Neutral Indus Towers Ltd for the Target Rs.390 by Motilal Oswal Financial Services Ltd
In-line 1Q; higher capex to weigh on dividends
* Indus Towers’ (Indus) 1QFY26 was broadly in line with our estimates, with recurring EBITDA (excl. provision reversals) rising 4% QoQ to INR42.6b.
* Operationally, tower additions moderated QoQ likely due to tapering off rural rollouts from Bharti, while tenancy additions remained robust, primarily driven by continued rollouts by Vi.
* Despite lower tower additions, capex was high at INR19.5b due to continued higher maintenance capex for strengthening aging towers and energy conservation initiatives like solarization, battery upgrades, etc. Management indicated that capex could remain elevated in the near term.
* Indus generated FCF of ~INR15.7b in 1QFY26 (INR98.5b in FY25). After adjusting for buyback in 1HFY25 and Bharti’s tower acquisition, we estimate Indus had surplus FCF of INR59b (or ~INR22/share) for distribution.
* However, Indus has decided to conserve cash in the near term, driven by factors such as elevated capex, inorganic opportunities and stability of customer. We view this decision as disappointing and believe it could lead to a sustained de-rating over the medium term.
* Our FY26-28 estimates are broadly unchanged. We continue to model bad debt provisions of ~INR20b (~25% of Vi’s annual service rentals) from FY27 to FY32 on account of Vi’s cash constraints (NPV impact of ~INR30/share).
* Further, we believe there are downside risks to our estimates of tenancy additions from delays in Vi’s debt raise and, in turn, its capex spends.
* We reiterate our Neutral rating with a revised TP of INR390, premised on DCF based 7.5x Sep’27E EV/EBITDA.
Adjusted for one-offs, core performance largely in line
* Adjusted for Bharti’s tower acquisition, Indus’ tower additions moderated QoQ to 2.75k (vs. 4.3k QoQ and our est. of 3.5k), while tenancy additions were still robust at ~6.1k (though lower than 8.2k QoQ and our est. of 7k).
* Reported average revenue per tenant (ARPT) at INR41.1k (flat YoY, 2% below) declined 2% QoQ (due to certain one-offs in 4Q).
* Consolidated revenue grew 4% QoQ at INR80.6b (+9% YoY, in line), as modest 1% QoQ growth in service revenue (+10% YoY, 2% below) was offset by higher energy reimbursements (+10% QoQ due to seasonal factors).
* Consolidated reported EBITDA was up 0.5% QoQ at INR43.5b (-3% YoY, 2.5% ahead), largely due to prior-period provision reversals.
* Adj. service EBITDA at INR43.8b (+12% YoY, inline) grew 3% QoQ.
* Energy spreads remained negative at INR1.2b (though lower vs. INR1.4b loss QoQ and our est. INR1.5b loss).
* Indus reversed bad debt provision of INR0.9b in 1QFY26 (vs. bad debt provision reversals of INR2.3b QoQ, our est. of NIL and INR7.6b YoY).
* Adjusted for bad-debt provision reversals, recurring EBITDA at INR42.6b (+4% QoQ, +14% YoY) was in line with our estimate.
* Reported PAT at INR17.4b (-3% QoQ, -10% YoY) was ~5% ahead of our estimate, primarily due to prior-period provision reversals. Adjusted PAT was broadly in line with our estimate
High capex despite muted tower additions; decides to conserve cash in short term
* Despite muted tower additions, capex was relatively higher at ~INR19.5b, indicating ~INR5.7m growth capex per tower add. This was primarily driven by spends on improving energy efficiency and higher maintenance capex.
* Reported FCF came in at INR15.7b in 1Q (vs. INR98.5b in FY25). Adjusting for buyback in 1HFY25 and purchase of Bharti’s towers, Indus has FCF surplus of ~INR59b (or ~INR22/share).
* However, Indus board has decided to conserve cash in the short term for meeting the needs for elevated capex, potential inorganic acquisition and stability of customer. We view this decision as disappointing.
* Indus’ receivables declined further by ~INR4b QoQ to ~INR44b, indicating ~INR5b in surplus collection during 1QFY26.
* Net cash (excluding leases) improved to ~INR25b (vs. ~INR9b QoQ).
Key highlights from the management commentary
* Capital allocation: Indus’ board has decided to conserve cash in the short term, in view of evolving industry landscape, stability of customer, elevated capex outlook and potential inorganic acquisitions. However, management remains committed to creating value for shareholders and will take a call on reinstating dividend payments at the end of FY26.
* Higher capex: Management indicated that despite lower tower addition capex remained elevated due to investments in energy efficiency initiatives, creating additional infra to support a second tenant on existing towers, and spends on certain towers, which could not be deployed in 1QFY26. Further, maintenance capex was elevated due to the strengthening of its ageing tower portfolio, battery replacement, etc. Management expects maintenance capex to remain elevated in the near term.
* Tower additions and outlook: Tower additions in 1QFY26 were impacted by certain seasonal factors. Despite a soft start to FY26, management indicated that order book remains robust and the focus remains on driving growth both organically (through higher market share in key customers’ rollouts) and inorganically (through acquisition of smaller tower cos).
Valuation and view
* Indus generated significant FCF of ~INR98.5b in FY25, aided by the collection of past dues from Vi. However, Indus’ board has decided to conserve cash in the near term as against earlier guidance of returning the same to shareholders.
* We view Indus’ capital allocation decision as disappointing and believe it could lead to a sustained de-rating over the medium term.
* With the completion of the first phase of Bharti’s pan-India 5G and rural rollouts, we believe tower additions will remain muted over the near term.
* Our FY26-28 estimates are broadly unchanged. We continue to model ~INR20b in bad debt provisions (~25% of Vi’s annual service rentals) from FY27 to FY32 on account of Vi’s cash constraints (NPV impact of ~INR30/share).
* Further, we believe there could be downside risks to tenancy additions (our estimate of 35k tenancies and ~50k loadings) from delays in Vi’s debt raise and, in turn, its capex spends.
* We reiterate our Neutral rating with a revised TP of INR390, premised on DCF based 7.5x Sep’27E EV/EBITDA.
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