Strong valuations, sector package to sustain rally in Indus Towers

Stake sale by telcos, higher ESG ranking, capex rollout other triggers

Tower infrastructure services provider Indus Towers has gained about 25 per cent over the last month with half the gains coming in the last few trading sessions. The street believes that the telecom relief package will keep Vodafone India (VIL) afloat ensuring revenue visibility and remove the tenancy overhang for now. The rollout of 5G networks, infrastructure sharing and improved rating on environment, social and governance (ESG) parametres are other factors which may lead to higher investor interest in the stock.

The key trigger, however, has been the relief package for the sector which will ensure survival for its major client, VIL. Bhupendra Tiwari of ICICI Securities says that VIL, which had an annual commitment of Rs 24,000 crore towards spectrum payment and AGR dues, will be the key beneficiary. While the key monitorable, according to him, is the timing and the quantum of tariff hike and fund raise to meet near-term commitments, the likely improvement in survival possibility of VIL will improve the overall value visibility of Indus Towers. While tenancy ratios are expected to be stable, the level of discounts will need to be monitored.

Valuations, post the announcements too favoured Indus Towers. Spark Capital believes that Indus Tower is the biggest beneficiary of the reforms package for the sector. Arun Prasath of Spark Capital said in a recent note that the company trades at 6.5 times its enterprise value to operating profit implying a 1.2 times replacement capex which is typically a valuation attributed to single tenant tower companies.

He expects Indus Towers to rerate substantially due to liquidity benefits for VIL, government’s willingness to take equity in telecom companies and increase in tower capex due to relief given to overall industry. With the market share versus tariff hike dilemma going away, tariff hike once again has become the biggest growth driver for Bharti/Jio, he adds.

Higher ranking on the ESG framework and possible stake sales by telcos are other factors which could bring in more investors. CLSA says that Indus Towers is among the top 40 companies on ESG across its coverage of 130 companies. 40 per cent of tower locations are ‘green sites’ and over the years it has seen almost 1 million tonnes cumulative carbon emission reductions. The company’s ESG rating is 8-17 per cent higher than the country and sector average scores.

A rerating trigger for Indus is potential stake sales by telecom companies; Bharti Airtel is the biggest shareholder in Indus Towers with a 41.73 per cent stake. While the stock has gained in recent rally, brokerages (CLSA has a target price of Rs 330) see an upside of over 20 per cent from current levels. Additional gains will depend on capex intensity and stake sale news.