Indus Towers may emit weak signals as Vodafone Idea concerns persist

Telecom infrastructure major Indus Towers reported a robust increase in the consolidated net profit for the December quarter of 2023-24 on the back of strong tower additions, even as Airtel continued to roll out its 5G network.

Indus reported revenue and adjusted Ebitda (earnings before interest, taxes, depreciation, and amortisation) growth of 1 per cent and 3 per cent, respectively, on a quarter-on-quarter (Q-o-Q) basis, led by tower and rental additions and receipt of Rs 300 crore from Vodafone for the past dues, which led to provision write-backs.

The rental Ebitda grew 3 per cent Q-o-Q, while PAT growth was strong at 19 per cent Q-o-Q, led by lower power costs, and interest income for delayed payments.

However, the new Airtel 5G rollout will lead to single-tenancy sites which means relatively higher capex-to-income ratios and a reduction in free cash flow.

The Vodafone (VIL) factor remains a cause for concern since there is constant worry about payments from VIL, which owns 21 per cent stake in Indus.

A forced stake sale by the beleaguered telecom service provider is not out of the question, which would impact the share price of Indus.  

Revenue grew 1 per cent Q-o-Q in Q3FY24 to Rs 7,200 crore led by 3 per cent Q-o-Q rental revenue growth but energy revenue declined 3 per cent Q-o-Q.

The rental revenue growth was due to the addition of 7,600 towers, and 7,200 co-locations implying a reduction in the average sharing factor (ASF) sequentially to 1.72x from 1.74x.

The Ebitda was up 5 per cent Q-o-Q to Rs 3,600 crore led by a dip in power and fuel expenses and a decrease in VIL-related provisions to Rs 64 crore from Rs 130 crore in Q2FY24.

After adjusting for VIL provisions, the adjusted Ebitda rose 3 per cent Q-o-Q to Rs 3,650 crore, and the adjusted margin improved 80bp Q-o-Q to 50.7 per cent. Higher finance income and lower depreciation and interest costs led to a 19 per cent Q-o-Q increase in PAT to Rs 1,540 crore. The net debt (excluding leases) declined from Rs 860 crore to Rs 4,600 crore in Q3FY24.

In the 9 months ending September 2023, free cash flow turned negative to Rs 600 crore due to a higher capex of Rs 6,150 crore.

Management said VIL collections improved in Q3FY24 and the company recognised Rs 300 crore as against the past overdue in addition to 100 per cent monthly collections, so it could reverse provisions for doubtful debts.

Indus has an adjusted interest receivable of Rs 330 crore from VIL, which increased interest income, and correspondingly a similar provision for doubtful debts has been created.

Hence, this is netted off with no impact on the P&L account. The Order Book is expected to grow for the next two quarters and capex may remain elevated.

In FY23, Indus renewed 33 per cent of its total portfolio and thereafter, it has not done any major bulk renewals. But, about 50-60 per cent of its portfolio would come up for renewal in coming years.

Indus is leveraging the benefits of Airtel’s aggressive 5G network rollout and densification. VIL’s inability to raise capital poses a risk since it is a key user.

The single-tenancy operations could hit free-cash-flow generation. But consolidation across the telecom services industry which leaves very few players makes single-tenancy inevitably part of the business model.

Conversely, the consolidation gives telecom service providers pricing power to hike ARPU and this could improve profitability and hence, the ability to pay Indus in a timely fashion. If VIL does turn around, there could be a big upside.

Indus’ share price hit a record high of Rs 236 on Wednesday, following Q3 results on Tuesday, before closing 5.8 per cent up at Rs 229.80. On Thursday, it gave up some gains closing at Rs 225.40.

Analysts are, however, divided as according to Bloomberg poll post results, seven of 16 have rated the stock as ‘underperform/sell/reduce’, six have a ‘buy/add/outperform’ and the rest three are ‘hold/neutral’. 

Their average target price is Rs 213 – ranging from a low of Rs 160 to a high of Rs 265.