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VIL pain showing in cash conversion for Indus

Indus Towers’ (erstwhile Bharti Infratel) proforma (post-merger) EBITDA was 4% higher than expected at Rs35bn (up 15% YoY) due to lower than expected expenses. Net tenancy addition was lower at 2,917 (I-Sec: 3,500), impacted due to natural calamities. However, we are concerned about the sustainability of strong tenancy adds as Bharti Airtel and RJio recently bought huge spectrums, which may negatively impact capacity-led tenancy demand, which indeed drives the sharing ratio.

Also, Vodafone Idea’s (VIL) going concern risk has increased as reflected in rising receivables, or reduced cash conversion. We have raised our EBITDA estimates for Indus Towers by ~2% each year for FY22E and FY23E on lower expenses, but cut our DCF-based target price to Rs232 (from Rs265) as we increase our WACC to 12.7% (from 11.4% earlier). Maintain HOLD.

* Gross tenancy additions normalise to 3,123: Indus’ net tenancy base rose by 2,917 on the back of gross additions, which increased to 3,123. The growth must have come from Bharti Airtel’s continued network rollout and was likely driven by both coverage and capacity requirements, in our view. Tenancy churn rose to 206, which has substantially dipped. Our concern is on rising single tenancies, which puts pressure on margins. Also, Bharti Airtel and RJio bought huge spectrums in the 2021 auctions and this may impact capacity-led tenancy demand.

* Rental per tenant (RPT) rose 4.2% YoY to Rs42,730. The increase in RPT could be attributed to rising single tenant towers and falling sharing ratio in addition to strong rollout of loading by anchor tenants. The rise is despite the negative impact of equalisation on RPT. Number of tenancies for which exit notices have been issued but equipment not removed, dip to 4,535 (vs 4,711 in Q3FY21).

* Adjusted for Ind-AS 116, EBITDA was up 17.7% YoY to Rs28bn: Indus’ revenues rose 11.7% YoY to Rs68bn; within it, rental revenues rose 8.1% YoY to Rs42bn. Energy revenues grew 18.1% YoY to Rs26bn. EBITDA had benefited from 57% YoY dip in other expenses to Rs1.2bn in Q1FY22 and maintenance cost increased only 5.7% YoY to Rs3.3bn. Adjusted for Ind-AS impact, EBITDA was up 17.7% to Rs28bn, of which energy EBITDA was at a negative Rs606bn (vs negative Rs729mn in Q1FY21) and rental EBITDA was Rs28.5bn, up 16.7% YoY. Other income declined 22% YoY on cash utilised for dividend. Net profit rose to Rs14bn, up 26% YoY. Capex was low at Rs7.5bn (11.1% of revenues) and net debt stood at Rs56bn (down by Rs2.7bn QoQ).

* Receivables rose 37.6% QoQ to Rs52.7bn: Receivables rose by Rs14.4bn QoQ, of which the company has mentioned 25% was due to timing issue (it got resolved in July’21), and remaining was due to support a customer that has delayed payment. Company has exhausted the advances paid by VIL at time of merger. Indus finds comfort from the security package given by VIL, which is valid for two years from date of merger.

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