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Healthy tenancy addition but future outlook uncertain

Indus Towers’ Q4FY21 performance was driven by continued traction in tenancy addition and lower operating costs, depreciation, which led to beat at the PAT level. Revenues came in at | 6492 crore, down 3.6% QoQ on a like to like basis, with core rental revenues at | 4141 crore, down 4% QoQ. We highlight that Q3FY21 included exit penalty of | 400.2 crore, which has come down to | 181.6 crore in Q4. EBITDA came in at | 3413 crore, down 3.9% QoQ on a like to like basis, with EBITDA margins at 52.6% (down 17 bps QoQ). PAT came in higher than estimates at | 1364 crore (flattish QoQ on comparable basis), largely owing to lower depreciation (lower by | 100 crore QoQ) due to a change in accounting policy post-merger.

Tenancy addition robust; future traction key monitorable

On a gross basis, Indus added 5024 tenancies while gross exits were 896. Consequently, net addition of 4128 co-locations was reported, which is robust. The tower addition at ~3715 was also robust, led by both capacity/coverage expansions of telcos. We note that while Indus is “hoping” for continued healthy traction riding on network transformation due to data usage explosion, we would monitor tenancy addition ahead, with Airtel being the only tenant expanding at healthy pace. While Vodafone Idea (VIL) fund raising plans have not yet fructified, long term tenancy growth outlook remains uncertain. We expect net co-locations to reach 353509 in FY23 vs. current co-location count of 322438. We expect reported rentals (including exit rentals) to witness 2.8% CAGR over FY21-23E to | 17772 crore. We note that the management expects exit penalty at ~ | 180 crore a quarter in CY21 and | 100 crore/ quarter thereafter in CY22.

Lower costs, depreciation drive PAT beat…

Margins during the quarter were lower owing to lower employee and other costs. Furthermore, lower depreciation due to change in accounting policy also aided the PAT beat. While energy spread was negative in Q4 and FY21, the company continues to engage with telcos to get back to fixed cost model, which, it believes, will be win-win for everyone. We expect margins to remain flattish over FY21-23E at 51.1%.

Valuation & Outlook

The robust tenancy addition for second consecutive quarter is positive but sustainability ahead will be important. The key risk of VIL’s survival continues to remain. Moreover, while opportunities in adjacent areas (viz. small cells/smart cities/in building solutions/active network sharing) exist, these may fructify only over the long term. We maintain HOLD rating with a target price of | 245/share, implying 5.5x FY23E EV/EBITDA. We will closely monitor the developments of VIL fund raising and survival strategies, before changing our stance.

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