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.