In its annual report to shareholders, Bharti Infratel Ltd’s chairman as well as its chief executive officer makes a case that the ongoing consolidation in the industry is a positive development for the company. “The consolidation leading to a few but strong participants is good for the tower industry in the medium to long term... (as these) financially stronger operators (would have) the ability and inclination for enhanced data networks," they say.

Investors, for some strange reason, are buying the argument. Infratel’s shares have risen over 40% from their lows in end-February to around Rs410, paying no mind to the fact that chief insider, parent company, Bharti Airtel Ltd, sold a large block of shares at Rs325 apiece only around three months ago.

Besides, it’s less than six months since the company lost close to $2 billion in value because of concerns that the consolidation among telcos will result in a drop in tenancies and lower revenues . Now the argument is pretty much being turned on its head.

Investors look hopelessly lost. Perhaps it’s true that the impact of consolidation among telcos may not be as bad an outcome for tower companies as was earlier expected. But to now conclude that the development is a net positive—Infratel shares are up 15% since Vodafone India Ltd and Idea Cellular Ltd said they were in merger talks—is absurd.

When companies merge, they no longer need as many towers and related infrastructure as they did when they ran separate operations. It’s true Vodafone and Idea said the overlap on tower tenancies amounts to only around 20% of the total, lower than some analysts’ estimates; but it’s also true that this fact was known before Airtel sold its stake in the company at a much lower valuation

Infratel’s management argues in the annual report that the reduction in revenue on account of the said overlaps will be more than offset by exit charges telcos have to pay when they prematurely terminate a contract, as well as the incremental revenue on account of faster rollouts by operators. “Jio is now expected to front-load its network expansion plans, to cater to a possible surge in demand after it launches its affordable feature phone," says an analyst with a domestic institutional brokerage.

Even so, it will be naive to expect this to offset the pressure on revenues owing to consolidation in the medium term. In any case, growth has already been slowing.

And as analysts at Kotak Institutional Equities wrote in a recent note to clients, it’s foolhardy to think that tower companies will prosper at a time when telcos are struggling. “We are amused with the Street’s increasing excitement on Bharti Infratel; tower companies derive their revenues (and ultimately their value) from the wireless industry that is under tremendous pressure. Can telcos continue to (refrain from) rationalizing their single-largest cost line item?" they ask.

One of the arguments used to support Infratel’s surge in valuations is that Airtel will sell down its stake in the company, besides which it will combine with Indus Towers and become an independent tower company, rather than one being controlled by a telco, who is also a customer. Some analysts point out that independent tower companies trade at higher valuations in overseas markets.

Be that as it may, it’s naive to gloss over the fact that consolidation will result in a fall in revenues, besides which, telcos will push for price cuts to stop/prevent losses. It’s high time investors did a reality check.

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