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Steady tenancy adds drive in-line EBITDA growth; outlook unclear

* Revenue/EBITDA grew 4.7%/3%, led by steady 3k tenancy adds and lower opex driving 4.1% rental EBITDA growth. Adjusted for one-time lower operating expenses, rental EBITDA was up 2.5% QoQ.

* Net tenancy additions at 3k have been stable and improved in the last year, with significantly lower exits reported. However, lower penalty receipts from VIL in FY23E should taper growth. Subsequently, we estimate a consolidated FY21–23E revenue/EBITDA CAGR of 5.1%/6.8%. Furthermore, given the weak long-term outlook, we maintain Neutral.

EBITDA up 3% QoQ (in-line)

* Proforma consol revenue grew 4.7% QoQ (in-line) to INR67.9b; rental revenue grew 1.7% sequentially (in-line) to INR42b. New tenancy adds came in at a steady 3k, with rental rates up 1% to INR42,730/tenant.

* Proforma consol EBITDA increased 3% QoQ to INR35.2b (in-line), aided by 4% revenue growth.

* Rental EBITDA grew 4.1% QoQ to INR35.7b on improved revenue performance and decline in repairs (-11% QoQ) and other expenditure (- 32.3% QoQ). Consequently, rental EBITDA margins improved ~200bps to 84.9% in 1QFY22. Energy EBITDA loss widened to INR606m v/s INR238m in 4QFY21. Adjusted for a 50% reduction in operating expenses, which may be reversed, rental EBITDA was up by 2.5% QoQ.

* PBT/PAT was up 4.5%/3.8% QoQ to INR18.8b/INR14.2b (in-line).

* Capex for 1QFY22 stood at INR7.5b (INR12.9b in 4QFY21); the count of towers was increased by 1772 in 1QFY22 (v/s 3,715 in 4QFY21) to 1,80,997.

Highlights from management commentary

* The quarter was impacted by a cyclone in 13 circles, which affected business and cost.

* Opportunities in 5G (telcos already doing a trial-run), building solutions, and small cells, among others, remain high; with reducing churn, tenancies should remain healthy.

* 25% of the increase in trade receivables during the quarter was attributable to timing issues, while the remainder was due to delay in payment by a customer. Indus has sufficient security cover towards the pending amounts.

* Energy margins would be reversed as customers shift from the passthrough model to the fixed energy model, and both parties would benefit from the investments to reduce energy cost.

Valuation and view

* The long-term network upgrade opportunity in the Telecom sector towards 5G, fiberization, small cells, and indoor coverage would continue to drive growth in the Telecom Passive Infrastructure industry. Recovery in tenancy adds and a reduction in exits have also brought about stability in earnings.

* However, FY23E onwards, the exit penalty receipts from VIL would reduce. Furthermore, its situation remains precarious, weighed by ballooning debt and its inability to raise funds and improve its liquidity. This remains the biggest overhang for Indus Towers as VIL remains a large client and the Tower-sharing business has a limited business case for single-tenancy operations. On the other hand, the threat from RJio’s increased focus in the Tower Infrastructure space may weaken Indus’ positioning.

* We factor in a revenue/EBITDA CAGR of 5.1%/6.8% over FY21–23E and arrive at TP of INR250 – implying EV/tenancy of 2m and EV/EBITDA of 5.7x. The stock garners healthy dividend yield of 10.4%, which could cushion against a further downside. Maintain Neutral.

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