Updated: Apr 14, 2022
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In this digital age, we’re always glued to our mobiles. And as such there is a 40% chance that our data is being carried by a telecom tower owned by Indus Towers. You might be wondering, what is Indus Towers?
Indus Towers is a provider of telecom towers and related infrastructure to wireless telecom service providers like Jio, Airtel, and Vodafone Idea. Indus Towers started off in 2006 when Bharti Airtel, Idea Cellular and Vodafone merged their tower companies in select circles. Today, it has approximately 180,000 towers and 322,500 tenancies, with a sharing factor of 1.8x. Sharing Factor or “Tenancy Ratio” refers to the average number of tenants on each tower. Higher tenancy ratio means higher profits for the tower company. Tenants are also sticky in nature. Indus Towers has a strong balance sheet and reported an RoE of 22% in fiscal year 2021.
However, one of the key tenants, Vodafone Idea, is facing insolvency due to high debt burden. If it were to go insolvent, India would be left with 2 and a half players, which will have long-term effects on competition in Indian telecom industry. This has forced the Government to relook at the telecom policy to make it more conducive. The government has agreed to provide Vodafone Idea with annual cash flow relief of Rupees 25,000 crore to improve its chance of survival.
5G auctions are set to be spread over the next 2 years with 5G sites leading to additional tenancy for the tower company. Internet of Things is expected to further drive growth in the telecom tower industry. Do you know – most of the cars come with a SIM these days?? Everything under the sun is likely to have a wireless 4G/5G connection.
So, with a higher tenancy ratio than the national average, marquee shareholders, an experienced management team and a strong balance sheet with dividend yield expected to be around 5%, things are looking good for Indus Towers. However, dependence on 2 or 3 tenants increases concentration risks.
So, what is our view on company valuation?
Indus Towers trades at an EV to EBITDA multiple of approximately 7x and a Price-to-Earnings ratio of 14x with an 8% growth expected at net profit and revenue level over the next few years. The current valuation seems to be reasonable.
Overall, the company looks interesting for investment from a long term perspective and should be explored further by investors.
As for the risks to our analysis, 5G deployment could see delays beyond the current expectation of 2 to 3 years. Moreover, the industry is set to continue to be dominated by 2 or 3 players only, for the foreseeable future.
So, would you invest in Indus Towers? Let us know in the comment section below. Be sure to like the video if you learned something from our analysis.
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