Indus Towers at over 2-yr high; Citi maintains buy, bull-case target Rs 400

Indus is witnessing demand for rural expansion and densification in urban areas, particularly from Bharti Airtel

Shares of Indus Tower hit an over two year high of Rs 284.40 as they rallied 5 per cent on the BSE in Tuesday's intraday trade amid heavy volumes, in an otherwise subdued market. In the past two trading days, the stock of the telecom Infrastructure company has surged 14 per cent.

At 09:52 AM, Indus Tower was trading 4 per cent higher at Rs 282.25 as compared to 0.43 per cent decline in the S&P BSE Sensex. A combined 21.1 million equity shares have changed hands on the NSE and BSE till the time of writing of this report.

Thus far in the calendar year 2024, the stock price of Indus Tower has appreciated 43 per cent on strong December quarter (Q3FY24) earnings, and expectation of recovery of past dues from the customers. By  comparison, the S&P BSE Sensex was up 0.5 per cent during the period.

In Q3FY24, Indus Towers' profit after tax grew by 19 per cent year-on-year to Rs 1,541 crore as against a loss of Rs 708 crore in the corresponding quarter of the previous year. Q3FY23 PAT was impacted by the substantial provision for doubtful debts and an exceptional item relating to impairment of revenue equalisation asset.

In addition to the business growth, the financial performance was also aided by unwinding of the past dues. The strong operational performance was underpinned by an accelerated rollout by one of their major customers in rural areas. The management said they expect its network expansion and 5G rollouts will continue to support the company's business growth in the near future.

Rural expansion and densification

Indus Towers is India's leading provider of passive telecom infrastructure and it deploys, owns, and manages telecom towers and communication structures, for various mobile operators. The company's portfolio of over 211,000 telecom towers makes it one of the largest tower infrastructure providers in the country with presence in all 22 telecom circles. Indus Towers caters to all wireless telecommunication service providers in India.

Indus is witnessing demand for rural expansion and densification, particularly from Bharti Airtel. Thus, the management expects the order book to remain strong for the coming quarters. Analysts at Emkay Global Financial Services believe the Rs 2,000-crore financial support by Vodafone Idea's (Vi's) promoter, when received, will reduce cash constraint for Vi till H1FY26E, as Vi's bank debt obligation reduces post-Q4FY24. This can provide revenue visibility for Indus.

"Further, 5G will require tower densification once the 5G rollout is largely complete, which will give further fillip to demand. The demand setting would remain healthy for the next few quarters, led by rural expansion, densification of urban areas, and 5G rollouts. We assume that provisioning related to Vi would gradually reduce, leading to an improvement in reported Ebitda margin for the company," the brokerage said.

Convertible debentures

Meanwhile, Vi has announced that American Towers has exercised the option to convert Rs 1,440 crore (out of Rs 1,600 crore) of optionally convertible debentures held by it in the company to equity. "Whilst this should be dilute for Vi (ATC would now own a 2.9 per cent stake in the company), this development is an indirect positive for Indus Towers, in our view," said analysts at Citi. 

In a bull-case scenario, Citi sees Indus Tower's stock at Rs 380 - 400 levels and has a 'buy' rating on the counter.

The conversion would mean leaser cash outgo for Vi (towards redemption of these OCDs) in FY25E, thereby creating more cash surplus for repaying vendor dues.

Combined with a likely decline in capex intensify, the brokerage firm expects Indus to generate Rs 4,000 crore (around Rs 15/share) of FCF in FY25E, which could then potentially be paid out as dividends.