Indus Towers Ltd
NSE:INDUSTOWER
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Indus Towers Ltd
Earnings Call Analysis
Q2-2024 Analysis
Indus Towers Ltd
The company has marked a robust operational performance with significant tower additions driven by substantial demand, particularly in rural areas from a major customer. Installation of solar-powered towers and an ambitious rural expansion initiative by both the private customer and the government are noteworthy this period. These efforts have propelled the company past the milestone of 200,000 macro towers, affirming its commitment to digital inclusivity. With 5G deployments by key operators accelerating, the company's infrastructure revenues stand to benefit while they maintain a stellar 99.96% network uptime even in extreme weather conditions.
The company has demonstrated a commitment to cost optimisation, achieving an 8% year-on-year reduction in diesel consumption—significant considering the expansion and additional load from 5G equipment. An agreement with IOC Phinergy aims to further reduce diesel consumption by deploying 300 emission-free energy systems. Additionally, over 2,200 solar sites were added during the quarter, reinforcing the company's focus on sustainable development.
Reported gross revenues and core revenue from rentals slightly increased by 0.8% and 0.1% respectively. Despite these gains, the company has faced a free cash flow challenge, registering at minus INR 10.3 billion for the quarter due to increased receivables and a CapEx of INR 23 billion. The increased CapEx reflects investment in the robust tenancy additions from a major customer, an effort expected to benefit shareholders in the long run. Fortunately, payment delays from a customer that affected receivables have been resolved in the current month, and discussions are ongoing for past due clearances.
The company is well-positioned to leverage significant growth levers through the continued nationwide expansion of 5G and a surge in data demand, with expectations of the rural expansion by a key customer continuing in the near term. Ongoing customer engagements to resolve payment issues and accelerate 5G rollouts promise to uphold the financial performance and cater to the burgeoning infrastructure demands in an increasingly connected India.
The company's dividend policy is closely linked to its free cash flow generation, which is assessed each quarter. Depending on the year-end free cash flow situation, management in conjunction with the board will make a decision on dividends. As an investor, this approach suggests that dividend payouts are contingent on sustained financial health and prudent cash flow management.
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Good afternoon, ladies and gentlemen, I'm Sunita, the moderator for this conference.
Welcome to the Indus Towers Limited Second Quarter ended September 30, 2023 Earnings Call. [Operator Instructions] Present with us on the call today is the senior leadership team of Indus Towers.
Before I hand over the call, I must remind you that the overview and discussions today may include certain forward-looking statements that must be viewed in conjunction with the risks that we face. I now hand over the call to our first speaker of the day, Mr. Prachur Sah, MD and CEO. Thank you, and over to you, Mr. Sah.
Thank you, and a very warm welcome to all participants. Joining me today are my colleagues, Mr. Vikas Poddar, CFO; Mr. Tejinder Kalra, COO; and Mr. Dheeraj Agarwal, Head Investor Relations on the call. I am pleased to present our business performance for the quarter ended September 30, 2023.
To begin with, we are pleased to have further built upon our strong operational performance in the previous quarters. Driven by robust demand from one of our major customers, particularly in rural areas, our tower additions during Q2 were the highest ever. On the collection front, from one of our major customers, it continued in Q2 as well.
Before going into detail about the key aspects of our business, I would like to express gratitude to our teams on the ground for their commitment and dedication towards helping Indus Towers drive digital inclusivity for all. During the quarter, our team of Mewat installed solar-powered towers in the Siachen Base Camp, which is at an attitude of 17,000 feet above sea level, is one of the most remote and isolated regions in the country.
The team is also actively facilitating the rapid tower additions in the underpenetrated areas of rural India by one of our major customers, thereby enabling connectivity for all. The government is also doing its bit to enhance connectivity in remote areas by working towards improving the backhaul infrastructure in these areas.
The government remains steadfast in its commitment to facilitate the swift rollout of telecom infrastructure across the nation while keeping sustainability in view. To this end, the Ministry of Power has notified the Green Open Access policy and a few states have already adopted the same with minor amendments.
The government is also engaged in discussions with multiple stakeholders for faster implementation of Green Open Access at the ground level. These steps aimed at incentivizing the use of cleaner sources of energy reiterate the government's focus on infrastructure expansion in a sustainable way.
With regards to 5G, rollouts by the top 2 operators continue to progress at a swift pace with these operators now catering to over 50 million 5G customers each. The total number of 5G Base Transceiver Stations or BTS deployed stands at almost 340,000 with more than 7,000 BTSs being deployed per week in August.
Our [indiscernible] revenues have continued to increase in view of this accelerated deployment of 5G on our sites. As the network matures, we expect the demand for new sites to increase in order to aid the network decongestion that bodes well for us given our leadership position in the passive infrastructure space. Statistics mentioned in the Ericsson Mobility Report reaffirmed the growth potential of 5G.
As per the report, global 5G subscriptions grew by 175 million in the June quarter compared to the 125 million additions in the March quarter and have reached almost 1.3 billion. The 5 billion mark is expected to be reached by end of 2028, with 5G subscriptions in India is also expected to reach 700 million by the same time.
Also, the emergence of use cases of 5G, such as launch of fixed wireless access or FWA by major operators will also drive the data consumption, which will need infrastructure. The data consumption story in the country continues to play out well, underpinned by continued migration of users from 2G to 4G and the swift adoption of 5G. The total data consumption across the top 3 operators grew by 24% year-on-year. in the June quarter, and the average data consumed per user per month grew by 15% year-on-year to 22.4 GB in the same period. We firmly believe that the burgeoning data consumption in conjunction with the rapid uptake of 5G will provide a boost to the demand for passive infrastructure. Being the largest passive infrastructure player in the country, we remain well placed to address the demand. Moving on to the operational performance for Q2. As highlighted earlier, we have surpassed a record tower additions reported in Q1. We managed to achieve this despite the harsh weather conditions usually witnessed during this time of the year. Driven by continued strong demand from one of our customers, we added 5,928 macro towers and 5,583 corresponding co-locations. Total macro towers and co-locations at the end of Q2 stood at 204,212 and 353,462 respectively, which represents a significant milestone for Indus when we crossed 200,000 macro towers, each growing by 8.7% and 4.5% on a year-on-year basis. Our industry-leading tenancy ratio stands at 1.73. Addition of co-locations on leaner tower remained healthy at 789 in Q2, and the overall base increased to 8,643 co-locations. Including leaner tower, our net co-location additions were at 6,372 in Q2 as against 5,984 in Q1. Next, I would like to bring you up to speed on the progress we have made on our 4 key strategic points, namely: market share, cost efficiency, network uptime and sustainability. Firstly, on market share, we are pleased to see that the digital interventions undertaken across our value chain, coupled with organizational changes to ensure a faster time to market of our sites continue to bear fruit for us. We have further strengthened our partner ecosystem and simplified our internal processes to smoothen the workflow. The run rate of our quarterly tenancy additions has nearly doubled on a year-on-year basis, thereby helping us increase our share in the business of our major customers. We expect the rural expansion of our major customer to continue in the near term, which augurs well for us as we possess the capabilities to match our customers stride for stride in its rollouts. Secondly, on cost efficiency. We continue to take steps towards optimizing both operating and capital expenses. We have been consistently reducing our diesel consumption and recorded an 8% year-on-year reduction in Q2. Please note that such a significant reduction was achieved despite an increase in overall energy load from the addition of new sites and 5G equipment. During the quarter, we were especially pleased to have signed an agreement with IOC Phinergy to deploy clean energy systems. We have agreed to deploy 300 0 emission energy systems based on Aluminum Air Technology to optimize diesel consumption at our telecom tower sites. We also added more than 2,200 solar sites during the quarter and continue to convert tower sites from indoor to outdoor, which aided the overall energy cost optimization. Our sharp focus on reducing the rental cost per tower through negotiation, site selection and product selection to minimize footprint has also yielded positive results. On CapEx, our initiatives are directed towards driving cost efficiencies across processes, including designing, procurement and erection through use of automation and digital interventions. This has helped for us to build towers that are cost competitive. Thirdly, on network uptime, which reflects robustness and resilience of our system and also a key requirement of our customers. We are maintaining a high level of uptime of 99.96% despite increase in weather disruptions. Due to the changing climatic conditions, the number of instances of significant weather events in Q2 of this year were more than 1.5x those in the same period last year. Amid the heavy rains, thunderstorms and lightening in areas of Uttar Pradesh and West Bengal, our field forces perseverate to deliver such a high network uptime. On the road map for digital transformation, we established the connectivity solution in 4 circles during the quarter. We will use the learnings from these circles to complete the implementation of real-time telemetry data system in the remaining circles.
Shifting focus to ESG, a vital aspect of the business that we continue to make steady progress in. On the environment front, we continue to make strides in our journey towards reducing our GHG emissions. As highlighted earlier, our tie-up with IOC Phinergy and initiatives towards adoption of renewable energy solutions would help us reduce our consumption of diesel and grid electricity. Out of more than 2,200 solar sites added in Q2, 27 sites in [indiscernible] entirely on solar power. This is a testimony to company's commitment to build ecofriendly telecom tower sites by investing in clean energy solutions. The company is also committed to reducing emissions from its value chain and is working towards tying up with electric vehicle cab aggregator for its employees travel. With regards to social dimension, the improvement in our gender diversity during the quarter was quite satisfying for us, driven by our focused hiring programs, policy interventions and top-down approach. Our gender diversity reached close to 10% over the quarter. Ensuring the safety of our field force is paramount importance to us. We have been conducting trainings and awareness programs to inculcate a behavioral change with our field force to address certain aspects such as safe driving, appropriate use of safety gear, hazard reporting, et cetera. We continue to evaluate our top value chain partners on various ESG parameters during onboarding and collaborate with them to improve their sustainability practices and disclosures.
I would now request Vikas to take you through our financial performance for the quarter ended September 30, 2023, and I look forward to your questions. Over to you with us, Vikas.
Thank you, Prachur, and good afternoon, everyone. I'm pleased to share with you all the financial results for the quarter ended 30th September 2023. Before I apprise you of our financial performance, I would briefly touch upon our robust operational performance. In quarter 2, we managed to improve upon the record tower additions in quarter 1, adding a total of 6,372 co-locations, including those on leaner towers. We expect the rural expansion of one of our major customers to continue in the near term. This, coupled with the measures we are taking to improve our share of the customer's rollout should help us continue the momentum.
Now moving on to our financial performance for quarter 2 FY '24. Our reported gross revenues declined by 10.5% year-on-year to INR 71.3 billion, whereas the core revenues from rental declined by 9.3% year-on-year to INR 43.4 billion. Please note that quarter 2 of last year included the benefit of deferred recognition of revenues arising from the settlement of old dues with our customers, which amounted to INR 11 billion in gross revenues and INR 5.5 billion in core revenues.
After adjusting for the deferred recognition of revenue, our gross revenues and core revenues were up 3.5% and 1.2%, respectively, year-on-year basis. The quarter 2 FY '24 revenues were impacted by the nonrecognition of revenue equalization assets for one of our major customers.
On a quarter-on-quarter basis, our reported gross revenue and core revenue from rentals were up by 0.8% and 0.1%, respectively. Our reported EBITDA increased by 22.9% year-on-year and declined by 1.6% quarter-on-quarter to INR 34.6 billion. EBITDA margin were up 13.2 percentage points year-on-year and down 1.2 percentage point quarter-on-quarter to 48.5%.
Please note that the EBITDA figures of quarter 2 FY '23 included an impact of provision for doubtful debts of INR 17.7 billion. Adjusted for the impact of the provision for doubtful debts and deferred recognition, EBITDA increased by 1.4% year-on-year and was flat quarter-on-quarter. Energy margins stood at minus 2.1% in quarter 2 FY '24.
We believe that the initiatives we are taking to reduce our diesel consumption will help us improve our energy margins. Our reported profit after tax grew by 48% year-on-year and declined by 4% quarter-on-quarter to INR 12.9 billion.
The adjusted profit after tax was down by 1.5% year-on-year and 1% quarter-on-quarter, a meaningful increase in depreciation due to rapid rollouts and the change in accounting treatment of asset life had a dampening effect on the net profit. Our reported pretax return on capital employed and post-tax return on equity for the rolling 12 months stood at 14% and 15.1%, respectively.
Free cash flow for the quarter was at minus INR 10.3 billion, which was impacted by a combination of increase in receivables and the elevated CapEx of INR 23 billion. As we had intimated in the previous quarters, the increase in CapEx is on account of strong tenancy additions we are seeing from the swift rollouts by one of our major customers. The company's prompt response by investing in this opportunity will yield long-term benefits for its shareholders.
Our receivables increased by INR 8.8 billion during the quarter due to delay in payment from one of our customers. I would like to highlight that this amount has already been cleared in the current month. Additionally, we remain in active discussions with the customer for clearance of its past dues and are keeping a keen eye on the customers' fundraise plans.
In summary, our continued robust operational performance is satisfying and is a testament to the capabilities we possess as one of the leading passive infrastructure players. We firmly believe that the progress we are making in each of our strategic priorities will drive growth and generate value for our shareholders over the period.
Improvement in collections this year has helped our financial performance, while the accelerated 5G rollouts and rural expansion by one of our major customers would serve as significant levers of our growth. I would now request the moderator to open the floor for question and answers.
[Operator Instructions] First question comes from Mr. Vivekanand Subbaraman from AMBIT.
Just 2 questions. So as far as -- as far as the customer from whom the receivables increased during the current quarter, Vikas, I noted that you mentioned that this receivable has been cleared. What about the past dues, some of which have been written off? Where are your discussions going on in that regard?
And secondly, related to this same customer, how do you see the ability of this customer to sustain payments for the remainder of fiscal '24 and hence, your ability to pay dividends for fiscal '24?
So maybe Vikas, you can add. I'll just summarize this payment situation. So while the customer had some challenges during the quarter, but we have received the monthly payments until October from them. Our expectations is that the monthly payments would continue, and we'll continue to charge as per the MSA to the same customer. And we are currently working with them on creating a robust time plan to invite the past dues. But just want to correct that there has nothing been written off...
So just to elaborate, I think, first of all, Vivekanand, we have provided, as we had explained in the previous quarters as well to derisk our balance sheet. We have not written off any receivables. We are in a very active engagement, so as Prachur was saying, we have received the payment subsequently and those delays have been cleared now. And we do expect the 100% or the near 100% payment to continue going forward. There are basically some positive developments as we all know. There was a hump of some financial commitments that they had in the previous quarter but that hump is pretty much over. So we do expect the near 100% payment to sort of continue.
And as far as the past dues are concerned, once again, I mean, while we all know that there is a bit of dependency on the funding -- fundraising plan, et cetera, but we are again monitoring that very closely. We are in touch with the customer and trying to work on that settlement as well. So as and when we have more clarity, we will certainly keep updating you.
Okay. This is helpful. Just 1 follow-up. So the INR 13 billion that increased -- the receivables, INR 13 billion that increased in 1H. Are you confirming that in October this amount also has been cleared by the customer? And a related point is -- provision -- the receivables provision that was made, provision for doubtful debtors in first half, INR 2.2 billion. What was this regarding?
So first of all, let me clarify, the INR 13 billion is -- it's a mixed bag. There are various things, but the amount pertaining to this particular customer has been cleared subsequently. The provision basically relates to the fact that there are always some timing issues, some ongoing reconciliation issues and also the fact that we are collecting some interest, et cetera.
So in terms of the accounting, we follow a very stringent ECL sort of computation. And as a result, we have provided for doubtful debts in this quarter to the extent of about INR 1.3 billion, but that's as per the -- our current accounting treatment. But I can confirm that we have subsequently received the amount that was delayed.
All right. I think you didn't answer my question on the dividend or the likelihood of investors getting a dividend in fiscal '24 in light of the reality as far as the payments are concerned.
Okay. So Vivekanand, I think as far as the dividend is concerned, as we have always explained, our dividend policy is linked to our free cash flow generation. So our dividend policy requires us to distribute 100% of our free cash flow. Currently, as you know from our results, our CapEx is elevated as we are investing in growth to generate those long-term returns. We are also ensuring that the collection against our monthly billing is managed well, and our working capital situation is managed well. We are working with the customer to also create a robust payment or settlement plan for the past dues, as Prachur was mentioning. So based on the free cash flow situation at the end of the year, which we keep assessing every quarter as well, management along with the board will certainly take a decision, and we will basically see where we stand at the end of the year.
[Operator Instructions] Next question comes from Mr. Sanjesh Jain from ICICI Securities, Mumbai.
I've got 3 of them. First one, the rental per month. That has declined sequentially, while we are adding a lot more single tenancy, which has a much higher rental than the base one, as well as we are adding a lot more loading, 5G loading, particularly for the [ April ]. The combined effect should have been a steady increase in the rental. Can you help me understand why has it dropped sequentially this time around?
Yes. So thanks for the question, Sanjesh. So first of all, I think your observation is right. We have basically seen a slight drop in our average revenue per tenancy or the ARPT. So while the underlying business growth continues as a result of the extra loading and tower rollouts and so on, we have had some transactions related to customers where we deferred the recognition of revenue in this quarter. There is no cash flow impact of the same. And as a result, we have seen some decline in this quarter. But on an underlying basis, the quarter-on-quarter sequential growth pretty much continues to be the same in line with what we have seen in the previous quarter.
Is it fair to assume that the revenue will get recognized next quarter and we will have some one-off kind of, again, which will also push decline of this quarter?
So this is basically a matter under discussion. We are still evaluating our position and hopefully, we'll be able to close and conclude this in the current quarter. But at this point of time, until we have concluded, it's very difficult to comment.
Fair enough -- but generally revenue recognition, we have a very stable MSA. Now why has this situation arise?
Well, it's -- you're right. I mean it is a stable MSA, but we do keep having evolutions in terms of products and in terms of some terms and conditions and so on. So while the core MSA is stable, you're right. But as and when we have these evolutions, there are some changes and we are sort of having some transaction on which we are still concluding the treatment.
Fair enough. My second question is on the tower addition. So first half has been a very strong uptake. How does the order book looks like for the second half? Will it be same? Because Airtel has said in their call that by November, December, it appears that the rural expansion will largely be behind. That means starting next calendar year, there could be a deceleration in the -- as far as rolling out the rural expansion. Does that apprise in your order book?
So Sanjesh, in the near term, our order book looks quite healthy. I'm expecting similar sort of rollout, probably slightly higher than this current quarter in the next couple of quarters. So in the near term, I don't see the order book reducing. If there is any change, we'll let you know. But as of now, the order book remains quite strong in the near term.
Got it. Got it. The next question is on the lean towers. Now that [ uptake ] looks much lower than probably what we have anticipated, expected. Is that the telcos are more focused today on the macro expansion and -- means our expansion will play a role more when they are looking at expanding the capacity or infill sites?
Yes, Sanjesh, I -- to be honest, I think, yes, there has been a mix change compared to last year. So I think -- but as you said, I think the situation would keep evolving as we go. So I think this quarter was much stronger on macro compared to lean. But the things may evolve as we go forward. That's a fair observation.
But any more insight why the lean has not been -- because this has been one of the as per the operators in terms of the infill side, macro side -- but the uptake looks much below expectation.
Sanjesh, this is Tejinder. So typically, the lean sites, the customers are using as infill or wherever there are any coverage gaps in the urban areas and so on. And depending upon how the operator wants to either go for rural geographic coverage or capacity build in some of the urban areas, this mix continues to change and evolve. So we are obviously currently building up as the customer demands us to build sites and wherever they want to focus first. So this mix will keep on shifting to that order. But we don't see, from an order book perspective, a big scale down in the demand of either kind of sites. It's just that the rollouts keep getting shifted depending upon where the operator wants to focus in a particular quarter.
Got it. Got it. One last quick question. Vikas, you mentioned that there has been some change in the useful life of assets and which has increased the depreciation and amortization number. Which are these assets are more to do with the batteries, DG set? Where are we seeing this acceleration or change in the useful life?
I'm sorry, Sanjesh, could you just repeat the last line? I didn't get the last line clearly.
So which are the assets where we have done a change in useful life? It is more to do with the battery, DG set?
Yes, yes. Got it. So basically, this is, again, the annual review process that we have to assess the useful life. And as part of the process, we have assessed the useful life of all the power equipments. So that includes the battery, the rectifier modules and all the other power equipment. And that basically has resulted in a change from 10 to 8 years. So that has created some onetime impact in depreciation. So that's the change that has happened.
Got it. Got. Understood, yes.
But I just want to highlight that it's a noncash because it's basically a change in the useful life. So it's a noncash impacting item.
No. My thing was that now that the EV availability in India has improved and that should have actually a positive impact because the DG set or battery, the life is more on the cycle they run and the cycle would have come down and so the useful life would have gone up, the reduction is [indiscernible].
No, that's a fair point. The thing is we -- when we do this reassessment, we look at the data points, and we have certainly considered the data for the last 12 months in terms of what is the replacement cycle, et cetera. That is a fair obsolete that we have noticed, despite the EV situation improving, I think 8 years is not really out of norm. It's pretty much the norm if you look at other industries as well when it comes to DGs or other power equipments. So I think the 10 years was probably a bit different from the reality. So we have sort of readjusted now.
[Operator Instructions] The next question comes from Mr. Arun Prasath from Avendus Spark, Chennai.
My questions are answered.
The next question comes from [ Mr. Sanket Gulati ] from [indiscernible] Holdings, Mumbai.
Sir, I have a couple of questions. So what is the CapEx that you are building in for the full year? And what's the CapEx requirement for a lean tower versus a macro tower? And what are the return ratios we are targeting for a macro tower versus a lean tower?
Thank you for the question, [ Sanket ]. I mean as far as the CapEx for the full year is concerned, I think Prachur did mention that the order book is quite healthy, and we do expect the rollout momentum to continue. So I think from that perspective, the CapEx will remain elevated for some time. As far as the CapEx requirement for a lean and a macro tower is concerned, I think, first of all, I just want to sort of make you aware that the towers are not really homogeneous. There are different varieties of towers.
And depending on the type of macro tower or the type of lean tower that we are building, the CapEx profile and the return profile could be very different. But I'll try to give a very generic answer. So a lean tower could be anywhere between, let's say, INR 3 lakh to -- INR 3.5 lakh to INR 5 lakh and a macro tower could be anywhere between INR 15 lakh to INR 25 lakh sort of. So it's a very wide range because of -- depending on the type of towers that we are building.
And typically, in terms of return, with lean towers, our return profile is slightly better, I would say probably somewhere around mid-double digit. And with the macro, it's usually depending on the tenancy, it would start with maybe a single digit. And if the tenancy improves, then we even see double-digit returns there.
At this time, I would like to hand over the call proceedings to Mr. Prachur Sah, for the final remarks.
Thank you. To sum up, we are pleased to have maintained the stronger tower addition momentum in Q2 as well. We expect the accelerated rural expansion of one of our major customers to continue in the near term which, coupled with the 5G rollouts augur well for us, given our leadership position in the passive infrastructure space. We endeavor to ride this growth journey in a sustainable way and create value for all our stakeholders, including shareholders, customers and partners. I wish to thank you all for joining this call. Have a good day.
Ladies and gentlemen, this concludes the conference call. You may now disconnect your lines. Thank you for connecting to audio conference service from Airtel and have a pleasant evening.