2QFY23 results update on Indus Towers

October 31, 2022

Muted performance led by write downs

INDUSTOW’s 2QFY23 performance was weighed down by higher provisions (INR17.7b), along with INR11b in write backs. Adjusted for the same, revenue/EBITDA stood flat at INR69b/INR45b. IDEA-related provisions ballooned to INR30b, highlighting the liquidity risk posed by it.
IDEA has proposed a substantial monthly billing until Dec’22 and the balance by Jul’23, subject to its capital infusion plans. We expect an EBITDA CAGR of a mere 2% over FY22-24, with a risk of falling tenancies, despite the optimism around 5G-led tenancy additions. Subsequently, we maintain our Neutral rating.

PAT remains under pressure due to collection challenges from IDEA

Consolidated revenue grew a strong 16% QoQ to INR80b. However, adjusting for one-off of ~INR11b, revenue remains flat at INR69b (in line).
Adjusting for this one-off impact, rental/energy revenue remained flat QoQ at INR42b/INR27b (in line).
Consolidated EBITDA grew 24% QoQ to INR28b. Adjusting for a doubtful debt provision for IDEA and a one-off revenue item, adjusted EBITDA was flat at INR35b (in line). Adjusted EBITDA margin was flat at 50.7%.
The company has provided for INR30b for doubtful debts in 1HFY23 (1Q/2Q: INR12.3b/INR17.7b).
Adjusting for IDEA-related provision and a one-off item in revenue, rental EBITDA rose 2% QoQ to INR36b and the operating loss in energy stood at INR850m.
Net finance cost grew 18% QoQ to INR3.3b (est. INR2.6b). Adj PAT have reduced by 10% QoQ to INR15b .
Gross debt (excluding lease) grew 10% YoY to INR60.4b in 1HFY23. INDUSTOW is planning to raise up to INR20b via the issue of NCDs, which may lead to a 33% increase in gross debt.
The company has liquidated investments worth INR13.7b in 1HFY23 (out of INR16.5b in FY22) primarily to pay dividend. Cash and investments stood at INR3.1b – the lowest in the last three years.
Capex stood at INR7.9b v/s INR7.6b in 1QFY23. The increase is due to the additions of 1,452 towers in 2QFY23, taking its total count to 187,926.

Highlights from the management commentary

It has agreed to IDEA’s payment plan. As per the terms of the payment plan, it will receive a substantial payment till Dec’22 and the remainder by Jul’23.
The management continues to see growth, led by: a) incremental loading revenue, and b) capacity additions from the setting up of new sites.
INDUSTOW is seeing a good 5G order pipeline. 5G coverage should constitute 50-60% of sites, given the target of telcos to cover 500 towns. The management expects 5-10% of average revenue from 5G.

Valuation and view

We expect the rollout of 5G services to drive network densification by telcos. Healthy growth in new and leaner small cells, with sharing alternatives, offers a good opportunity in the Telecom-passive infrastructure industry.
The proposed monthly billing payment plan by IDEA will be a key monitorable going forward as single-tenancy operations make a limited business case for a tower sharing company.
We factor in a revenue/EBITDA CAGR of a mere 2% over FY22-24 to arrive at our TP of INR197, implying an EV/tenancy ratio of INR2m and an EV/EBITDA ratio of 4.6x. The stock garners a healthy dividend yield of 5% (FY22), but the management said it will be a function of FCF, which remains at risk. We maintain our Neutral rating.

CT Bureau