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Last week I received an email in regards to Bharti Infratel’s IPO. We do not invest in IPO’s as it is hard for us to grade quality & performance grading and also believe that you get better opportunity to buy from secondary market at discount price.

After reading through the prospectus, my first impression in regards to this business model and segment was positive. They would have almost sold me their business with those attractive numbers of subscribers and how telecom industries need more towers in the future.

It is also very easy to understand the business model of Bharti Infratel. They invest their shareholders money in building and running telecom towers and rent them on long lease in range of 5 -15 years to all the telecom operators.

Does it sound attractive business to you so far? Please don’t even think of starting your own business and become one of the competitors of Bharti Infratel. You are better off investing in property market or somewhere else.

We always ask investors to look for five characteristics before investing in any business.

  • The future prospects of the business should be attractive
  •  and the business should be not highly leveraged,
  • return on equity should be high and should be sustainable
  •  with competitive advantage
  •  cash flow should be positive.

To get a better picture of its business performance we created this table sourced from the financial information provided in prospectus.

 

2008

2009

2010

2011

2012

Jun 2012

Contribution by Shareholders

Rs 10,255.26 Crore

Rs 10,351.69 Crore

Rs 13,627.57 Crore

Rs 13,994.92 Crore

Rs 14,524.21 Crore

Rs 14,682.39 Crore

Long Term Borrowings

Rs 3025.58 Crore

Rs 1,377 Crore

Rs 3,966 Crore

Rs 3717 Crore

Rs 2,388.81 Crore

Rs 2,218.15 Crore

Debt Ratio

28%

11%

23%

26%

16%

14%

Net Profit

Rs 40.37 Crore

Rs 195.24 Crore

Rs 252.97 Crore

Rs 551.48 Crore

Rs 750.73 Crore

Rs 213.07 Crore

ROE

2%

2%

4%

5%

 

Surplus/Deficit Cash flow

-Rs 4,970.49 Crore

-Rs 2,588.97

-Rs 970.71 Crore

-Rs 98.98 Crore

Rs 1,185.30

Rs 139.44 Crore

Now consider this as business proposition, in real terms it is one of the business proposition! Bharti Infratel promoters and shareholders have placed an offer to general public and other investors for around 21% of their business equity and are looking for the buyers to buy their business valuing it for in the range of Rs 39,660.60 Crore (Rs 210/ share) to Rs 45,326.40 Crore (Rs 240/share).

Looking at the above table, we are happy with this business leverage and also buy the story of the future prospects. I am also happy with their cash flow standing as they are self sufficient with their investments and are generating enough surpluses from their operations recently but not convinced to invest looking at its return on equity.

If you are a short term trader and have invested in this business for small profits and are speculating then good luck for this hand! But if you are a long term investor and looking to hold this business for long then think again as Banks risk free fixed terms are giving better returns (in range of 8% – 9%) then this business.

Value Operations fund does not own any shares or offered any price in the IPO of Bharti Infratel.