Indus Towers – Attractive play with T&Cs attached

Updated: Dec 2, 2021

Company Name – Indus Towers Limited (Indus)

Current Share Price – INR 284 (November 18, 2021)

Market Cap – INR 76,657 cr

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 tower and related infrastructure. The company is engaged in building, acquiring, owning and operating tower 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. 180,000 towers with c. 322,500 tenancies, implying a sharing factor (tenancy ratio) of 1.8x. Tenancy ratio is the average number of tenants on each tower – higher number leads to better capital efficiency on both fixed and variable cost level for the tower company (higher tenancy -> better profitability). Tenants are also sticky in nature. Company has a strong balance sheet with D/E ratio of 0.5x and RoE of 22% in FY21.

However, one of the key tenants is Vodafone Idea which is facing an existential threat with 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 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. Furthermore, the option of paying interest amounts on deferment of payments, through equity could lead to the Government owning a 23% stake in Vodafone India at the end of four-year period. This improves Indus Towers' tenancy outlook over the next few years given that forced site reduction is unlikely to take place now. Moreover, the Govt's potential stake in Vodafone India could possibly prevent it from going under, which lowers the key tenancy risk.

Bharti Airtel's recent plans to step up network investments by raising INR 21,000 cr through a rights issue and investing the cashflow relief of INR 11,700 cr towards network investments, are likely to accelerate tower and tenancy additions for Indus Towers. 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. 0.5x in a business with annuity cashflows. Dividend yield 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 inability to fully pass the higher fuel (oil) price to the tenants

2. Key Historical Financials

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

3. What is my view on company valuation?

Indus currently trades at EV/EBITDA (TTM annualized) ratio of c. 7.3x and P/E (TTM annualized) ratio of c. 14.4x.

I expect the company to grow at 8% at both revenue and net profit level for next few years. With a strong balance sheet and ROE, PEG ratio can be expected to be around 2.0x (American Tower Company has PEG ratio of 2x) implying PE ratio of 12.8x (after 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 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 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 continuity of its business; can also lead to stretched working capital levels

  • 5G technology deployment could get delayed – currently expected in 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 Middle East across a wide variety of sectors. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in 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.


I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. 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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