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Healthy earnings growth on high exit penalty and decent tenancy adds

* Indus Towers (INDUSTOW) reported healthy revenue/EBITDA growth of 5.9%/15.6% QoQ owing to a high exit penalty of INR4b and healthy 4.2k tenancy adds. However, EBITDA grew at just 3% QoQ, excluding the exit penalty changes. 

* Our estimates are now realigned with that of the merged entity – which now includes Bharti Infratel, along with 100% of Indus Towers (v/s only 42% earlier). Subsequently, we estimate an LTL FY21–23E revenue/EBITDA CAGR of 4.3%/5.5%.

Proforma consol. revenue/EBITDA up 5.9%/15.6% QoQ

* Consol. revenue increased 5.9% QoQ to INR67.4b (in-line on LTL comparison). Rental revenue increased 7.4% QoQ to INR43b (5.4% above LTL est.), led by high INR4b exit penalty charges and healthy 4.2k tenancy adds (1.3% QoQ). Energy revenue also improved 3.5% QoQ to INR24b (2.1% below our LTL estimate).

* Consol. EBITDA increased 15.6% QoQ to INR35.5b (8% beat on LTL), led by 13% growth in rental EBITDA and reduction in losses in Energy EBITDA.

* Rental EBITDA grew 12.8% QoQ to INR36.1b on INR4b exit penalty charges and healthy margin improvement. Energy EBITDA loss also reduced to INR562m v/s INR1.3b in 2QFY21.

* The EBITDA margin improved 440bp QoQ to 52.7% on a 400bp improvement in the Rental EBITDA margin (83.7%), attributable to high exit penalties and slower loss in Energy EBITDA.

* PBT/PAT was up 21.2%/20.3% QoQ to INR18.4b/INR13.6b (8.7%/7.7% beat on LTL).

* Capex for 3QFY21 stood at INR10.9b (INR8.7b/INR7.2b in 2QFY21/3QFY20) – the QoQ increase was due to nationwide lockdown; the count of towers added in 3QFY21 stood at 3,416 (v/s 2,464 in 2QFY21), totaling 175,510.

* Consol net tenancy stood at 4.2k in 3QFY21 v/s 3.5k in 2QFY21. Gross colocation exits were at 354. Thus, gross adds stood at 4,558. The average sharing factor remained flat at 1.82x in 3QFY21.

* The rental per tenant (per month) increased 6.3% QoQ to INR44,845, primarily on the inclusion of exit charges. Excluding this, the rental per tenant was in-line (+1% QoQ).

Highlights from management commentary

* Operating metrics: The company saw the highest quarterly co-location additions in the past three years coming equally from the increased densification and expansion of coverage to tier 2/3 cities (lowest churn).

* New growth opportunity: The company is revalidating its growth strategy and believes future growth is hinged on small cells, smart cities, fiber, WiFi, data centers, and the macro tower business.

* Exit penalty: Indus has received a large portion of the exit penalty from VIL. It should receive INR1.8b quarterly up to 3QFY23, following which the penalty should be less than INR1b annually for another year.

Valuation and view

* Indus Tower reported earnings improvement, primarily led by high exit penalty charges, excluding which EBITDA growth was moderate.

* Management indicated the 5G and fiber opportunities should continue to drive growth in the future; tenancy adds have also improved over the last couple of quarters.

* However, given that VIL is a significant contributor to the company’s revenue – which is facing liquidity risk due to its huge cash obligations – long-term concerns still prevail. Furthermore, RJio’s increased focus on infrastructure may weaken Indus’ positioning. Thus, the long-term overhang of business viability continues.

* We factor in a revenue/EBITDA CAGR of 4.3%/5.5% over FY21–23E and roll forward our valuation to FY23 to arrive at TP of INR245 – implying EV/tenancy of 1.9m and EV/EBITDA of 5.7x and P/E of 11.6x. The stock garners healthy dividend yield of 6%, which could cushion against a further downside. Maintain Neutral.

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