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).


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.



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