ICICI Direct sees an upside potential of 11% in Indus tower share!!! 


About the stock: Indus towers share was formed by the merger of Bharti Infratel and Indus Tower share.  

This combined strength makes Indus towers share one of the largest telecom tower companies in the world.  

It has 184748 towers and 335106 co-locations (as on Q3FY22) and a nationwide presence covering all 22 telecom circles. Q3FY22Results:  

Stable operating performance; receivables stretch continued. 

The company reported net addition of 2555 co-locations vs. 3566 co-location addition in Q2, lower than our expectation of 3500 tenancy addition.  

Revenues came in at ₹ 6927 crore, up 0.7% QoQ with core rental revenues at ₹ 4397 crore, up 3.4% QoQ. 

EBITDA was at ₹ 3699crore, up 2.1% QoQ, with margins at 53.4% (up 70 bps QoQ).  

Receivables were up by ~ ₹ 1600 crore QoQ to ₹ 7351 crore, with debtor days at ~97 days vs. ~76 days in Q2 &~54 days as on FY21. 

What should investors do? 

Indus towers share price has delivered merely ~9%return over the past five years owing to concerns over its key tenant (VIL) survival. 

There is a lack of clarity on the long-term tenancy growth despite the improvement in survival chances of Vodafone Idea. 

ICICI direct maintains HOLD on the stock. 

Target Price and Valuation:  

ICICI direct values Indus towers share at ₹ 280i.e. 6x FY24E EV/EBITDA. 

Key triggers for future price performance: 

Growth in medium term will be driven by the opportunities in the adjacent areas such as small cells, smart cities, active network sharing and building solution. 

Working capital is stretched due to normalization of VIL stress. 

Overall tenancy demand from 5G transition. 

Alternate Stock Idea:  

Besides Indus Towers share, ICICI direct likes Tata Communication in the telecom space. 

A play on cash flow generation consistency and growth levers like cloud, edge & security, IOT. 

BUY with a target price of ₹ 1775. 

Key performance highlight and outlook: 

On a gross basis, Indus towers share added 2971 tenancies while gross exits were 416.  

Consequently, net addition of 2555 co-locations were reported vs. 3566in Q2, which is stable.  

The tower addition at ~1286was also decent, albeit lower than last few quarters run rate.  

ICICI direct highlights that equity conversion of moratorium interest, government has become a key stakeholder in Vodafone Idea (VIL), owing to which its medium-term survival odds have improved.  

However, long term tenancy growth outlook for Indus towers share remains uncertain.  

Due to data usage explosion, Indus towers share is hoping to have continued healthy run-on network transformation which is noted by ICICI direct. 

There should be a key focus on the addition of lean towers which should be monitored continuously. 

ICICI direct expects net co-locations to reach 365360 in FY24vs. FY21 co-location count of 322438.  

ICICI direct expect reported rentals (including exit rentals) to witness 3.4% CAGR inFY21-24E to ₹ 18121crore.  

ICICI direct note that the management expects exit penalty to taper sharply in CY22 vs. ₹ 185crore/quarter, currently. 

VIL stress continues to stretch working capital. 

The debtors were up by ~ ₹ 1600crore QoQ on account of VIL taking additional time for clearing the dues.  

It expects the telecom package, tariff hikes, bank guarantee releases and fund-raising plans to improve VIL’s liquidity and, thus, ability to pay on time, going ahead. 

Other highlights: 

The energy spreads margins were negative 1.5% in Q3.  

ICICI direct note that the company has been engaging with telcos to get back to fixed cost model vs. pass through model currently, which, it believes, will be win-win for everyone.  

However, no major breakthrough/update was given in this regard. ICICI direct bake EBITDA margins of 52% in FY24 vs. 51% in FY21. 

As per the management, commercial launch of 5G in the near-to-medium term will fuel the data consumption (likely to grow 2.7x (to ~40GB/month by 2026). 

Thus, demand for mobile infrastructure such as towers and fibres are likely to improve in-tandem with usages and required densities, in-turn, providing huge opportunity to companies like Indus Towers share in the long term. 

Sharing revenue per tower (RPT) has improved to 2.3% QoQ to | 79,609 per month in Q3, mainly backed by improved tenancy and loading.  

The RTP increase was also due to non-recurring benefits arising due to billing re-conciliations, municipal taxes, etc, contributing to ~1% QoQ increase. 

The capex remained underwhelming at ₹ 710.7 crore inQ3FY22 (vs.₹ 830.2 crore in Q2FY22).  

Net debt at ₹ 5,079 crore was lower by ₹ 103.5 crore QoQ. 

The tenancy addition momentum remains decent.  

ICICI direct note that VIL’s survival over the medium term has been addressed with the government becoming a stakeholder. 

ICICI direct maintain their HOLD recommendation with a revised target price of ₹ 280/share (vs. ₹ 310, earlier), as ICICI direct rolls over to FY24E and assign target EV/EBITDAof 6x on FY24 EBITDA vs. 7xFY23E earlier. 


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