Why GTL Infra is still an ugly duckling for buyers

GTL Infra, the cellphone towers company that saw a phenomenal crash in its shares on Monday, continued its downward spiral on Wednesday. It fell by over 6% during the day to touch a low of Rs 15.55.

Within three trading days the stock has more than halved from the Rs 32 level it traded last Thursday. While the promoters have said that none of them have sold shares nor has any pledged shares been dumped in the market, speculators are circling around for the kill.

[caption id=“attachment_29681” align=“alignleft” width=“380” caption=“Big problems before GTI Infra head Manoj Tirodkar. Photo courtesy GTL Infra”]  [/caption]

The share collapsed on Monday when it became obvious that the company would not be able to raise equity immediately to reduce its huge debts - which are four times the equity base. The management has denied that it even went on a roadshow to raise $300 million, but the markets have taken this to mean that the promoters just can’t raise the money.

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This has prompted rumours that the company may be ripe for a takeover, but the numbers will deter most suitors.

GTL Infrastructure offers ready-to-use infrastructure (mainly cellphone towers) to wireless telecom operators. The company has 32,650 towers, out of which nearly 30,000 are believed to be operational.

The cost of setting up a tower is between Rs 5 lakh and Rs 50 lakh depending on the height and location. If we take the average cost of Rs 25 lakh, GTL Infra’s towers have a replacement cost of about Rs 8,000 crore.

Revenue for a company like GTL comes from the rentals paid by telecom companies using its towers. More than one telecom company can use the same tower. Average rentals per user per tower are currently around Rs 26,000 per month per tower. The cost of operating the tower is around Rs 10,000-13,000 per tower, depending upon the location. These days tower companies pass on the cost of diesel to the clients.

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The tenancy ratio (number of towers rented by clients against the total number of towers available) is one of the key parameters that analysts track to differentiate between two tower companies. This ratio for GTL Infra is in the range of 1.3, while for others it is in the 1.75-1.9 range. This means GTL Infra has fewer clients per tower compared to the competition.

On the financial front, the company has an equity of Rs 957.3 crore and a net debt (net of cash) of around Rs 10,000 crore. At the current price, GTL Infrastructure has a market value of Rs 1,500 crore. The enterprise value of the company is thus Rs 11,500 crore (market value plus net debt), which is at a 40% premium to the replacement cost of the towers. Few buyers would want to take on a company at this premium (paying an effective Rs 11,500 crore against assets of Rs 8,000 crore).

Even this premium looks too high if we consider the cash outgo till November 2012. GTL Infra has to provide Rs 1,400 - 1,500 crore for buying back its foreign currency convertible bonds (FCCBs), which are due for redemption. Apart from this there is a Rs 1,000 crore principal to be paid back to banks, which is due around that time. Given the numbers that we have worked out, it is extremely unlikely that these commitments can be met unless fresh funds are infused in the company. No surprise then, informed investors are bailing out.