Weak signals from Indus Towers on renewal, tenancy ratio concerns

Need for additional towers in question as operators recently added spectrum

Led by higher tower additions and lower costs, Indus Towers March quarter financials were marginally ahead of analyst expectations. Gross tenancy additions were up 10 per cent sequentially to 5,024, the highest in over three years. The additions and growth are likely on the back of Bharti Airtel’s continued network rollout driven by the need for both coverage and capacity requirements, says Sanjesh Jain of ICICI Securities in a post result report.

Though operating profit was down sequentially by 4 per cent, this was in line with estimates. As compared to the year ago quarter, this is up 20 per cent on falling other expenses and lower than expected energy losses which have been trending down over the last three quarters. 

The stock however declined over 3 per cent in trade given multiple concerns. While tower additions have been strong, the tenancy ratios have been falling for multiple quarters. This is the single most important metric which impacts operating profit margins and the current trend has seen the average tenancy ratio fall from 1.85 in the year ago quarter to 1.81 currently. 

The upcoming contract renewals in FY23 is another factor which could impact revenues given the weak balance sheet of Vodafone Idea. Any increase in discounts for the operator would have to be passed on to other operators which would have a negative impact on revenues. An even bigger concern is the ability of Vodafone Idea to survive given that the expected relief led by price hikes has not materialised. The tenancy ratio will deteriorate further if Vodafone Idea rationalises its tower base.

Finally, the large amount of spectrum being brought by Airtel may reduce the need for additional towers to service customers. While the company is confident given that data demand has been strong and that companies would need to expand to increase coverage and enhance capacity, analysts believe the spike in data consumption has not necessarily reflected in tower rentals or tenancy ratios.

While a healthy dividend yield and the fact that the company is trading at a sharp discount on an enterprise to operating profit basis to global peers are supportive of stock prices, in the near term the stock, which has risen about 6 per cent over the last three months will continue to underperform the broader markets.