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In-line 2Q; elevated capex hurts FCF generation

Indus Towers’ (Indus) 2QFY26 was broadly in line with our estimates, with recurring EBITDA (excl. provision reversals) rising 3% QoQ to INR43.8b. ? Reported EBITDA at INR45.7b grew 5% QoQ (6% ahead), driven by priorperiod provision reversals of ~INR1.95b.

* Operationally, tower additions picked up QoQ after a subdued 1Q, while tenancy additions moderated, likely as Vi’s rollouts tapered off during 2Q. However, management indicated that the order book for both tower and tenancy additions remains robust in the near term.

* Indus’ capex surged ~31% QoQ to INR25.6b, and receivables inched up ~INR5b, which led to a moderation in the FCF generation to ~INR3b in 2Q (vs. INR15.7b in 1Q).

* Management indicated that capex remains elevated due to higher maintenance capex for strengthening aging towers, energy conservation initiatives such as solarization and battery upgrades. The increase in receivables was attributed mainly to timing issues and is expected to unwind in the coming quarters.

* Indus’ recent announcement of its foray into Africa appears to be at a preliminary stage, with further clarity on investments and potential return ratios expected to emerge over the next 3-6 months.

* Our FY26-28 estimates remain broadly unchanged. While the recent SC verdict allowing the GoI to re-examine the AGR issue is a key material positive for Vi, we continue to model ~INR20b of bad debt provisions (~25% of Vi’s annual service rentals) from FY27 to FY32, given Vi’s cash constraints despite a potential AGR waiver (overall NPV impact of provisions is ~INR31/share for Indus).

* A potential fundraise by Vi, following the AGR relief, could improve visibility on the continuation of its INR500-550b capex plan, which would be sentimentally positive for Indus. However, we note that our estimates already bake in ~35k/~50k tenancies/5G loadings from Vi over FY25-28.

* We reiterate our Neutral rating with an unchanged DCF-based TP of INR390, premised on DCF-based 7.5x Dec’27 EV/EBITDA. The risk-reward appears fairly balanced at CMP (bull case: INR450; bear case: INR330).

In-line 2Q; tower additions pick up but tenancy additions moderate

* Indus’ tower additions picked up QoQ to 4.3k (vs. 2.75k QoQ and our est. of 3.5k), while tenancy additions moderated further to ~4.5k (vs. 6.1k QoQ and our est. of 7k) due to the tapering off of Vi’s rollouts during 2QFY26.

* Reported average revenue per tenant (ARPT) at INR41.7k (+1% YoY, 1% above) inched up 1% QoQ. However, management indicated that the quarter benefited from certain prior-period reconcilliations (~0.8% boost).

* Consolidated revenue grew 2% QoQ at INR81.9b (+10% YoY, in-line), as service revenue grew 3% QoQ (+11% YoY), while energy reimbursements remained flat QoQ (+7% YoY).

* Consolidated reported EBITDA rose 5% QoQ at INR45.7b (-6% YoY, 6% ahead), largely due to prior-period provision reversals (INR1.95b).

* Adjusted service EBITDA at INR45.2b (+3% QoQ, +15% YoY) was ~2% above our estimate.

* However, energy under-recovery widened to INR1.4b (vs. our estimate and 1Q under-recovery of INR1.25b).

* Indus reversed a bad debt provision of INR1.95b in 2Q (vs. reversals of INR0.9b QoQ, our est. of NIL and INR10.8b YoY).

* Adjusted for provision reversals, recurring EBITDA at INR43.8b (+3% QoQ, +16% YoY) was 1.5% ahead of our estimate due to lower employee costs (-4% QoQ, 8% below) and other expenses (-10% YoY, 6% below).

* Reported PAT at INR18.4b (+6% QoQ, -17% YoY) was ~9% ahead of our estimate, primarily due to prior-period provision reversals. Adjusted PAT was broadly in line with our estimate.

Elevated capex and increase in receivables weigh on FCF generation

* With a pick up in tower addition, capex surged 31% QoQ to ~INR25.6b. Maintenance capex remained elevated; the company continues to invest in energy efficiency initiatives such as solarization and battery replacement.

* Receivables increased ~INR5b QoQ to ~INR48.5b, indicating a net shortfall in collections by ~INR3b (net of prior period provision reversals).

* Reported FCF came in at INR3b in 2Q (vs. INR15.7b in 1Q) due to higher capex and an increase in receivables. For 1HFY26, Indus’ FCF stood at INR18.6b (vs. INR98.5b in FY25, boosted by the collection of Vi’s past dues).

* Net cash (excluding leases) improved to ~INR29.6b (vs. ~INR24.6b QoQ).

Key highlights from the management commentary

* Africa foray: Indus is currently conducting preliminary studies in Africa, focusing initially on new site build-outs, with Airtel Africa as a key anchor tenant. Management expects to provide further clarity on the scale of investments and return metrics over the next 3-6 months. Indus’ African foray will be funded through a mix of debt and equity, and management remains open to pursuing inorganic opportunities, if they come at the right valuation in due course.

* Higher capex: Management indicated that capex remained elevated due to a sequential pick-up in tower additions, investments in energy efficiency initiatives, creation of additional infrastructure to support second tenants on existing towers, and continued maintenance capex for strengthening the aging tower portfolio and battery replacements.

* Tower additions and outlook: Tower additions picked up in 2QFY26, driven by a higher share in key customers’ new build-outs and a shift from other towercos. However, tenancy additions continued to moderate in line with the tapering of Vi’s rollouts. Management indicated that the order book remains robust, at least in the near term, for both tenancy and tower additions.

Valuation and view

* Our FY26-28 estimates remain broadly unchanged. While the recent SC verdict allowing the GoI to re-examine the AGR issue is a key material positive for Vi, we continue to model ~INR20b bad debt provisions (~25% of Vi’s annual service rentals) from FY27 to FY32, given Vi’s cash constraints despite a potential AGR waiver (overall NPV impact of provisions is ~INR31/share for Indus).

* A potential fundraise by Vi, following the AGR relief, could improve visibility on the continuation of its INR500-550b capex plan, which would be sentimentally positive for Indus.

* However, we note that our estimates already bake in ~35k/~50k tenancies/5G loadings from Vi over FY25-28, and we do not expect any material earnings upgrades from the recent regulatory developments.

* We reiterate our Neutral rating with an unchanged DCF-based TP of INR390, premised on DCF-based 7.5x Dec’27 EV/EBITDA. The risk-reward appears fairly balanced at CMP (bull case: INR450; bear case: INR330).

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