Q2FY24 Review: Indus Towers: Delivers the goods, but not still out of the woods

27 Oct 2023 , 01:00 PM

Indus Towers’ Q2 Ebitda declined 1.7% QoQ — less than feared — due to lower-than-expected provision for doubtful debts (PDD) related to Vi. Though Q2 saw Rs10bn increase in receivables QoQ, management stated that most of these were realised in October. Analysts of IIFL Capital Services see this as a decent outcome, since Q2 saw significant payment obligations for Vi (Rs43bn debt maturing + spectrum payout). While Vi’s obligations ease from Q3FY24, the telco’s prospects can materially improve only if it manages to raise funds. Analysts of IIFL Capital Services largely maintain estimates and Rs182 TP for Indus. Any potential relief to Vi, if the Supreme Court (SC) permits the DoT to allow a reconciliation with telcos on the dues and the DoT agrees with telcos’ self-assessment, can improve receivables from Vi in the near term and can lend the visibility for revenue growth for Indus. Maintain REDUCE on Indus, since the path to improvement of Vi’s financial position is still paved with uncertainty. 

Decent Q2; strong tower additions, but nil FCF due to high capex: 

Indus’ Q2 was marked by strong tower additions and fairly low Vi-related provision. Higher receivables (which have subsequently normalised in October), coupled with higher growth capex resulted in Rs11bn negative FCF in both Q2 and H1. Analysts of IIFL Capital Services estimate Indus to witness negative FCF in FY24, which may lead to nil dividend. 

Management cautiously optimistic: 

Key takeaways from the earnings call: 1) Rural rollout by a large customer (Bharti) drove record tower and tenancy additions. 2) Indus expects this to continue in the near term (which should also result in elevated capex for Indus). 3) The company expects to receive 100% monthly payments from Vi since the phase of bunched-up obligations for the telco is behind. 4) Indus continues to engage with Vi on receiving past dues (Rs78bn as per Indus’ letter to TRAI). 5) At the end of FY24, the Board will take a call on dividend payout based on the prevailing situation (payout policy is 100% of FCF). 

Maintain estimates: 

Analysts of IIFL Capital Services largely maintain estimates, as the gains from higher tower additions are offset by a mix-change towards the single-tenant towers. For Indus, their TP of Rs182 is based on 75:25 probability of a three/two player market. While Vi has been making some progress on fundraising (as per media reports), analysts of IIFL Capital Services continue to build in Rs4bn quarterly PDD for Indus, considering Vi’s uncertain prospects.