritize relevant action plans that can mitigate these risks. Key risks that may impact the Companys business include:
Changes in Regulatory Environment
Despite huge improvements, the regulatory environment in India continues to be challenging. Regulatory developments will have significant implications on the future of telephony as well as Indias global competitiveness. Any adverse regulatory changes, changes in taxation and policies may affect the profitability outlook of the Company.
Natural Disasters Damaging Telecom Networks
The Companys telecom networks are subject to risks from natural disasters or other external factors. The Company maintains insurance for its assets, equal to the replacement value of its existing telecommunications network, which provides cover for damage caused by fire, special perils and terrorist attacks. Such failures and natural disasters even when covered by insurance may cause disruption, though temporary, to the Companys operations. The Company has been investing significantly in business continuity plans and disaster recovery initiatives which will enable it to continue with normal operations and offer seamless service to our customers under most circumstances.
Technological Changes Affecting the Tower Demand
The potential future demand for towers could be affected by technological changes and advancements. There have been some trials in the past of new technologies which can provide wireless broadband access by placing balloons or low orbit satellites in the air thus bypassing the need for towers.
None of these solutions have been commercially/technically deployed yet and the cost is also unclear. We dont foresee any risk in near future and the Company keeps assessing all the new technology advancements in the sector for better understanding and preparedness.
Summary & Outlook
Indias wireless tele-density is at ~91% (Mar 31, 2018) with ~1.18bn subscribers. However, wireless broadband penetration is still ~30% and internet speeds remain low vs. global standards, thus presenting a vast opportunity for growth for the country. This coupled with the Digital India initiative of the Government which aims to transform India into a digitally empowered society should lead to increased demand for data networks which bodes well for the Company.
Internal Control Systems
The Chief Executive Officer (CEO) and Chief Financial Officer (CFO) are accountable for financial controls, measured by objective metrics on accounting hygiene and audit scores. The Company has deployed a robust system of internal controls that facilitates the accurate and timely compilation of financial statements and management reports, ensures regulatory and statutory compliance, and safeguards investor interest by ensuring the highest level of governance and periodic communication with investors. The Audit and Risk Management Committee reviews the effectiveness of the internal control system across the Company and also invites the senior management / functional heads to provide an update on their functions from time to time. A CEO and CFO Certificate included in the Corporate Governance. Report confirms the existence of effective internal control systems and procedures in the Company. The Companys Internal Assurance Group also conducts periodic assurance reviews to assess the adequacy of internal control systems and reports to the Audit and Risk Management Committee of the Board.
The Company has enhanced its internal control systems across all circle operations by significantly improving the quality and frequency of various reconciliations, enhancing the scope and coverage of revenue assurance checks, segregation of duties, rolling out self-validation checks, regular physical verification, systems audits, desktop reviews as well as continuous training and education. Bharti Infratel is certified by British Standards Institution (BSI) on Information Security (ISO 27001) and
Business Continuity (ISO 22301) Management Systems. With regular trainings and awareness sessions, all Infratel employees have been certified in the same. We are extremely protective of our customers privacy and take reasonable measures to ensure the security of personal data that we collect, store, process or disseminate. Successful ISO certification reiterates our commitment towards providing our customers with a secure and trustworthy service. This is ensured through agreements and contracts which involve accessing, processing, communicating or managing the partners information.
In summary, the healthy balance between empowerment and accountability at every operating level fosters a culture of responsible growth and well-judged risk taking.
At Bharti Infratel, we believe people excellence is the foundation for building a culture of service excellence. Our aim is to sustain our fervor as an employer of choice and we have outlined our key focus areas during the year to achieve that goal.
We completed 10 glorious years of our establishment last year. For a ten year old organization growing at a steady pace, it is important that the organization culture is well defined and articulated amongst all employees. Infratel is a B2B company with little or no brand presence for the end customer, it is therefore imperative for us to make our presence felt as a preferred employer to potential employee segments enabling us to attract and retain the right fits from across industries. We realized that the first step to creating an employer brand was to define and articulate the culture for Bharti Infratel which will be our USP and differentiating factor as a brand for external and internal employees. We therefore conducted a study not only to define and articulate the culture at BIL but also create a transformation roadmap for enabling change and aligning our systems and processes to the organization and leadership expectation. The clear themes emerging out of the study were around Collaboration, People Orientation and Innovation.
Safety is viewed as a key parameter to demonstrate commitment to our people and the community at large. It is an integral part of our decision-making and is the prime consideration in all spheres of our activities. We have an effective Safety Policy in place that strives for zero fatality and prevents all workplace injuries. In order to ensure safe work practices, Cardinal Safety Rules and Consequence Management Matrix have been framed and implemented. This year to drive better awareness and consciousness on Safety we observed National Road Safety
Week (Jan 11-17) and National Safety Week (Mar 5-9), through Slogan contest, poster making, Safety quiz, My Safety Story, etc. Safety Training continues to be an area of focus where we ensure all new joiners complete mandatory safety training and existing employees go through refresher training.
With employee strength of nearly 1247 (on Standalone basis) spread across our 11 circles and 74 zones, Last Mile Connect continues to be critical to drive and uphold employee motivation, engagement and loyalty. Connect forums & open house sessions were held across locations. The teams were recognized for their efforts and they were made aware of the processes and policies. Special emphasis was placed towards induction and orientation of new employees.
In our continued endeavor to increase the Gender Diversity within the organization, we took an atypical route to attract women talent both at the field and non-field roles. We were successful in creating an audio visual depicting the opportunities, challenges and the work environment that we provide to our employees. We have seen positive traction with the overall Diversity Numbers move from 7% to 9.1%, and with field roles Diversity number improving from 4.9% to 12.5%. In order to retain our women talent, there in on-going effort to conduct Gender Sensitization workshops across geographies to increase awareness about the individual differences that both sexes bring to work. The two pronged approach of attraction and retention has shown sustainable results.
At Infratel, we strongly believe in identifying and developing internal talent to meet our growth objectives and drive business performance. Given the dynamic state of business in todays market, it is imperative that we proactively identify the weak spots and build capabilities of our mid-level leaders to be able to lead teams and deliver results even more efficiently & effectively. Addressing talent gaps and developing internal talent takes precedence at Infratel. The potential of our future leaders is critical to the organizations success and hence we follow a structured mechanism to assess and develop our mid-level leaders so as to build a sustainable pipeline of internal talent. This year, we carried out an extensive study to create the leadership success profile defining key behaviors from operations, business and people stand point. This was followed by an assessment of most of our mid-level leaders at BIL to understand the current level of potential and identify capability gaps against the leadership success profile. We have further built a focused and dedicated development approach for bridging the identified capability gaps and preparing them for future leadership roles.