(INDUSTOW IN, Mkt Cap USD5.5b, CMP INR170, TP INR170, Neutral)
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– Indus Towers (Indus) reported a subdued quarter with revenue/EBITDA of +1/-2% QoQ (in-line/6% miss), due to flat rental revenue and continued VIL provision. Tenancy additions have lagged tower additions, which impacted its profitability adversely. Further, FCF turned negative due to high capex and the amount blocked in trade receivables, primarily due to VIL.
– Indus is benefiting from the aggressive site additions from Bharti along with the 5G rollout, but being single-tenancy sites, it could alter the return profile despite adding linear (single-tenant) sites. Further, VIL’s weak outlook and limited funding capability could: a) dilute tenancies in the near term, and b) increase risk on the long-term tower-sharing-led business model. Subsequently, we reiterate our Neutral rating on the stock.
Subdued earnings owing to weak rental segment
– Indus’ revenue grew 1% QoQ to INR71b (in line) led by energy revenue growth of 2% QoQ to INR28b, while rental revenue was flat QoQ to INR43b.
– The company added ~6k towers and only ~5.6k co-locations. This implies a reduction in the average sharing factor to 1.75x from 1.77x.
– EBITDA declined 2% QoQ to INR34b (6% miss), due to an increase in VIL provision to INR1.3b (vs. INR870m in 1QFY24).
– After adjusting VIL provisions, EBITDA was flat QoQ to INR36b (in-line) and the adjusted margin contracted 60bp QoQ to 49.8%.
– The increase in depreciation costs has led to a 4% QoQ decline in PAT to INR13b (12% miss).
– Adjusted PAT (after VIL provision) was flat QoQ to INR14b.
– For 1HFY24, FCF turned negative at -INR9b (vs. +INR2b in 1HFY23) due to higher capex of INR39b in 1HFY24 (vs. INR13b in 1HFY23). The company generated 3.5% FCF yield in FY23.
– Net debt (excluding lease) rose from INR10b in 1HFY23 to reach INR54b.
Highlights from the management commentary
– The demand for passive infrastructure will rise as a result of rising data consumption and the quick adoption of 5G networks.
– VIL continues to pay monthly payments until Oct’23, and Indus is working on another plan to clear-off past dues.
– Order book is healthy and likely to remain even stronger in the next couple of quarters. Hence, it is expected that the capex may remain elevated.
– As the network matures, the company expects the demand for new sites to increase in order to aid the network decongestion. The launch of FWA will also drive data consumption that will require infrastructure.
Valuation and view
– We believe that Indus has the potential to capitalize on Bharti’s aggressive network density and 5G rollout. The new smaller sites with sharing alternatives could also help the business economics, while churning in tenancies is a concern.
– On the other hand, VIL’s lack of ability to raise capital is a risk to its survival, which, in turn, hampers the company’s visibility. This could also limit the company’s ability to deleverage, generate FCF and pay dividends, thus posing a risk to the company’s financials.
– We factor in a revenue/EBITDA growth of 3%/23% in FY23-25E on a low base of FY23 due to VIL write-offs, and arrive at our TP of INR170, implying an EV/tenancy ratio of INR1.6m and an EV/EBITDA ratio of 3.9x. We reiterate our Neutral rating on the stock.