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Higher provisions impact profitability; receivables remain a key monitorable

* INDUSTOW saw an eventful 1QFY23, with a muted performance. Adjusted EBITDA fell 1% QoQ. It finally saw a MSA renewal, concluding with an annual escalation of 2.5%, but 9% exit allowance and an estimated 12-15% cut in rental, which could dilute earnings. The INR12.3b provision for doubtful debt and receivables of INR62b, of which ~INR40b may be overdue, hints at an upcoming impact stemming from the liquidity risk posed by IDEA.

* IDEA has proposed part payment until Dec’22, which can further balloon receivables, with recovery subject to its capital infusion plans. We estimate an EBITDA CAGR of 1.6% over FY22-24, with a risk of falling tenancies. We maintain our Neutral rating.

Adjusted revenue/EBITDA remains flat sequentially

* Consolidated revenue fell 3.1% QoQ to INR69b (in line). Revenue in 4QFY22 included a one-time provision reversal of INR5.5b. Adjusting for one-offs (a reversal of the revenue provision and exit charges of INR5.5b), consolidated revenue rose 5% sequentially.

* Rental revenue fell 11% QoQ (7.3% miss) on lower rental rates, despite flattish tenancies. Adjusted for one-offs, rental revenue grew by ~1% QoQ. Revenue from the Energy segment grew 12.8% QoQ to INR26.7b.

* Consolidated EBITDA declined by 44.3% QoQ to INR22.6b (est. INR39.1b) on account of higher operating expenditure (up 51% QoQ).

* Other expenses included INR12.3b towards doubtful debts on account of the weak liquidity position of IDEA. Adjusted for the one-off reversal in 4QFY22 and provision in 1QFY23, EBITDA fell 1% to INR34.9b.

* PBT/PAT fell 73.6%/73.9% QoQ to INR6.4b/INR4.8b (73% miss) on the back of a decline in operating profit.

* Net debt (excluding lease) grew sharply to INR52.6b, v/s INR28.5b as of Mar’22, on account of lower FCF of INR5.5b (v/s INR22.3b in 4QFY22) as EBITDA declined steeply in 1QFY23.

Highlights from the management commentary

* Contract renewals: INDUSTOW completed MSA renewals for two customers, with an exit allowance of ~9% and an annual escalation of 2.5%. The lease equalization impact of these renewals is pegged at INR500/tenancy.

* Receivables can remain high: Acceptance of the revised payment plan can lead to a rise in trade receivables in the near term.

* Growth from new areas: The company is seeing good demand for leaner, single tenancy towers, given its lesser space requirements. It added 121 new leaner towers in 1QFY23.

* 5G: The management expects average loading in 5G to be higher as compared to 4G on the back of power and antenna requirements.

Valuation and View

* The recently concluded 5G spectrum auction is expected to drive network densification by telcos. Healthy growth in new and leaner small cells, with sharing alternatives, continues to offer a good opportunity in the Telecompassive infrastructure industry.

* The renewal of MSA is a welcome positive. We estimate that actual rental rates have reduced by 12-15%, which is offset against the 2.5% escalation rate.

* The proposed payment plan by IDEA, on the back of rising dues, underscores its weak liquidity position. This poses a key concern going forward.

* Single-tenancy operations makes a limited business case for a tower sharing company.

* We factor in a revenue/EBITDA CAGR of 2%/1.6% over FY22-24 to arrive at our TP of INR195, implying an EV/tenancy of 2m and an EV/EBITDA ratio of 4.5x. The stock garners a healthy dividend yield of 5% (FY22), but the management said it will be a function of FCF, which remains at risk. We maintain our Neutral rating

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