Q1FY24 Review: Indus Towers: Decent Q1; Vi faces large payouts in Q2

31 Jul 2023 , 11:51 AM

Indus Towers’ Q1 Ebitda saw 1.4% QoQ growth, slightly below estimates, due to lower energy spread. Q1 saw the highest tower additions in a long time, as Indus garnered higher market share in Bharti’s rural 4G rollout. Management expects tailwinds from the aforesaid factor to hold steady for the next 4-5 quarters. While Vi has been making payments to Indus on time for the past 6 months, the telco’s financial position remains stressed as seen in the delay in licence fee payments to the government. Analysts of IIFL Capital Services calculations indicate that Vi faces ~Rs43bn in debt repayments and spectrum instalments in Q2, which may exert pressure on payments to Indus unless Vi raises funds. However, Vi’s payment obligations moderate from Q3FY24. Indus’ Q1 FCF was almost nil due to higher capex, and near-term FCF prospects are weak; analysts of IIFL Capital Services assume no dividend in FY24. Analysts of IIFL Capital Services largely maintain estimates and their Sep’24 TP is Rs181. Maintain REDUCE. 

Decent Q1; strong tower additions but nil FCF: 

Indus’ Q1 was marked by strong tower additions and fairly low Vi-related provision. The former factor resulted in a capex spike, which led to nil FCF, albeit in a good way since this was mostly growth capex. 

Management cautiously optimistic: 

Key takeaways from the earnings call: 1) 5G has been deployed on 25-30% of towers at the industry level. 2) One-third of 5G BTSs are on Indus. 3) A large customer’s (read Bharti) 4G rural rollout should continue for 5-6 quarters. 4) Vi has been making current payments (but not past dues) in the last 6 months. 5) While the dividend policy is set at 100% of FCF, there is limited visibility on FCF considering the delay in fund-raising of a large customer (read Vi). 

Maintain estimates; Vi faces large payouts in Q2FY24: 

Analysts of IIFL Capital Services largely maintain estimates as gains from higher tower additions are offset by a mix change towards single-tenant towers. From Vi’s disclosures, analysts of IIFL Capital Services estimate that it faces Rs43bn outgo in Q2FY24 (Rs26bn debt maturing and Rs17bn instalment related to 5G spectrum). Further, while the redemption of Rs8bn (out of the Rs16bn) OCDs issued to ATC is also due in Q2, Vi has the flexibility to skip payment, with ATC subsequently exercising its option of converting the OCDs into equity. Analysts of IIFL Capital Services TP of Rs181 is based on 75:25 probability of a three/two player market.