Weak signal from Indus Towers on renewal, tenancy ratio
Need for additional towers in question as operators recently added spectrum
Led by higher tower additions and lower costs, Indus Towers’ March quarter (Q4) financials were marginally ahead of analyst expectations. Gross tenancy additions were up 10 per cent sequentially to 5,024, the highest in over three years. The additions and growth are likely on the back of Bharti Airtel’s continued network rollout, driven by the need for both coverage and capacity requirements, said Sanjesh Jain of ICICI Securities in a post-result report.
Though operating profit was down sequentially by 4 per cent, this was in line with estimates. As compared to the year-ago quarter, this was still a rise of 20 per cent, thanks to falling other expenses and lower-than-expected energy losses, which have been trending down over the last three quarters.
The stock, however, declined over 3 per cent in trade over multiple concerns. While tower additions have been strong, the tenancy ratios have been falling for many quarters. This is the singlemost important metric that impacts operating profit margins and the current trend has seen the average tenancy ratio fall from 1.85 a year ago to 1.81.
Upcoming contract renewal in FY23 is another factor that could impact revenues, given Vodafone Idea’s (Vi’s) weak balance sheet. Any increase in discounts for the operator would have to be passed on to other operators, which would have a negative impact on revenues. An even bigger concern is Vi’s ability of to survive, as the expected relief led by price hikes has not materialised. The tenancy ratio will deteriorate further if Vi rationalises its tower base.
Finally, the large amount of spectrum being brought by Airtel may reduce the need for additional towers to service customers. While the company is confident because data demand has been strong and companies will need to expand to increase coverage and enhance capacity, analysts believe the spike in data consumption has not necessarily reflected in tower rentals or tenancy ratios.
A healthy dividend yield and the company trading at a sharp discount on an enterprise to operating profit basis to global peers are supportive of stock prices, but in the near term, the stock, which has risen about 6 per cent over the last three months, will continue to underperform the broader markets.