Should you subscribe to Bharti Infratel's IPO?

Bharti Infratel, the telecom tower unit of mobile operator Bharti Airtel Ltd, is also set to launch its $825 million initial public offering (IPO). The IPO will open on December 10 for institutional investors and a day later for the public. It will close on December 14. The company has fixed a price band of Rs 210-240 for the offer.

A few analysts believe the lower end of the price band offers fair value. But does it?

There are no clues in the 594-page draft offer document the company has filed with the Securities and Exchange Board of India (Sebi). The company conveniently notes: "As there are no listed companies in India that are directly comparable to the business carried on by the Company, no comparison with industry peers is being offered."

At the same time, the advisors to the issue have refrained from making any comparisons with Indian peers or global telecom tower companies.

Be that as it may, there is one listed entity, a well-known one, in the telecom towers business: GTL Infrastructure. It is an independent tower company promoted by first-generation entrepreneur Manoj Tirodkar.

In 2010, Tirodkar was in negotiations to buy Anil Ambani's tower company, Reliance Infratel Ltd. However, the deal fell through because of valuation differences. Incidentally, Reliance Infratel had received Sebi approval in January 2010 for an IPO to raise about Rs 5,000 crore but did not go ahead with it.

The GTL Infrastructure stock, which has a face value of Rs 10 per share, is today worth Rs 8.64 per share. It's not hard to see why. The company is under financial stress - it incurred a loss of Rs 370 crore on a turnover of Rs 550 crore in financial year 2011/12.

GTL Infrastructure has gone in for a corporate debt restructuring (CDR) exercise and will take a while to emerge from it.  

Clearly, the mobile towers business is not an easy one to be in.

Many argue that GTL Infrastructure is not the best example for a comparison with Bharti Infratel because of its poor financial health. Tirodkar is also not considered a strong promoter. One of his companies, GTL Ltd, figured in scamster Ketan Parekh's infamous K-10 stocks.

One could perhaps draw a comparison with global companies American Towers and Crown Castle Corporation. The two companies have been doing the rounds in the past to make an acquisition in India's tower sector.

The price to earning (P/E) ratio is a good place to begin. This ratio indicates the expectations of investors from a stock. A higher ratio shows expectations of high sales and profit growth. Bharti Infratel has a P/E ratio of over 55, which is quite high. American Towers's ratio is 42, while Crown Castle International's P/E is very high, at 78. Bharti's P/E has been based on its consolidated earnings per share in 2011/12 and the higher end of the IPO price band, Rs 240 per share .

When it comes to the number of telecom towers, Bharti Infratel is much bigger than the other two companies. It has 34,000 towers of its own and another 110,000 through its subsidiary Indus Towers, in which it holds a 42 per cent stake. American Towers has over 50,000 towers in the US, Brazil, Chile and half a dozen other countries. Crown Castle has over 30,000 towers in the US and Australia.

Sales is another valuation parameter. The price-to-sales measure divides market capitalisation by sales. The lower the ratio, the better, and Bharti Infratel scores over its global counterparts on this front. Its price to sales ratio is at around 4.79 whereas American Towers's ratio is at 10.73 and Crown Castle's is 8.62.

Many use another measure, price to book, to value a company. This ratio takes into account the share price and the book value or the net asset value. Again, the lower the ratio, the better. At 0.94, Bharti Infratel has a very low price-to-book ratio compared to American Tower's 8.33 and Crown Castle's 6.68.

However, the Indian telecom sector, in which Bharti Infratel operates, is a turbulent one. It has had to grapple with the 2G spectrum allocation scam, cancellation of 2G licenses, tariff wars, and instances of over-leveraging that saw companies overpay for 3G licenses.

Not a great operating environment for any company.

So, while the numbers looks good, Bharti Infratel's future is directly linked to the fortunes of the struggling telecom sector. An indication of its troubles came from the poor response to the 2G auction last month.

Some of the facts are out there. So, is the pricing fair? Investors will make that call on December 10.

Read all about the telecom sector's travails in Business Today's latest issue.