The biggest concern for Indus Towers now: Is growth potential diminishing?

The major concern that analysts point out is if the high rate of tenancy addition is unlikely to sustain as Bharti Airtel is close to completing its rural 4G rollout and 5G rollout over the next 12 months will largely come as loading.

Rising single tenancy and potential decrease in demand can place Indus Towers in a bind in coming periods, analysts said. The company, already facing several challenges, will likely not have an easy time going ahead either.

Analysts were largely neutral to bearish on the stock with a few exceptions. Shares of the tower leasing company traded flat for another day on July 31 at Rs 174 on BSE. The stock has not reacted much to Q1 numbers.

Sanjesh Jain, a research analyst at ICICI Securities, who downgraded the stock from ‘hold’ to ‘reduce’, underlined that the company’s Q1 numbers were good on two counts – high tenancy addition and no provisioning.

Indus Towers last week reported a consolidated net profit of Rs 1,348 crore for the quarter ended June 2023, an increase of 182 percent YoY. Its revenue from operations also rose 3 percent to Rs 7,076 crore from Rs 6,897 crore in the corresponding quarter last fiscal.

Quarter-on-quarter, the number of towers grew by 5,410 to 1,98,284 at June-end. Sharing revenue per tower per month was steady at Rs 73,286 while sharing revenue per sharing operator per month came in at Rs 41,503, nearly flat QoQ and YoY, and largely in line with expectations.

The major concern that analysts point out is if the high rate of tenancy addition is unlikely to sustain as Bharti Airtel is close to completing its rural 4G rollout and 5G rollout over the next 12 months will largely come as loading. Moreover, the company has seen higher single tenancy towers, which for a company that earns from providing tower sharing services, cannot be termed good.

“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,” said Jain.

Aliasgar Shakir, Research Analyst at Motilal Oswal also agreed with Jain’s contentions. He said with single-tenancy operations, Indus Tower may face challenges in deleveraging its debt, generating sufficient FCF, and making dividend payments.

“The company’s financials could be at risk due to a potential decline in tower leasing demand. (Moreover) Vodafone Idea’s inability to raise capital poses the risk of survival, which, in turn mars the visibility and prospects of Indus Tower,” he added.

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Vodafone Idea has been dealing with severe cash crunch and had to dilute equity and onboard the government as the largest shareholder. The cash crunch has led to its inability to make timely payments to Indus Towers.

Jain has cut his EPS estimates for Indus Towers by 4-5 percent over FY24-25 and arrived at a target price of Rs 155. Shakir factors EBITDA growth of 50 percent and 7 percent in FY24 and FY25 on a low base on FY23, due to Vodafone write offs, arriving at target of Rs 170.

However, not everyone is as pessimistic.

Citi not just maintained its ‘buy’ rating on the counter but also raised the target price to Rs 210. It said that Q1 performance was in-line with expectations. It underlined that monthly collections from Voda Idea remain at 100 percent of billings, a big positive. Moneycontrol