IGI Logo

Tower adds and provision write-backs aid earnings

-      Indus reported revenue/adj. EBITDA growth of 1%/3% QoQ (in line), led by strong tower/rental adds of 7.6k/7.2k and INR3b in provision write-backs. Rental EBITDA grew 3% QoQ. PAT growth was strong at 19% QoQ, led by lower power costs, and interest income for delayed payments.

-      The company is benefiting from aggressive site adds by Bharti and the 5G rollout. However, since these are single-tenancy sites, they could drive higher capex, which alters the return profile despite adding linear (single tenant) sites and reduces FCF. Further, VIL’s weak outlook and limited funding capability could dilute tenancies in the near term and raise concerns about its long-term tower sharing-led business model. Subsequently, we reiterate our Neutral rating.

     Rental revenue picks up due to tower adds; ASF declines

-      Revenue grew 1% QoQ to INR72b (in line) led by 3% QoQ rental revenue growth while energy revenue declined 3% QoQ

-      Rental revenue growth was led by an increase in the number of towers. Added ~7.6k towers, and ~7.2k co-locations implying a reduction in the average sharing factor (ASF) sequentially to 1.72x from 1.74x.

-      EBITDA was up 5% QoQ to INR36b (in line) led by: a) a dip in power and fuel expenses and b) a decrease in VIL provision to INR641m (from INR1.3b in 2QFY24).

-      After adjusting for VIL provisions, the Adj. EBITDA rose 3% QoQ to INR36.5b, and the adjusted margin improved 80bp QoQ to 50.7%.

-      Higher finance income and controlled depreciation/interest cost led to a 19% QoQ increase in PAT to INR15.4b.

-      Net debt (excluding lease) declined INR8.6b to INR46b in 3QFY24.

-      For 9MFY24, FCF turned negative to INR6b due to higher capex of INR61.5b.

    Highlights from the management commentary

-      VIL collections improved in 3QFY24 and the company recognized INR3b against past overdue in addition to 100% monthly collections, which resulted in the reversal of provisions for doubtful debts.

-      Recognition of interest income: Indus has an adjusted interest receivable of INR3.3b from VIL, which resulted in an increase in interest income, and correspondingly a similar amount of provision for doubtful debts has been created. Hence, the effect is netted off from P&L.

-      Order book is healthy and is expected to grow for the next couple of quarters. Hence, capex may remain elevated.

-      Renewal of portfolio: In FY23, the company renewed ~33% of its total portfolio and thereafter, it has not done any major bulk renewals. But about 50%-60% of its portfolio would come up for renewal in the coming years.

    Valuation and view

-      Indus could leverage the benefits of Bharti’s aggressive network densification and the rollout of 5G services. The new leaner sites (small cells) with sharing alternatives could support business economics, while there is a churn in tenancies.

-      But VIL’s inability to raise capital poses the risk of its survival, which could raise concerns about Indus’s single-tenancy operations, which makes a limited business case for a tower-sharing company. This could affect the company’s financials by limiting FCF generation and subsequent deleveraging and dividend payments.

-      We factor in revenue/EBITDA growth of 5/6% in FY24-26E and arrive at a TP of INR210, implying an EV/tenancy ratio of INR1.6m and an EV/EBITDA ratio of 3.9x. We reiterate our Neutral rating on the stock.

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412