Indus Towers Ltd – Attractive Play With T&Cs Attached

Updated: Jun 9


Company Name – Indus Towers Limited (Indus)


Current Share Price – INR 190 (May 16, 2021)


Market Cap – INR 51,325 cr

 

[Updated for Q4FY22/FY22 results]


1. What is interesting about the stock?

We are glued to our mobile phones all the time – there is an almost 40% chance that our data or call is being carried by a telecom tower owned by Indus nearby.. but, who is Indus?


Indus is a provider of towers and related infrastructure. The company is engaged in building, acquiring, owning, and operating towers and related infrastructure and providing access to these towers primarily to wireless telecommunications service providers - customers include Bharti Airtel, Vodafone Idea, and Reliance Jio.


Company has a unique history – Bharti Airtel, Idea Cellular and Vodafone merged their tower companies in selected circles to form Indus Towers in 2006. Other towers of these companies continued in their respective companies with some transactions here and there. Bharti Airtel listed its remaining tower company or Bharti Infratel in 2013. Subsequently, Vodafone got merged into Idea Cellular and all the tower portfolios got merged into Bharti Infratel (listed company ) in November 2020. Bharti Infratel changed its name to Indus Towers in December 2020. What a convoluted story!


Indus has c. 185,500 towers with c. 335,800 tenancies, implying a sharing factor (tenancy ratio) of 1.8x. The tenancy ratio is the average number of tenants on each tower – a higher number leads to better capital efficiency on both fixed and variable cost levels for the tower company (higher tenancy -> better profitability). Tenants are also sticky. Company has a strong balance sheet with a D/E ratio of 0.8x and RoE of 33% in FY22.


During the quarter that ended March 31, 2022, the shareholding of promoter groups changed. Vodafone sold a 7.1% stake in Indus Towers out of which 2.4% were sold in the open market and 4.7% have been sold to Bharti Airtel.


Current promoter holding is:

  • Bharti Airtel: 46%

  • Vodafone: 21%

In the next few years, I expect Bharti Airtel to keep acquiring shares from Vodafone which Vodafone will use to fund its operations.


One of the key tenants is Vodafone Idea faces an existential threat with a high debt burden and telecom policy overhang (AGR and spectrum charges). If Vodafone India were to become insolvent, India (with its large population) would be left with 2.5 players (Jio, Airtel, BSNL/MTNL) which can have long-term implications. Telecom has become a core infrastructure with high penetration of mobile phones powering digital services. This has forced the Government to relook at the telecom policy to make it more conducive for the industry.


Recently, the government has eased the overhang by offering a four-year moratorium on AGR and spectrum repayments which will provide an INR 25,000 cr annual cashflow relief to Vodafone Idea and improve its chances of surviving for longer. In January 2022, Vodafone Idea opted to convert its interest on spectrum installments and AGR dues to Government equity by exercising the option offered by the Government in the relief package. Vodafone India estimated the net present value (NPV) of the interest to be about INR 16,000 cr with the equity shares to be issued to the Government at a par value of INR 10 per share, both subject to final confirmation by the DoT. The conversion will therefore result in the dilution of all the existing shareholders of the Company, including the promoters. Following conversion, it is expected that the Government will hold around 35.8% of the total outstanding shares of Vodafone Idea and that the promoter shareholders Vodafone Plc and Aditya Birla Group would hold around 28.5% and 17.8% respectively. These shareholding details were estimated by the Company before the capital infusion from its promoters in March 2022. In early March 2022, Vodafone Idea announced that it planned to raise a combined INR 14,500 cr from its promoters Vodafone Group Plc and Aditya Birla Group, and external investors. To that end in late March, Vodafone raised INR 4,500 cr via a preferential allotment to its promoters and related entities. Of this, INR 3,375 cr was infused by Vodafone Plc which it had already raised as part of the sale of the 7.1% stake it held in Indus towers. The remaining INR 1,125 crores were infused by the Aditya Birla Group. The balance of INR 10,000 crores is to be raised through equity or debt, or a mix of both.


Bharti Airtel and Google entered into a "long-term, multi-year agreement" to accelerate the growth of India’s digital ecosystem and co-create 5G specific use cases. Under this partnership, Google intends to invest up to USD 1 bn, as part of its Google for India Digitization Fund. The investment includes a USD 700 mn equity investment in exchange for a 1.3% stake in Bharti Airtel. Bharti Airtel plans to spend INR 1.2 lakh crore in capex and related expenses through subsidiaries — Indus Towers, Nxtra, and Bharti Hexacom — over the next four years. Out of the total proposed capex, Bharti Airtel will spend INR 88,000 cr in business with mobile tower company Indus Towers according to its stock exchange filing.


Besides, 5G auctions are expected over the next two years, after which its network rollouts are likely to accelerate. 5G sites will lead to additional tenancy for the tower company – 5G works at higher frequency radio waves which carry much more data but have shorter ranges. Internet of Things (everything under the sun is likely to have a wireless 4G/5G connection) is expected to further drive growth in the telecom tower industry. Do you know – most of the cars come with a SIM these days??


Strengths and Weaknesses of Indus


Key strengths of Indus are:

  • High tenancy ratio – 1.8x vs 1.4x (national average)

  • Marquee shareholders like Bharti, Vodafone

  • Experienced management team

  • Strong balance sheet – D/E ratio of c. 0.8x in a business with annuity cashflows.

  • The dividend yield is expected to be c. 5%

Key weaknesses of Indus are:

  • Dependence on 2/3 tenants increases concentration risk (a weak tenant like Vodafone Idea has led to receivables getting stretched)

  • Fuel price risk – As the towers are powered by generators still and the fuel is a pass-through item in most contracts, there might be volatility and an inability to fully pass the higher fuel (oil) price to the tenants

2. Key Historical Financials


With the merger (Bharti Infratel and erstwhile Indus Towers) being completed in November 2020, prior financials are not fully comparable:

  • Company had healthy growth in Q4FY22 - revenue and net profit increased 10% and 34% respectively on a YoY basis

  • Cash flow conversion (CFO/EBITDA) has been poor at 61% due to an increase in receivables from Vodafone Idea of ~ INR 3,000 cr. This has been settled by Vodafone Idea after March 31, 2022

  • D/E ratio is at 0.8x which is quite low for a tower company (quite stable revenue due to long term agreements)

  • ROE/ROCE is quite healthy at 25/33%

3. What is my view on company valuation?


Indus currently trades at an EV/EBITDA (TTM annualized) ratio of c. 4.6x and a P/E (TTM annualized) ratio of c. 8.1x.


I expect the company to grow by 8% at both revenue and net profit level for the next few years. With a strong balance sheet and ROE, the PEG ratio can be expected to be around 2.0x (American Tower Company has a PEG ratio of 2x) implying a PE ratio of 12.8x (after a 20% margin of safety). So, the current valuation of the company seems to be reasonable.


Listed comparable in the US – American Tower Company and Crown Castle trade at PE (TTM) multiple of 25-30x.


Reliance Jio has sold its tower business (c. 175,000 towers with nearly 1.0x tenancy) to Brookfield at an enterprise value of USD 8 billion. Using this benchmark and adjusting for the higher tenancy factor at Indus (1.8 times due to higher tenancy), the enterprise value of Indus Tower comes to around USD 14.4 billion or INR 110,000 cr (vs current market level of INR 85,000 cr)


Company is also expected to have a dividend yield of 5% which is quite attractive.


On an overall basis, the company looks interesting for investment from a long-term perspective and should be explored further by investors.


4. What are the risks to the investment analysis?


Risks to the analysis are:

  • Concentration risk will remain in the foreseeable future – 2/3 of telecom players will dominate the Indian market

  • Vodafone India needs to raise equity capital to reduce the debt level – any issue in raising equity capital can impact the continuity of its business; can also lead to stretched working capital levels

  • 5G technology deployment could get delayed – currently expected in the next 2/3 years


About the Author


I have over 15 years of experience in venture capital, private equity, and investment banking in India and the Middle East across a wide variety of sectors. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in the Middle East, to look after investments, M&A, and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB), and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.


I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).


I am an Insignificant Investor in the public market and co-founder of SocInvest.

Disclosure


I have the stock, option, or similar derivative position in the companies mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.


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