Indus Towers: Cashflow conversion normalises, ICICI Securities

Indus Towers’ (Indus) Q4FY23 performance was good on two counts – 1) tenancy addition accelerated with net add of 3,396 despite 512 exits; and 2) no provisioning, that had marred EBITDA in previous three quarters due to delay in VIL receivables. We believe tenancy addition is unlikely to sustain as Bharti is close to completing its rural 4G rollout; 5G rollout over the next 12-18 months will largely come as loading. Loading can drive rentals by 5-10%. Further, tenancy expansion is largely coming as single tenancy towers where ROIs are lower until Indus adds more tenancy / loading. We are watching working capital situation and casflow conversion for Indus; it has normalised in Q4FY23 (last three quarters were significantly lower) as VIL has made the entire payment for the quarter. We have cut our EPS estimate for FY24E / FY25E by 0.3-1%. Our revised DCF-based target price is Rs143 (vs Rs158 earlier) as we have increased the discount on DCF value to 25% (vs 15% earlier) due to the rising risk. Maintain HOLD.

• Rental/tenant rises 1% QoQ. Reported rental revenue dipped 10.4% YoY due to Rs5.5bn one-off gains in the base, adjusted for it, rental revenue was up 1.3% YoY / 1.8% QoQ to Rs42.5bn. Rental revenue YoY was impacted by 1) lower penalty revenue of Rs33mn in Q4FY23 vs Rs283mn in Q4FY22; and 2) discounts on rentals due to large renewals. Rental revenue QoQ has benefited from higher revenue towards equalisation which gets loaded upfront in renewal quarter, and it will gradually dip each quarter till expiry. Rental revenue has partly benefited from 5G rollout through higher loading revenue, and the benefit will likely reflect more in coming quarters.
• Net tenancy addition strong at 3,396: Indus’ net tenancy was hit by 512 exits (from renewal portfolio). Tower addition was also strong at 3,482. Tenancy addition was lower than tower growth due to exits. Tenancy sharing ratio stood at 1.78x (vs 1.8x in Q3FY23), therefore proportion of single tenancy tower is rising. Tower addition should have benefited from faster 4G rollout by Bharti in rural location which is nearing its completion post which we expect tenancy addition to slow down materially. Lean tower addition was 1,235 in Q4FY23 vs 1,408 in Q3FY23. The company expects single tenancy lean towers to have better RoCE vs macro towers.
• EBITDA normalises due to nil provisioning. Indus’ revenue fell 0.2% QoQ / 5.1% YoY to Rs68bn. Energy revenue fell 3.4% QoQ / up 5.5% YoY to Rs25bn. Cash EBITDA fell 19% YoY to Rs27bn (Rs5.5bn one-off gains in base), but rose 7x due to nil provision as VIL has made the entire payment due for Q4FY23. EBITDA loss from energy was Rs566mn. Net profit stood at Rs14bn (vs loss of Rs7bn in Q3FY23). Capex was Rs15.3bn (22.7% of revenue) in Q4FY23, and it was at Rs41bn (14.7% of revenue) in FY23. It was higher due to faster 5G loading, and tower addition. The company has not announced any dividend for FY23 and is watchful of its working capital situation.
• Other highlights. 1) Though company believes single tenancy tower has grown, it has re-aligned capex and new towers are costing lower to protect ROIs; 2) 5G loading on towers will earn additional rental of 5-10% depending on single or two bands. This is despite drop in 5G equipment weight from earlier 40kgs to 18-20kgs; 3) company has received 90-100% of payment dues from VIL for Q4FY23. It is under negotiation with VIL for recovery of earlier dues as well; and 4) energy margin was impacted by certain adjustments in Q4FY23. The company is working on certain initiatives to turn profitable again on energy revenues.
• Key risks: 1) Concerns on VIL’s going concern status; and 2) lower-than-expected benefit from loading charges.

For report, https://www.communicationstoday.co.in/indus-towers-cashflow-conversion-normalises/

CT Bureau