Buy Indus Towers Ltd for the Target Rs.410 By Emkay Global Financial Services Ltd
The Board of Indus Towers approved the company’s foray into African markets, beginning with Nigeria, Uganda, and Zambia, sighting revenue diversification, operational scalability, and long-term value creation. We see this capital allocation unfavorably, considering the consistent currency depreciation and challenges in dividend upstreaming from Africa. We note that due to the same reasons, African tower companies, like telecom players, are trading at a discount to global peers. While we maintain BUY on Indus given its attractive valuations (FY26E EV/EBITDA: 6.3x) and strong cash flow yield (FY26E: 7.0%), we await more clarity on the quantum and timing of its Africa foray before revisiting our stance; we may consider downgrading in case of significant capital deployment in the Africa business.
Entering uncertain territory
Indus Towers on 2-Sep informed stock exchanges that its Board has approved its foray into African markets toward capitalizing on the growth potential. The filing alluded to its robust financial position and anchor customer relationship with Bharti Airtel, for establishing a strong and competitive presence in these regions. As part of its broader growth strategy, the company will continue to evaluate expansion opportunities in other African markets, where Airtel has an established presence. While we concur with the management on the growth potential, we do not yet have clarity on 1) the amount of capital that will be committed toward this endeavor, nor on its timeline; 2) how the company plans to safeguard against the volatility of underlying currencies; 3) how the company will manage to return the cash to shareholders, considering the challenges for upstreaming of the dividend from some of these countries. Airtel Africa has already sold bulk of its ~38k towers, with only ~2k owned towers. If Indus acquires only these 2k towers, then we expect a limited capital outgo; however, the company deciding to acquire towers from other tower companies may require higher capital commitment.
Outlook and valuations – Valuations may correct on large capital deployment
The company has net cash of Rs24.6bn on its books, and refrained from returning capital to the shareholders this year despite strong cash flows. The company can lever up its balance sheet to optimize the capital structure. However, we believe that the Street will take this capital allocation negatively, considering the challenges of working in Africa. This is also reflected in the multiples of African tower companies Helios Towers and IHS Holdings, which trade at CY26E EV/EBITDA of 7.0x and 6.0, respectively, compared to 12-15x for global peers. Indus Towers’s low valuations are due to the overhang of longterm viability of Vodafone Idea, which is one of its key customers. In case of large capital allocation toward the Africa business, we see the risk of further correction in valuations. In the absence of more details on the foray, we maintain BUY on the stock with target price of Rs410, valuing the company at 6.5x Q1FY28E EV/EBITDA.
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