Hold Indus Towers Ltd For Target Rs.205 - Emkay Global
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No respite from challenges
Indus Towers posted 2.7% qoq revenue growth in Q4, helped by the provision reversal of Rs5.5bn (Rs1.8bn in Q3FY22). Excluding the reversal, revenue missed our estimates, with weak tower and tenancy additions of 699 and 685, respectively.
EBITDA margins jumped 369bps qoq to 57.1%, while adjusted margin was flat on lower other opex. Energy margins, at -1.2%, remained negative for the eighth quarter in a row. Dividend payout impacted by lower cash conversion due to delayed payments from VIL.
Receivables declined by only Rs2.9bn, despite receiving Rs33.7bn from VIL, as payment delays on incremental billing continue. MSA renewal has been concluded with one customer with a rental discount; revenue loss will be recouped from incremental tenancies.
The dependency on a single customer for growth and rental discounts will keep operating performance under pressure. We trim FY23/FY24E EBITDA by 2.4%/2.5% and retain Hold with a revised TP of Rs205 (Rs270 earlier), cutting target multiple to factor in higher CoE.
Muted tower and tenancy adds lead to weak operating performance: The one-time reversal of a Rs5.5bn provision led to 2.7% qoq growth in revenue to Rs71.2bn. Adjusted for this reversal, revenue declined by 5.2% qoq and fell short of our estimates by 4.8%. Tower and tenancy additions remained weak, at 699 and 685, respectively, largely due to operators restricting capex spending. The sharing factor was stable at 1.81. Exits increased to 627 from 416 in Q3FY22. Reported EBITDA margins jumped 369bps qoq, supported by higher reported revenue and lower other expenses. Receivables fell only marginally to Rs70.6bn from Rs73.5bn in Q3FY22. The company has also completed its merger negotiations with a key customer for MSA renewal, while negotiations are continuing for another. With respect to the security package with VIL, Indus has also agreed to not invoke the security till July 15, 2022, subject to VIL paying a certain minimum amount each month, aggregating to Rs30bn. Indus announced dividend of Rs11/share (payout ratio of <50%).
Outlook: Indus’ business prospects continue to be dependent mostly on Bharti Airtel for incremental tower additions, supported only by single tenancy. While Vodafone PLC’s stake sale has helped to bring down the receivables marginally, VIL’s inability to raise capital will continue to restrict network investments. Further, the recently concluded MSA with a customer comes with a rental discount, which is negative for incremental revenue growth, which is already sub-par. Despite this, we are not building in lower ARPT due to the lack of disclosure from the management regarding new rental pricing. Timely payments from VIL on incremental billing even after MSA renewals (at discounted rates) lacks clarity.
Key risks: 1) faster-thanexpected 5G rollout; 2) higher demand of lean towers; 3) new revenue streams (smart cities, fiber, small cells, etc.); 4) timely payments and network investments by VIL; and 5) growth from Jio.
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