Stake-sale overhang likely to keep Indus Towers stock under pressure

Rental renegotiations another dampener for the stock

The twin rounds of stake sale in Indus Towers (Indus) by Vodafone Group Plc (Vodafone Plc) will have multiple implications for Vodafone Idea (Vi), Bharti Airtel (Airtel), and Indus. The stake sale helps Vi monetise its assets and allows Airtel to consolidate its holdings in Indus. The impact on Indus is mixed. Vodafone Plc had 28.1 per cent stake in Indus. It sold 2.4 per cent stake on Thursday and followed it up with an announcement that it would sell an additional 4.7 per cent stake to Airtel on Friday. 

For the country’s largest tower company, the sale of stake is positive in some respects, but there is an overhang as well.

The positive is that the company’s receivables from Vi will be settled. In fact, the stake sale to Airtel is on the condition that the amount received by Vodafone Plc will be used (via Vi) to clear its India unit’s outstanding dues in Indus.

The negative is rental pressures, which could be on the downside, both from Vi, which is struggling with higher debt and market-share loss, and Airtel. Analysts believe the consolidation of Airtel’s stake in Indus could lead to better terms for the former.

Says Hemang Khanna of Kotak Institutional Equities, “Airtel has indicated it may look at the renegotiation to drive a reduction in operating costs, which will impact Indus’ 2023-24 earnings.”  

While Vodafone Plc sold its 2.4 per cent stake at Rs 226.8 a share, the agreement between Airtel and Vodafone would mean that the deal price would be lower than Rs 226.8.

The Indus stock closed at Rs 214.2 on Friday. The stock had slipped 18 per cent on Thursday after an announcement of stake sale by Vodafone Plc. The market crash due to Russia’s invasion of Ukraine added to the selling pressure. The recovery in the stock on Friday was limited to 4.5 per cent, given the overhang related to the sale of the residual stake.

While the asset sale in Indus is a positive for Vodafone, the benefit from it might be limited, given that part of the stake is pledged with banks. The move is also seen by analysts as a failure to bring in an external investor, which, coupled with Vodafone’s weak financials, is viewed as a negative for Indus.

Most analysts have a 'Buy' rating on Airtel, given the medium-term market-share gains and improvement in average revenue per user.

Given the Vodafone overhang, the ratings for Indus are mixed, while Vi remains a 'Sell'.