Indus Towers’ Q2FY23 result had two one-offs: 1) Settlement gain received was Rs11bn of which Rs5.5bn was recognised in rental revenue thus, rental was inflated; and 2) rising receivables due to delay in payment by VIL. Indus has taken provision of Rs17.7bn on aging receivables in Q2FY23 (Rs30bn in H1FY23). The payment plan stretches delayed receivables at least till Dec’22, and repayment till July’23. Tenancy addition continues to remain stable post Bharti’s completion of a huge 4G rollout, and exits (likely from renewals). 5G rollout will largely come via loading; however, Indus believes loading charges for 5G equipment will be higher vs 3G / 4G on higher power requirement. We have cut our EPS estimate for FY23 by 22.9% on recognising provision in our annual estimates. Our revised DCF-based target price is Rs194 (vs Rs210) as we increase our WACC to 12.9% from 11.7% on rising risk to VIL revenue. Maintain HOLD.
- Receivable issue prolongs. Indus has taken provision for doubtful debt of Rs17.7bn in Q2FY23, and Rs30bn in H1FY23 for aging receivables. This is despite liquidating pledge shares of Vodafone Plc, and VIL making part payment. Despite large provision, receivables (including other financial assets) have increased to Rs100bn (from Rs92bn in Q1FY23). VIL has committed to pay partially till Dec’22, and thereafter, will completely pay the bill. It has proposed to pay dues as on Dec’22 (including interest) over Jan’23 to July’23. This is based on VIL being confident on raising capital. Indus does not except more provisioning if VIL sticks to its payment scheduled.
- Lean towers are adding to tower/tenancy growth. Lean towers (which largely works on single tenancy structure) have been growing strongly, and Indus added 1,535 lean towers in Q2FY23. In the past three quarters, it has added ~3,100 such towers. This is not reflected in tower and tenancy counts.
- Rental/tenant grew 12.4% QoQ. Reported rental revenue rose 13.3% QoQ / 12.5% YoY to Rs48bn. However, it has one-off settlement gains (which company recognising on cash received basis) of Rs5.5bn. Adjusted from one-off gains, revenue was Rs42bn, up 0.3% QoQ (dip on YoY basis due to lower penalty gains). It is also impacted by cut in rentals of Rs500/month for renewal tenancy. We expect rental revenue to grow faster in coming quarters due to fast 5G rollout by Bharti and RJio which will drive higher loading charges immediately. Over the next few quarters, Indus expects 50-60% of towers to have 5G loading which can add 5-10% to rental revenue.
- Net tenancy addition at 1,746: Indus’ net tenancy was impacted by 543 exits (probably from renewal portfolio where renewal happened for only 91% of tenancy); tower addition was steady at 1,452. Tenancy sharing ratio stood at 1.8x. We do not expect faster growth in macro tower/ tenancy as telcos (Bharti / RJio) are close to completion of 4G network rollout, and gearing up for 5G rollout in H2FY23.
- EBITDA (adjusted for Ind-AS 116) was down 30% YoY / up 34% QoQ to Rs20bn. Indus’ revenue rose 15.5% QoQ / 15.9% YoY to Rs79.7bn which benefited from one-off gain of Rs11bn. Its rental revenue rose only 13.3% QoQ / 12.5% YoY to Rs48bn and has a one-time settlement income of Rs5.5bn. Energy revenue grew 19% QoQ/ 21.3% YoY to Rs32bn, also had settlement income of Rs5.5bn. Cash EBITDA was down on higher provisioning of Rs17.7bn; EBITDA profit from energy was Rs4.6bn. Net profit stood at Rs8.7bn, down 44% YoY. Capex was Rs7.9bn (10% of revenue).