VIL survival due to govt relief vital; FY23/24 estimates up 2-5%; TP raised to Rs 310; upgraded to ‘Buy’ rating
The government’s reforms lift the key overhang on Indus Tower’s tenancy. Moreover, Bharti’s plans to step up capex, imminent 5G capex cycle and ongoing moderation in tenancy exits all signal an improvement in tenancy outlook. We raise our FY23/24 estimates by 2-5%, lift our PT to Rs 310/share and upgrade the stock to Buy. Despite the 20% move over past month, the stock trades at an undemanding 6.5x EV/Ebitda and offers an attractive 7% dividend yield.
Govt. reforms lift key overhang: The government’s recent measures which offer a four-year moratorium on AGR and spectrum repayments will provide a Rs 250-bn annual cashflow relief to Vodafone Idea (VIL) 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 govt. owning a 23% stake in VIL at the end of four-year period. This improves Indus Towers’ tenancy outlook over next few years given that forced site reduction by VIL is unlikely to take place now. Moreover, the govt’s potential stake in VIL could potentially prevent it from going under, which lowers the key tenancy risk.
Bharti’s capex focus, 5G another positive: Bharti Airtel’s recent plans to step up network investments by raising Rs 210 bn through a rights issue and investing the cashflow relief of Rs 117 bn towards network investments are likely to further accelerate tower and tenancy additions for Indus Towers. Besides, 5G auctions are likely over the next two years, after which network rollouts are likely to accelerate.
Rising gross tenancies; falling exits: Over the past two years, Indus Towers has seen a steady rise in gross tenancy additions led by network rollouts by Bharti Airtel. Moreover, tenancy exits for Indus Towers have moderated, indicating that network optimisation by Vodafone Idea (VIL) is complete. Even though tower and tenancy additions in Q1FY22 were impacted by lockdowns, the tenancy outlook for Indus Towers is on an improving trajectory.
Raise earnings and PT; upgrade to Buy: We lower our FY23-24 tenancy exit estimates and raise our tower forecasts by 1-2% to factor in Bharti’s higher capex. Both these combined result in a 1-3% upward revision to our tenancy estimates and 2-5% upgrade to our FY23-24 revenue/Ebitda/PAT estimates. We upgrade Indus Towers to Buy with a revised PT of Rs 310 due to earnings upgrades and a higher 7x target EV/Ebitda multiple. Despite the 20% move over the past month, Indus Towers still trades at 6.5x EV/Ebitda, in line with its 3-year average, and offers an attractive dividend yield of 7%, the certainty of which has also improved. Investments into VIL by its promoters could add to further upside.