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Indus Tower: FCF generation muted on higher CapEx

Indus Towers’ (Indus) Q1FY24 performance was good on two counts: 1) tenancy addition accelerated with a net add of 5,048 despite 518 exits; and 2) there was no provisioning that had marred EBITDA previously. We believe the high rate of tenancy addition is unlikely to sustain as Bharti is close to completing its rural 4G rollout; 5G rollout over the next 12 months will largely come as loading. Rising single-tenancy towers have diluted margins and RoCE, and VIL has to significantly recover to increase visibility on rising tenancy sharing over the medium term. We see operators decelerating 5G network rollout from FY25 onwards, and tower renewals with discounts will keep average rental revenue under pressure. We have cut our EPS estimates by 4-5% over FY24E/FY25E. However, our revised DCF-based target price is INR 155 (earlier: INR 143) as we cut the discount on DCF value to 15% (earlier: 25%) due to improving collection efficiency. Downgrade to REDUCE (from Hold).

Rental/tenant rises 0.7% QoQ to INR 41.5k
Reported rental revenue rose 2.7% YoY / 2% QoQ to INR 43.3bn. Rental/tenant YoY (down 0.9%) was impacted by lower penalty revenue of INR 32mn in Q1FY24 vs INR 287mn in Q1FY23, and renewal discount of INR 500/tenant/month. Rental/tenant QoQ has benefited from higher 5G rollout through higher loading revenue and single-tenancy rollout with Bharti’s rural expansion. Lean towers have grown to 7.9k, up by 936 in Q1FY24 while rental/tower is just INR 15.6k.

Net tenancy addition strong at 5,048
Indus’ net tenancy was hit by 518 exits (from renewal portfolio). Tower addition was strong at 5,410. Tenancy addition was lower than tower growth due to exits. Tenancy sharing ratio stood at 1.77x (vs 1.78x in Q4FY23), hence proportion of single-tenancy towers is rising. Tower addition should have benefited from faster 4G rollout by Bharti in rural locations, which is nearing its completion post which we expect tenancy addition to slow.

EBITDA grew 1.4% QoQ to INR 34.8bn
Indus’ revenue rose 4.8% QoQ / 2.6% YoY to INR 70.8bn. Energy revenue grew 9.5% QoQ / 2.5% YoY to INR 27bn. Cash EBITDA grew 77% YoY to INR 26.7bn (+0.3% QoQ) due to lower provisions as VIL has made the payment due for Q1FY24. Provisions in Q1FY24 were at INR 0.9bn vs INR 12.3bn in Q1FY23. EBITDA loss from energy was INR 850mn. Net profit stood at INR 13.5bn (vs INR 4.8bn in Q1FY23). Capex was INR 22bn (31.3% of revenue) in Q1FY24 due to higher macro tower rollout, and loading expansion for 5G.

Other highlights
1) Industry 5G rollout accelerated to 12k BTS in Jun’23 from 5k BTS in Mar’23. Company estimates 5G rollout done in 250k-275k sites (representing 25-30% of cell sites) covering 3,500 cities/towns. Of these, 1/3rd have been rolled out by Indus Towers. Indus believes 5G will be rolled out eventually on all towers (same as 4G) over next 2-3 years; 2) company consumed 8% less diesel YoY in Q1FY24 due to better energy solutions. However, energy losses were higher in Q1FY24 due to seasonality; 3) towers coming for renewal in FY24 and FY25 is 10% each year; and 4) capex of INR 22bn includes INR 14bn for macro tower rollout, and INR 6bn for 5G loading and lean towers.

Key risks
VIL regaining going concern status; and 2) higher-than-expected benefit from loading charges.

For report,

CT Bureau

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