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Revenue remains in line, tenancy additions improving

* Indus Towers (INDUSTOW) reported an in line revenue/EBITDA decline of 3.6%/3.9% QoQ due to 4% decline in rental revenue as exit penalty receipts remain low in 4QFY21. Excluding the impact of exit penalty charges, rental revenue grew 1% QoQ.

* The company has consistently improved its tenancy addition since the past three quarters (3.7k adds in 4QFY21). We estimate a consolidated FY21-23E revenue/EBITDA CAGR of 4%/6%. Given the weak long-term outlook, we maintain neutral.

EBITDA falls 4% QoQ (in line) as exit penalty receipts drop

* Pro forma consolidated revenue declined 3.6% QoQ to INR64.9b (in line with our like-to-like estimate post consolidation). Rental revenue fell 4% QoQ (in line) to INR41b due to a 5% decline in rental per month per tenant. This was partly cushioned by lower penalty and healthy (4.1k) tenancy additions (1.3% QoQ). Energy revenue fell 3% QoQ to INR23.5b (in line with our LTL estimate).

* Pro forma consolidated EBITDA declined 4% QoQ (in line with our LTL estimate) to INR34.1b, led by ~3% decline in both revenue and operating expenses.

* Rental EBITDA fell 5% QoQ to INR34b due to lower (INR1.8b) exit penalty charges and a 5% decline in revenue sharing per operator per month to INR42.4k. Energy EBITDA loss reduced to INR238m v/s INR562m QoQ. PBT/PAT rose 2.3%/0.3% QoQ to INR17.9b/INR13.6b (in line with our LTL estimate).

* Capex for 4QFY21 stood at INR12.9b (INR10.9b in 3QFY21) - the QoQ increase is due to the ensuing COVID-19 led nationwide lockdown, amid rise in demand for Telecom infrastructure and towers. Towers added in 4QFY21 stood at 3,715 (v/s 3,416 in 3QFY21), taking the total to 179,225.

* For FY21, revenue stood flat YoY at INR257b, EBITDA increased by 4% YoY to INR131b, while PAT declined 1% YoY to INR50b.

Highlights from the management commentary

* Energy margin: Expect margin to improve going forward as the company is moving towards a fixed energy model and the management remains hopeful of completing FEM soon with operators.

* Leverage: Financial leverage at 1.45x stands within the firm’s target structure. Debt conveyance stands at 1.45x (against the permissible limit of 1.35x), thus there is further room to raise debt if required by the business.

* Demand from 5G rollout: Post announcement of ingenious 5G tests by RJio and demo tests of 5G by BHARTI, 5G will be aggressively rolled out with improved performance parameters of latency, speed, and network capacity. This will give rise to massive opportunities in the internet space and the application of 5G to GDP contribution could be significant.

* Impact of RM costs: There is some impact from the rise in raw material costs (steel and other commodities), but the company has been improvising in design changes. Support for 5G services and load bearing capacity, and cost/tower has seen positive trends. Towers in rural areas have evolved quite significantly over the past decade.

Valuation and view

* The management continues to reiterate that 5G and fiber opportunities would continue to drive growth in the future as dependency on strong Telecom infrastructure remains. Tenancy additions have also improved in the past three quarters (net additions of 9.6k), which signifies demand for new towers.

* However, VIL remains a large client for INDUSTOW, and the tower sharing business has limited business case for single tenancy operations. VIL is facing a severe liquidity risk due to its huge cash obligations. Its long-term business concerns still remain an overhang for INDUSTOW. On the other hand, threat from RJio’s increased focus on tower infrastructure may weaken INDUSTOW’s positioning.

* We factor in a revenue/EBITDA CAGR of 4%/6% over FY21-23E to arrive at our TP of INR260/share – implying an EV/tenancy of 2m and EV/EBITDA of 6x. The stock garners a healthy dividend yield of 5%, which could cushion against a further downside. Maintain Neutral.

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