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Indus unlikely to benefit from VIL capex in the near term

Indus Towers’ (Indus) stock price increased >20% post government reform in the telecom sector announced a few days ago, which has increased VIL’s going concern visibility. However, VIL still has a long way to go as it needs tariff hike and recouping of some market share. Even in a bull case where VIL incurs capex to catch up on 4G capacity gap compared to Bharti Airtel (Bharti), we don’t see material benefit to Indus. Our analysis shows VIL does not need much of cellsite addition, but it needs to expand 4G BTS which comes at marginal cost (loading charges). Further, tenancy expansion from 5G is at least 2-3 years away and visibility on other businesses such as fibre is limited. We have retained our estimates for Indus, but cut our WACC to 10.8% (from 12.8%) on VIL’s reduced going concern risk. Our revised DCF-based target price works out to Rs266 (earlier: Rs232). Maintain HOLD.

Government relief package increases visibility on VIL as a going concern

* The Indian government has announced the telecom relief package, which provides four years of moratorium on AGR and spectrum dues. This reduces the payment burden for Vodafone Idea (VIL) by a significant Rs252bn p.a. based on our calculations.

* Further, the government has the option to convert deferred dues and also annual interest on the deferred payment, into equities. In worst case, we believe this could pave the way for VIL to become majority-owned by the government, thus, increasing going concern visibility.

* We believe the worst case for Indus Towers has been averted with VIL remaining a going concern. However, VIL still needs equity infusion and significant tariff hike for catching up on capex, in our view.

* Please refer our report (link) for details.

VIL is expected to fight back, and capex investment is key…

* We expect VIL to fight back for a fair market share as cashflow issues have been postponed to FY26. News article (link) suggests promoters are looking to infuse cash, which should boost investor confidence and likely help raise external funding as well.

* We expect VIL to use capital to accelerate its capex in 4G where it lags peers in terms of data capacity though it always enjoyed a huge advantage on spectrum quantity.

* As of Q1FY22, VIL had 21% lower 2G cellsites compared to Bharti, 31% lower mobile broadband (MBB) cellsites and 48% lower MBB BTS. Thus, VIL has much to catch up on 4G investment.

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