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Gross addition strong; visibility on sustainability low

Indus Towers’ (erstwhile Bharti Infratel) pro-forma (post-merger) EBITDA came in 10% higher than expected at Rs34bn (up 19.6% YoY) due to: 1) lower than expected energy losses, which has been unpredictable in past few quarters; and 2) lower other expenses and negligible CSR cost. Net tenancy addition was higher at 4,128 (I-Sec: 3,500) on higher tower adds (3,715). However, we are concerned about the sustainability of strong tenancy adds as Bharti / RJio recently bought huge spectrums, which may impact capacity-led tenancy demand, which indeed drives the sharing ratio. Also, Vodafone Idea’s going concern risk has not receded. We have raised our EBITDA estimates by 1-2% for FY22E/FY23E, and DCF-based target price to Rs265 (from Rs240) on roll-forward of valuation to FY22, but increase our WACC to 11.4% (from 11.3% earlier). Maintain HOLD.

* Gross tenancy additions strong at 5,024: Indus’ net tenancy base rose by 4,128 on the back of gross additions, which increased to 5,024 (vs 11,327 in FY21). This growth must have come from Bharti Airtel’s continued network rollout and has been likely driven by both coverage and capacity requirements, in our view. Tenancy churn rose to 896 (3,800 in FY21) likely utilising annual provisioning. Our concern is on rising single tenancies, which puts pressure on margins. Also, Bharti and RJio have bought huge spectrums in the 2021 auctions, which may impact capacity-led tenancy demand.

* Rental per tenant (RPT) dipped 5.3% YoY to Rs42,477. This can be attributed entirely to lower penalty revenues (Rs1.8bn vs Rs4bn in Q3FY21). The negative impact of equalisation on RPT was likely offset by fall in sharing ratio, while rising loading revenues also helped. Number of tenancies for which exit notice has been issued but equipment not removed, rose to 4,711 (vs 4,474 in Q3FY21).

* EBITDA rose 19.6% YoY to Rs34bn: Indus’ revenues rose 2.9% YoY to Rs65bn; within this, rental revenues rose 5.7% YoY to Rs41bn. Energy revenues declined 1.6% YoY to Rs23.5bn. EBITDA had benefited from one-off costs in Q4FY20 while CSR cost was very low in Q4FY21, which together helped EBITDA rise by 19.6%. Other expenses dipped 76% YoY as explained above and has been very volatile. Depreciation normalised QoQ (down 6.8%) as the previous quarter had one-off costs. Net profit rose to Rs13.6bn, up 38.3% YoY. Company has skipped final dividend as it announced a one-time special dividend of Rs17.8/sh in Q3FY21.

* Adjusted for Ind-AS 116, EBITDA was down 5.7% QoQ to Rs27bn: EBITDA (exenergy) rose 31% YoY to Rs27bn, but was down 6.7% QoQ due to one-off gains in Q3FY21. Rental costs increased 11% YoY to Rs7bn, which will restrict margin expansion going forward. Energy margin was negative for the fourth quarter in a row on lower contribution of fixed energy contracts, but losses have declined

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