Indus Towers’ Q1FY23 result was marred by two issues: 1) Completion of tenancy renewal where Indus has agreed to cut rentals by Rs500/month, and 9% of tenancy has option to exit without penalties; and 2) rising receivables due to delay in payment by VIL. Indus has taken provision of Rs12.3bn on aging receivables. The new payment plan stretches delayed receivables at least till Dec’22, and repayment till July’23. Tenancy addition continues to remain weak 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. We believe some more tenancy exits are possible in the next few quarters, and lower rental means rental revenue growth will be muted in FY23. FY24 onwards, accelerated rollout of 5G may benefit Indus. We have cut tenancy by 0.5%, but increased rental due to higher revenue equalisation. Thus, our EPS estimate for FY23-FY24 has increased by 4-6%. We have not accounted for provisions as these are expected to be realised. Our revised DCF-based target price is Rs210 (vs Rs206).
- MSA renewal agreed, rental cut by Rs500. Indus has agreed on tenancy renewal with two large customers for the next 10years and renewed tenancy represents 1/3rd of total tenancy; another 20-25k tenancy will come for renewal each over the next two years. Two customers have retained the option to exit up to 9% sites without exit penalty (thus 91% of sites are renewed). Indus believes not many sites of 9% will actually exit. It has also offered competitive pricing, and has cut rental by Rs500/ tenant/ month, while escalation of 2.5% will continue. Loading charges will remain unchanged.
- Receivable issue prolongs. Indus has taken provision for doubtful debt of Rs12.3bn for aging receivables. This is despite liquidating pledge shares of Vodafone Plc, and VIL making part payment. Adjusted for provisioning, receivables in Q1FY23 have grown by Rs4.2bn (+6% QoQ). This is despite monthly payment commitment honoured by VIL till 15th July’22. VIL has committed to pay partially till Dec’22, and thereafter will completely pay the bill, and 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.
- 5G rollout largely to start with loading. Indus’ believes 5G rollout will happen in few weeks, and expects initial rollout to be large via loading which means operators will mount equipment on existing sites. However, considering 5G sites are bulky and require more energy solutions, loading charges are expected to be higher.
- L2L rental/tenant fell 2.1% QoQ. Reported rental revenue dipped 11.2% QoQ / 2% YoY to Rs41,879. However, in Q4FY22, rental revenue had a one-off benefit of Rs5.4bn. And in Q1FY23, rental revenue was higher due to rise in revenue equalisation which rose to Rs1.8bn in Q1FY23 from Rs1bn in Q4FY22. Adjusted for all these, underlying rental declined 2.1% QoQ to Rs40,619 (down Rs882). The company said it has cut rentals by Rs500/month for renewed tenancy, while rentals will remain unchanged for new tenancy.
- Net tenancy addition at just 591: Indus’ net tenancy was impacted by 733 exit (probably from renewal portfolio); tower addition was steady at 1,027. Lean tower addition is excluded from the calculation. We anticipated significant deceleration in tenancy adds as Bharti was getting closer to completion of its 4G rollout, and VIL’s capex was constrained.
- EBITDA (adjusted for Ind-AS 116) was down 46% YoY / 54% QoQ to Rs15bn. Indus’ revenue rose 1.5% YoY to Rs69bn (down 3.1% QoQ on one-offs in Q4FY22). Its rental revenue rose only 0.3% YoY (down 11% QoQ) to Rs42bn which benefited from higher revenue equalisation. Energy revenue grew 3.4% YoY (+12.8% QoQ) to Rs27bn. Cash EBITDA was down on higher provisioning of Rs12.3bn; EBITDA loss from energy was Rs167mn (vs Rs292mn in Q4FY22). Net profit stood at Rs4.8bn, down 66% YoY. Capex was Rs7.6bn (11% of revenue).