1. Energy reimbursements drive revenue, margins

Energy reimbursements drive revenue, margins

Pricing remains a risk, with management indicating major contract renewals at Indus in FY18

By: | Published: May 2, 2016 5:34 AM

Core financials were stable in Q4FY16 with the beat in Ebitda margin being driven by higher energy pass through. The company announced a buyback plan of Rs 20 bn (levels of up to Rs 450/share) and dividend of Rs 3/share: total payout ratio is >100% for FY16. Despite the steady and predictable nature of business, pricing remains a risk, with management indicating major contract renewals in Indus tower in 2018. We tweak our ests and maintain our PT/Hold rating.

Headline results better in Q4FY16, core metrics in line: Top-line growth was slightly ahead of estimates (+7.3% y-o-y, +2.2% q-o-q) due to higher energy reimbursements. Ebitda margin expansion of +200bps q-o-q was also driven by expansion of energy spread. Service margin showed a small 20bps q-o-q contraction. Service revenue growth was healthy at 9.3% y-o-y, with tenancy growth of 6.5% y-o-y (500 tenancy canceled during Q4) and rental/tenant +1.9% y-o-y on account of increased loading due to 3G/4G rollouts.

Buyback and dividend: The company announced a buyback of Rs 20 bn up to a price of Rs 450/share, which is 2.34% of the equity share capital of the company, through a tender offer. In addition, the company also announced a dividend of Rs 3/share. Total payout ratio was 112% for FY16.

Execution stable, pricing on renewals a key risk: While tenancy growth has disappointed vs expectations through FY16, overall revenue growth of +5.5% y-o-y and margin expansion of 70bps indicates execution remains stable. A key risk is on rental pricing post renewals, with management indicating major renewals at Indus in FY18e (few for Infratel).

Valuation/Risks

We revise our estimates to incorporate the results, with earnings forecasts for FY17e/18e remaining largely unchanged. Our forecasts now imply 11% Ebitda CAGR for the company in FY16-18e. While we roll forward our DCF based PT to FY18e (from average of FY17E and FY18E) previously, it remains unchanged at Rs 390 as we lower our exit EV/Ebitda to 11x. Maintain Hold, which we believe balances the risks to margins and cash flows with the steady execution and improving tenancies, in light of the rich valuations.

Risks—Upside: higher-than-expected capex outlay from operators. Downside: weakness in site additions, fall in rentals.

—Jefferies

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