IGI Logo

Core performance slightly weaker

* Indus’ 2QFY25 reported financials came in ahead of our estimate owing to a higher-than-estimated reversal of prior period bad debt provisions (INR10.8b vs. our estimate of INR5b).

* vHowever, its core operational performance was slightly below with Indus’ recurring EBITDA at INR37.9b (+1% QoQ, +7% YoY), coming in ~2% below our estimate on lower tower net additions and weaker energy spreads.  

* Tower additions further moderated QoQ to 3.7k (vs. our est. 5.5k) on adverse weather events, which also led to moderation in capex (-19% QoQ).  

* With moderation in capex and collection of prior dues, Indus’ 1H FCF was robust at ~INR33b (of which INR27.5b was used for recent buyback).  

* Vi’s recent fund raise and upcoming network rollout is materially positive for Indus as it: 1) helps sustain 100% collections, 2) enables past dues recovery (INR36b) and 3) provides incremental business from Vi’s network expansions at minimal capex.

* However, we believe the near-term benefits are adequately factored in. We remain concerned about long-term risks from the shortfall in Vi’s payments, given its large cash shortfall (INR200b+ annually over FY27-31E). We build in modest ~INR20b bad debt provisions (25% of Vi’s annual service rentals) over FY27-31 (NPV impact of ~INR27/sh), in our base case.  

* We cut our FY25/26 revenue/EBITDA by 2-3% on slightly lower tower additions. We maintain Neutral rating on Indus with revised DCF based TP of INR385 (implies 7.5X FY27 EBITDA).

Weak core performance due to lower tower additions and weaker energy spreads

* Consolidated revenue was up 1% QoQ at INR74.7b (+5% YoY, 1% miss).

* Service revenue at INR47b (+1.5% QoQ, +9% YoY) was ~1% below our estimate on account of weaker net tower additions.  

* Energy reimbursements at INR27.6b (flat QoQ, -1% YoY) came in ~2% below our estimate due to higher energy under-recovery.

* Consolidated EBITDA was up 8% QoQ at INR48.6b (+42% YoY) and was 11% ahead of our estimate, largely owing to higher prior-period reversals.

* Adjusted service EBITDA at INR39b (flat QoQ, +9% YoY) was ~1% below our estimate on account of lower service revenue.  

* Energy spreads recovered marginally QoQ to negative INR1.35b (vs. INR1.5b loss QoQ), but were higher than our estimated loss of INR1b.  

* Indus reversed bad debt provisions of INR10.8b in 2QFY25 (vs. bad debt provision reversals of INR7.6b QoQ and provisions of INR1.3b YoY), which was higher than our estimate of INR5b.

* Adjusted for bad debt provision reversals, recurring EBITDA at INR37.9b (+1% QoQ, +7% YoY) was ~2% below our estimate due to weaker energy spreads and lower service revenue.

* Reported PAT at INR22b (+16% QoQ, +72% YoY) was 22% above our estimate, largely due to the higher provision reversal.

*Recurring 2Q PAT at INR14.2b (+5% QoQ, +2% YoY) was ~2% below our estimate due to the lo

* 1HFY25 reported EBITDA came in at INR94b (up 36% YoY), driven by INR18.4b prior period reversals. Adjusted for the same, recurring EBITDA at INR75.3b was up 6% YoY.

* For 2H, the implied revenue/core EBITDA growth rate is 8%/9%, based on our estimates.  

Net tower additions moderated QoQ (weaker); ARPT flat QoQ (in line)

* Net macro tower additions moderated further to 3,748 QoQ (vs. our estimate of 5,500 and 6,174 net adds QoQ);  

* Indus also added 182 net leaner towers QoQ (vs. 492 QoQ).  

* For the second successive quarter, net macro tenancy additions were higher than tower additions at 4,308 (lower vs. our est. 6,500 and 6,340 QoQ).

* The end-period tenancy ratio moderated further to 1.65x (from 1.66X QoQ), as the incremental tenancy ratio remained lower at ~1.1x (vs. ~1x QoQ).  

* Reported sharing revenue per macro tenant (ARPT) at INR41.1k (flat QoQ, +0.5% YoY) was in line with our estimate.   

Receivables further moderated QoQ; net debt (excluding leases) jumps

 * Receivables moderated further by ~INR0.9b QoQ to INR56.3b. It also had ~INR10.8 bad debt provision reversal, implying a net surplus collection of ~INR12b during 2QFY25 (vs. ~INR15b in 1Q).  

 * Over the past few quarters, Indus has recovered INR23.3b towards past dues from Vi, with prior period bad debt provisions now at INR35.5b (vs. INR53.9b at Mar'24 end)

. * Capex moderated further ~19% QoQ to INR15.2b (vs. INR18.9b QoQ) as net tower additions moderated QoQ; however, capex per tower addition inched up to INR3.3m (vs. INR2.6m QoQ).

 * Net debt, including lease liabilities, was up ~10% QoQ at INR210b (vs. ~INR204b YoY). Net debt, excluding lease liabilities, jumped to ~INR37b (vs. ~INR24b QoQ).

 * Reported 2Q FCF moderated to INR14.4b (from INR18.7b in 1Q). Its 1HFY25 FCF stood at INR33b, aided by collections of prior-period dues and also moderation in capex.

 * We note that Indus has already used INR27.5b in the recent buyback, and dividend reinstatement will depend on the FCF generation in 2H.  

Highlights from the management commentary

* Tower/tenancy additions: Tower additions were impacted by adverse weather events. The order book remains healthy and management expects tenancy additions to improve further on account of Vi’s network rollouts.

* Market share with key customers: The management expects rising urban presence and large rollouts in past few years to help Indus to win a high share in Vi’s upcoming rollouts.

* Prior-period due collections: Ongoing collections from Vi remained 100%. Further, it was able to collect prior period dues for the fourth successive quarter, which led to the reversal of ~INR11b in bad debt provisions, while receivables declined by a modest ~INR1b QoQ. The management remains engaged with Vi for swift clearance of over-dues and ensure timely payments.

* Dividends: The management reiterated that its dividend policy remains linked to FCF generation and it will take a call on reinstating dividends at FY25 end, based on FCF generation. 1H FCF was largely used for funding the recent buyback.   24 October 2024 13

 Valuation and view

* Vi’s recent fund raise and upcoming network rollout is materially positive for Indus as it: 1) helps sustain 100% collections, 2) enables past dues recovery (INR36b) and 3) provides incremental business from Vi’s network expansions at minimal capex.

* However, we believe the near-term benefits are adequately factored in. We remained concerned about long-term risks from the shortfall in Vi’s payments, given its large cash shortfall (INR200b+ annually over FY27-31E).

* We build in modest bad debt provisions of ~INR20b (25% of Vi’s annual service rentals) over FY27-31 (NPV impact of ~INR27/share), in our base case.  

* We marginally lower our tower addition estimates for FY25-26 while keeping tenancy addition estimates broadly unchanged. As a result, we cut FY25-26E revenue by 2-3% and FY25-26E recurring EBITDA (excluding         provisions) by ~2%.

 * We value Indus on a DCF-based TP of INR385 (implies 7.5x FY27E EBITDA). We reiterate our Neutral rating on the stock.  We value Indus on a DCF-based TP of INR385 (implies 7.5x FY27E EBITDA). 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