Weak signals for Indus Towers after unfavourable SC verdict for Vi

An adverse judgment by the Supreme Court will impact Vodafone Idea (VIL) unfavourably and in turn, may have a negative impact on Indus Towers too. The tower company also faces stiffer competition and potential loss of rental revenues.

The Supreme Court has rejected a curative petition for adjusted gross revenue (AGR) dues to be recalculated. This leaves VIL with a net AGR debt of $8.5 billion equivalent (Rs 70,300 crore) as of the April-June quarter (Q1) of financial year 2025 (FY25) (of which about 20 per cent is the principal) in addition to spectrum dues of about $17 billion (Rs 1.4 trillion).

VIL also owes Indus Towers around Rs 4,600 crore, which are operational dues it is clearing. The cash-strapped telecom services company was hoping for a judgment that substantially reduced its AGR dues. As a result of the judgment, it may be forced to slow down network rollout, and this will also lead to further loss of market share to Airtel and Jio.

VIL is the second-largest tenant of Indus Towers and this could put stress on the tower company, by reducing tower tenancy ratios and further delaying repayment of dues. The tower company is also facing stiffer competition after a consolidation where Brookfield (with partners BCI and GIC) has concluded 100 per cent acquisition of the American Towers' (ATC) India business at an enterprise value of $2.2 billion. ATC was the number three tower operator in India with a footprint of 76,000 sites.

Brookfield will combine its India telecom infrastructure (Summit Digitel, Crest Digitel and ATC India) under a new brand ‘Altius’ with a combined 2,57,000 tower portfolio (whereas Indus Towers has 2,26,000 towers).

Summit was spun-off from Reliance Jio in 2020. Jio uses Summit in rural sites, but it is Indus’ tenant in some urban areas. There could be some migration out of Indus to Altius on Jio’s part.

VIL will continue to gradually lose share if the higher AGR dues restricts its ability to rollout services. This could mean FY25 onwards, Indus may face gradually declining tower tenancy ratios, as well as slower payment of dues.

VIL should be able to repay its past dues to Indus by FY26. But VIL’s plans included expansion of its 4G network and 5G rollout. It recently did a $3.6 billion network equipment deal with Nokia, Samsung and Siemens. VIL plans to add new base stations to its existing sites, which means loading revenue for tower companies, as well as to add fresh sites, for fresh tenancies.

Loading revenue is only 10-15 per cent of revenue from fresh tenancies. While Indus will be sustained by Airtel’s expansion (34,000), VIL’s plans may be curtailed or delayed. VIL aimed to increase its unique network sites from 183,000 to 2,15,000 – 2,20,000 (32,000 – 37,000 net site addition).

After the SC rejected the petition, VIL said that it planned to negotiate AGR with the government. There may be a positive outcome, since the government is the largest shareholder in VIL following conversion of debt into equity. Hence, it is in the government’s interest to allow VIL to negotiate favourable terms. Otherwise, VIL with annual cash EBITDA of about $1 billion (annualising Q1FY25), would find it hard or impossible to repay $25 billion equivalent in a meaningful timeframe.

Typically, the tower business has predictable cash flows, steady dividends, and moderate growth (around 5-7 per cent EPS CAGR). However, consolidation in the telecom and tower industry has hurt Indus Tower’s prospects. VIL is clearing past dues. However, the poor long-term prospects of VIL unless it receives relief, may negatively impact Indus, which also faces stiffer competition.