Indus Towers Ltd
NSE:INDUSTOWER
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Indus Towers Ltd
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Good afternoon, ladies and gentlemen. I'm Rajitha, the moderator for this conference. Welcome to the Bharti Infratel Limited Third Quarter ended December 31, 2019, Earnings Call. [Operator Instructions in case of a natural disaster, the conference call will be terminated post an announcement. Present with us on the call today is the senior leadership team of Bharti Infratel Limited. 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. Akhil Gupta. Thank you, and over to you, Mr. Gupta.
Thank you very much, and thank you all for joining us on this earning call for the third quarter ended 31st December 2019. The quarter that went by had 2 very important and unprecedented developments for the telecom industry in India. The first one was, as I'm sure you are all following very closely, is the honorable supreme court judgment on adjusted gross revenue or the AGR as it has become popularly known. After rejection of the review petitions, the telecom operators had filed modification petition before the honorable Supreme Court, which reportedly have been directed to be listed for hearing on Monday, the 3rd of February. This hearing will be critical for the industry, and we are hopeful for a positive outcome, which will help create long-term investments in telecom networks. As a fall out of this AGR blow, the second major development was the tariff hikes by all operators. After years of intense price competition, which has led to significant revenue erosion, I feel this is a much needed and welcome first step towards sustained financial health of this sector. Coming to these company updates. First, an update on the merger with Indus Towers. You might recall, the longstop date for this scheme was initially on 24th October 2019. Since the requisite approvals had not been received, and therefore, the conditions precedent could not be completed, the Board of Directors in the meeting on 24th October extended the long stop date to 24th December 2019. The approvals also did not come by 24th December, and therefore, the long stop date was extended again until 24th February 2020, subject to agreement on closing adjustments and other conditions precedent for closing, with each party retaining the right to terminate and withdraw the scheme. The approval of the DoT or FDI is still awaited. We will keep you appraised of any development that may arise in this regard. Moving on to the business side. I'm pleased to report that despite massive turbulence and uncertainty on the operator side, Infratel has reported yet another quarter of improved net additions on both towers and co-locations during this quarter, with the net tower addition being the highest in 4 years on a quarterly basis. As a result, the company has been able to largely recover the revenue and profitability that was lost due to large exits of co-locations that was witnessed over the last several quarters, primarily on account of Vod-Idea merger. We firmly believe that an improved financial environment for the operators will only enhance this momentum from hereon. Coming to the financial and operational highlights of the quarter. Please note that the results of this quarter are not comparable to last year's corresponding quarter due to: A, impact of Ind AS 116 that is lease accounting, which came into effect from 1st April 2019; and B, reversal of tax provision in the last quarter and lower provision this quarter due to reduction in income tax rate from 36% to about 25% recently. As on 31st December 2019, the consolidated tower base stood at 94,244 with consolidated co-locations at just over 174,000, with a co-location factor of 1.85 at the closing. On reported basis, the consolidated revenues for the quarter at INR 3,673 crores were up 1% on Y-on-Y basis; EBITDA at INR 1,883 grew 24% Y-o-Y; operating free cash flow at INR 1,181 crore, grew at 8% Y-on-Y; and consolidated PAT at almost INR 100 crores (sic) [ INR 800 crores ] grew by 23% year-on-year. However, as I stated earlier, excluding the impact of Ind AS 116, revenues, EBITDA and operating free cash flow for the quarter are at more or less the similar levels as compared to last year, while the profit after tax is up 17% year-on-year. The return on capital employed pretax and the return on equity post tax for the quarter were approximately 26% and 27%, respectively. To conclude, despite recent financial turbulence due to AGR adjustment, based on the expectations of further rationalization of tariffs, which I believe the operators definitely need to do going forward, we remain optimistic on the future of Indian telecom industry. And we honestly hope that with the support of the government, the industry can begin to repair itself and that we can be helpful to the operators to fulfill the Digital India vision and offer world-class telecom services across the length and breadth of this nation. Thank you all. We can now open the floor for questions and answers.
[Operator Instructions] Now the first question comes from Mr. Vivekanand Subbaraman from AMBIT Capital, Mumbai.
I have a few financial questions. One is the quantum of exit charges that were included in the reported results. And -- can this number also be provided for the stand-alone entity? Second question is on the energy margins. They seem to be quite low, even if I look at it on a 12-month basis. Usually, second half is seasonally strong. And last quarter, you had discussed about some energy contracts being re-worked. Can you give an update on that? And the last question is on the CapEx. It seems as though the CapEx intensity has come down despite the incremental towers that have been rolled out in the current quarter. Any reason for that?
Very good afternoon to all of you. DS Rawat here. Let me try and answer these questions. Your first question about exit charges on a consolidated basis. This quarter had a number of approximately INR 105 crores, as exit charges that has been incorporated. During the quarter, we also had settlement of exit charges until the month of October, November for the operators, all the exits that have come in. And due to that, you will see next quarter number at about INR 110 crores. So that's on the exit charges for operators. And then on your question on energy margins. This I have said last time too, energy margins have to be seen on a full year basis. We are targeting to reach a 3% levels on a full year basis for energy margins. We also said this year is lower because some of the long-term contracts did get negotiated in the last quarter, and that's why you did see an impact on negative margins which was lower. On a sequential quarter basis in both the companies, you must have seen improvement of energy margin and that's what I was referring when I talked in the last call that we expect seasonally the quarter 3 and quarter 4s to be better than what we had in quarter 1, 2. So on a full year basis, we will still strive to see if we can reach the 3% mark for the energy margins. And some of these are long-term contracts, so we do see an impact whenever they come up for negotiations being played out on the P&L there. On CapEx intensity, yes, we do see lower Capex, despite a higher number of new tower rollouts that Akhil referred to in the beginning of the call, primarily because the tenancy additions have not been there. Some of the equipment is getting reused whenever there is electronic equipment that's taken out. The maintenance CapEx is also down and that's also seasonally down during these seasons, we do run special projects on maintenance CapEx as and when there are adverse weather conditions that are likely to come in. We do advance some of this maintenance CapEx, particularly towards battery and upgradation and so on and so forth. So to your question, yes, the CapEx intensity is lower, and it's also translating because of lower new tenancy addition. While the tower growth is slightly higher, we are not having as much of tenancy growth that we've had in the past.
Okay. A couple of small follow-ups. Could you please give the exit charges number for the stand-alone entity only in certain stand-alones?
I'm afraid I do not know if that has been given as a separate number there.
Okay. And one small follow-up on the CapEx number. The 3G shutdown that is happening, that might be giving you some vacant cabinet space. Is that also getting redeployed in some cases, helping you save CapEx?
We are technology-agnostic as far as we are concerned on the tower side. Spectrum is not being surrendered by any operator. If you see that, obviously, means there is an electronic equipment or a plan to reuse whichever frequencies, whether it's the 2G frequency being reused or a 3G frequency being reused for some other purposes. Increasingly, what we are noticing, and this can be confirmed both by operators and my own word here, is that operators are trying to use maximum spectrum for 4G as much as possible. And there is hardly any electronic space that is kind of -- or the tower space or the space associated with radio equipment that is needed or power that we've seen as a reduction on account of any of the 3G being moved either to 4G or being moved because on a net portfolio basis, we still see cabinet expansions being done by operators, and pretty much all the sites there, they're trying to switch on 4G on all the bands that they can. So we still continue to see healthy cabinet additions in our entire network.
The next question comes from Mr. Pranav Kshatriya from Edelweiss Securities, Mumbai.
My first question is regarding tenancy cancellation. We continue to see almost the 1,200-odd tenancy cancellation per quarter. Do you think that in the next 2 quarters, it should get over or it can prolong even further?
Again, a difficult question for me to answer. Better said by the operators than from me. My own guess and hope is that this is probably the last of it in terms of exits that are to come in. And it also depends on the verdict. But if the verdict is supporting operators to come back for growth, we will. The early signs of tower growth that Akhil referred to is that is an indication, I hope, that we will have tenancy growth to come in. And operators, instead of using exit as an option, will come back for the growth strategies to cater for the growth given that with tariff hikes, we will be in a position to take on a much more aggressive market to compete on quality. And quality definitely means that you would need larger number of tenancies and larger electronic deployment by the operators. So it's more a hope. I do expect that going forward, we should see these numbers, either be the last of it or kind of turn 10 towards 0.
My second question is on energy margin. You talked about this year it being 3%. So will that be a trend for a longer term? Or it is more aberration for this year and next year, we should revert back to 5%, which is where we were before?
Again, we've said this in the past that typically 3% to 5% is what we look for as energy margins. And because there are some long-term contracts that came up for negotiation, we are looking to come back to those run rates. To answer your question, we will still aspire to move that up as we move forward, but we will have to see this how this plays out in the coming year too.
The next question comes from Mr. Sanjesh Jain from ICICI Securities, Mumbai.
One question, a bookkeeping question, on the financial income. It has been variable consistently from around $900 million to around -- sorry, INR 900 million to around INR 1,000 million a couple of quarters back, now to around INR 770 million, whereas the cash balance is increasing. So what are we missing here?
Sanjesh, some of it has to do with the interest rate movement as well. Of course, we've had some treasury movements in the last quarter as well. I would think that if we keep continuing to maintain the cash balance considering the macro environment, you'll have to see them -- the movement in that line as well.
So at Infratel level, we've had some debt, and we've also conserved a certain amount of cash to see in case post merger, there is a cash call to take on part of the stake from the shareholders. And you do see that there is -- while the net debt numbers look similar on account of dividend being paid out from the cash, we have increased a small amount of leverage in Infratel standalone. Indus did pay back a certain amount of their debt. In Infratel, there is a small increase in debt and there is higher cash. Interest rate movement also has been a small move and that's also caused a little bit of treasury income to be lower. But that's a small number.
No. I was just looking at the cash balance and not actually the net debt number. Cash balance has been more or less increased or remained stable.
Because we increased our borrowing in Infratel.
Okay. So how should we look at interest cost or in interest finance income for the full year, at around 7%, 7.5%? That's what we should assume?
The yields have been coming down, Sanjesh. So very difficult to give that number, but it has been on the downward trend.
[Operator Instructions] The next question comes from Mr. Manish Adukia from Goldman Sachs, Mumbai.
Just a couple of questions. Of your 2 largest customers, one of them is under a lot of balance sheet pressure, which could get further aggravated, depending on how the AGR situation plays out. Have your customers started to have any discussion with you regarding either longer payment schedules for either NTP to Infratel or negotiating for lower rentals that they pay on the towers? And my second question is on your tower build out, it's been a bit elevated the last couple of quarters. Would it be safe to say that these towers at this point in time are being built for just one customer, with little to no visibility on a potential second tenant on these towers?
So to your first question, again, we keep discussing with customers on various opportunities and growth areas that we can work on, particularly towards newer technologies, particularly towards in building new products that we can create for the future. Those discussions are on. If your question is about payment terms changes, we are not discussing any change in payment terms from where we are right now with any of the operators. Your question on tower build out. Yes, we are seeing an increased build out, going out from operators into areas where they were not there, and some of these are also towards catering for capacity for the operators. To us, that's a healthy sign, a leading operator in a leading circle, increasing tower base. It's only a question of time before subsequent operators will come back and fill in on those. So we are choosy about where we are building these towers. We do that analysis to see that there is a potential for a second tenant to come in, at least in the towers that we are trying to build as we move forward.
And just a follow-up on the first question. So I mean, given the financial stress in your customer segment, do you think, if they come to you and if there was a situation where you had to, for the near term, negotiate on lower rentals, would that be something you'll be okay with? Or is that absolutely a no go area for you?
Again, this is a hypothetical situation right now for me to be conjecturing on a call like this. We keep working on cost-saving measures jointly. And one of the big areas that we work on is energy, which is a pretty meaningful part of an operator OpEx. And that's jointly what we work on. What you're seeing is energy and the drop in revenue that we saw for us is kind of co-created with operators to see that we have a win-win proposition. And nobody is kind of going really out of pocket, and we are also becoming more and more environment friendly. You see our green tower disclosures. You look at the amount of solar sites that we are building. So these are initiatives that we try and co-work with our operators. And also, as I said, we keep working on co-creating new products for the future, whether it's small cells, whether it has other solutions, in-building solutions, going into high footfall areas. So we are working on those solutions to see how we can create a win-win opportunity between operators and us. Every time there is a new policy opportunity, we've been working towards the regulator also to see that sharing becomes the norm for most of the people. And there, we've seen a huge support from the government too in the last quarter in terms of increasing or looking at enhancing the scope of IP-1s to take on larger sharing. And you will appreciate that any sharing that you do, whether it's in fiber, whether it is in-building or whether it's in a small cell, there is definitive saving and it's a win-win proposition for all 3 of us. So those are areas we'd rather work on to focus, the newer areas of growth, and see how we can create a win-win proposition between all of us.
The next question comes from Mr. Varun Ahuja from Crédit Suisse Capital, Singapore.
I've got a couple of questions. First, I want to understand the sharing revenue per sharing operator. This has been showing some different share trend over the last couple of quarters. So this quarter for Bharti Infratel, this is down. Last quarter, it was up. And for Indus, it is up 6% while last quarter, it was down. So just wanted to understand what is happening there. Are there any one-offs in last quarter? So I appreciate your comment on that. And secondly, I know -- I don't know if you can share something, but what is -- it's been almost 6, 7 months, more than that, the approval is still pending on the merger. Is there anything that you have captured? What is leading to such a delay in that approval process?
So Varun, firstly, the ARPT trend, yes, it does look a little wavering between Indus, Infratel, when you do that analysis. But if you add that up on a 9-month basis, and compare that to the previous 9 months, there is a secular 10% increase across both the companies on the ARPT. Second, exit discussions have been going on with operators. And depending on the settlement, you do see a little bump up on the quarter that some of these exit settlements are reached. In the current quarter, there is an impact on Indus, which is in the order of about INR 20 crores that's showing up on the exit income, and that is causing Indus numbers to be slightly elevated there because the day you finally reach an agreement, there are previous couple of quarter payments that are also simultaneously made and that gets recognized. And that's why you do see a little bit of difference there. I would say, look at that on a full year basis. I've also addressed it in the previous question, given a guidance of where this number of ARPT on a consolidated level will move. It is currently at INR 105 crores because of the settlement -- next month -- next quarter, it's likely to move to INR 110 crores. So that's a number that should inch up. And you will see, as I said, on a longish horizon depending on where the settlements have happened, and these are 2 independent companies. So their discussions are at different points of time and they get signed off. The moment you sign, you settle from the date you've started the discussion on. Your question about approval. The last information that I have, and that's something that I can share is that it's still waiting for the DoT's FDI approval to come in, and I do not have any further details than that at this moment to share.
[Operator Instructions] The next question comes from Mr. Kunal Vora from BNP Paribas, Mumbai.
On the new towers, it's likely that you will have only one tenant. Is the pricing any different because with single tenant, you might not even cover the cost of capital?
Kunal, we have a standard MSA for all the operators, which we offer on a nondiscriminatory basis. Every tower when we build, rarely is it that 2 operators simultaneously tell us to build towers. That happened in the cases where we go for joint biddings or when simultaneously, an airport or a government building is opened up for all the operators to build sites in an area where normally, we were not getting permission. So we look at this on a portfolio basis. There is a standard MSA. Operators can choose to roll out on that. It makes it easy for the operators to choose the type of product that they want. We build a tower, which is meant for sharing, and that's what I was referring to in my earlier answer to one of the questions where I said, we do evaluate the opportunity of subsequent operators coming into the tower when we build them. I agree that on a single tenant tower, the returns are significantly lower. And that's why we look at this on a portfolio to see as we roll out new towers, which is actually capturing the ground in terms of being there early. And that's a strategic advantage for us to reach out in areas where others are not present. As and when there are capacity or coverage catch-up that is being done by subsequent operators, we start to see that move up on the tenancy ratio. And I think tenancies are at the levels that we come down on in terms of our returns too.
Sure. But considering that there's a change in situation now and the possibility of getting a second tenant of many of these towers will be very low, would you consider a change in MSA or no such thoughts?
Right now, nothing to answer to that question. Again, I do not see a problem in terms of getting a second tenant to come in most of these towers. And why I say that is for a particular reason, and this is something we've been saying that if there are stronger 3 or 4 players that are left in the market, you do not expect a huge difference in coverage or the kind of quality that both of them render, and they will run at about 33%. We've been saying that they will run for the market share, and they will have to give similar or if not better services to gain in the market even marginally. And that is where we think, even if there are 2 strong operators or 3 strong operators, once the leader goes in, it's only a matter of time before the second and third comes in. Today, there is -- there isn't a huge gap between the #1 and #2 in any circle that we look at. In the past, it was true that the leader was leading by a huge margin, they were north of 50% RMS in some circles and the trailing people were sub 20%. In which case, the opportunity for a second tenant was lagging by a huge time line. Today, with most of the operators having similar, if not exactly the same spectrum bands, all going after the 4G high-end customers, all having close to about 10-gig kind of utilization, I do not foresee this to be a challenge to get a second tenant as long as we're not building a tower very next to an existing tower. That I agree, yes, we're doing that as well. But you know the MSA does not encourage customers to ask someone to build a tower next to an existing tower. It is cheaper for them to go there both in terms of rent and energy to an existing tower, whether it's my competitor's tower or whether it's my own tower. Given our scale and size, I get the benefit of that. But we do not stop operators too, despite our right of first refusal to go into an existing tower if there is one.
Okay. Next question, last question, is how do we look at the average rental? You already explained a little bit. But I just wanted to hear your thoughts on the 2.5% annual escalations, which should start kicking in, like in the next couple of years. When do we start seeing that?
Those 2.5% increase on the base rate is going on every year. So it's not something that we've stopped. Yet, there was a freeze given to migrate to this new scheme, and that gets unfrozen as and when the particular operator reaches that threshold. Let's say, a site, which is 2 years old, it would have got unfrozen after 2 years of freeze. And so it is a gradual process where unfreezing continues to happen to all the sites. If your question is when will the entire 2.5% play out, I will have to check and come back to you, exact year.
Because my understanding was that in like 2022 or '23, you'll have a bulk of the towers getting bigger, tenants getting defreezed and for all towers you should be getting escalations?
Yes, should be around that time. But as I said, I do not have it top of my hands straight away, but it is also a process. A 1-year old tower would have got unfrozen exactly 1 year, 2-year old would have got unfrozen in 2 years. And in 5, 6 years, the expectation was pretty much all the towers will probably get into an unfreeze stage.
The next question comes from Mr. Mudit Kedia from Arpwood Capital, Mumbai.
One business question was with respect to -- if one were to look at the unit economics of a single tower, say, with 2 co-locations, 2 loading, no space further to add and 2.5% escalation, how do you really arrest your EBITDA margins going forward, given a rental increase would be a bit higher than what your escalations are to keep offered to the telcos?
Sorry, could you repeat the question? I missed something in between. You wanted the unit economics of a 2-tenant tower?
A 2-tenant tower, sir, with no loading further possible on that tower given that the escalation is freezed at 2.5% and your other costs, say for example, your rentals or employees that you would have incurred or have assigned would grow at a higher rate than what you have on an escalation front. So how does an EBITDA margin or [ other ] EBITDA gets arrested in that case?
So again, a little hypothetical question. In terms of what we see really on the operator domain happening is that there are newer technologies, and you continue to add more electronics, you continue to consume more power, you continue to use larger utilizations per customer. Otherwise, this is like saying if the operator's growth is completely stacked -- sorry, there's some announcement that's played out. Are you able to hear me?
Yes, now I can.
Sorry. So let me come back. So a little hypothetical in terms of question. It's like saying growth -- entire industry comes to a halt. Nothing happens. So in reality, we started off with a small spectrum way back in '96 and today, you'll see 50, 60 megahertz. I look at 5G as a road map. People talk about 100, 200 and 300 megahertz of spectrum there. That's the kind of growth that's likely to come in. So in theory, there is nothing like loading is going to stop. Newer technologies, meaning there's more loading. There is a bigger opportunity for business growth to happen. But on a unit economics, we are today at 1.84, 1.85 tenancy ratio. That's what you see realistically the number there on a portfolio basis. EBITDA margins and returns are where they are, that you can see there, too. Yes, we continue to drive operational excellence to see what we can do to reduce cost at 60%, 70% EBITDA margin, depending on which company you're looking at. Your cost is about 30%, 35%. That's where we are. As long as it meaningfully recovers the cost that your escalation recovers, at least their increase in cost, we are net on a positive there, and we would rather grow the portfolio from that point on and support customers in their growth strategies, which should translate into better loading for us. We would continue to have northwards movement, though at a smaller pace. The initial big jump is, obviously, with tenancy enhancement from one tenant to 2 tenants, that is the EBITDA or return ratios that you're looking at. But from there on too, every incremental loading is not a negative for us. It continue our marginal cost of supporting those as lower, and you are able to keep your EBITDA levels at the levels as it is. And we continue to drive on the operational cost side, too, to make sure that our costs are kept optimal and the productivity levels continue to improve with the interventions of IT and other things.
Okay. And just one follow-up. With respect to any new tenancy that you add on a tower, what sort of a typical discount that an earlier tenant gets, if you could explain this?
That's typically about INR 2,000, as standard MSA rate. So INR 35,700 becomes INR 32,000, and the second tenant, from there on, it turns to INR 30,000, and this is a typical ground-based tower rentals that are applicable from 1, 2 to 3D.
The last follow-up question comes from Mr. Vivekanand Subbaraman from AMBIT Capital, Mumbai.
Just wanted to check, are there any one-offs in the depreciation line item? Because if I look at the numbers in 1H and the 3Q numbers, they seem to be very different. And second question is on the other expenses line item. That number also has been quite volatile over the 3 quarters of fiscal '20. Is there any one-off there to keep in mind? Or any other factor that is affecting -- or resulting in very high volatility there?
Depreciation, there is a one-off. Exact details, I probably have to request Surabhi to send that across if that is all right with you. There is also a little bit of 116 impact that plays into depreciation. So I'm sorry, that I'm not be able to give you the exact numbers in the call straight away, but there are one-offs that are there on the depreciation that comes in. Second, on the other expenses that you are seeing again, there too, there are impacts of some provision for doubtful debts, which we provide for as per the policy -- beyond 90 days of non-collection is provided for. So you do see times when the money is collected, it gets written back too. So a quarter-on-quarter impact, last quarter, there is an increased PDD, the increase on provision for doubtful debts on account of some of the smaller operators not having paid within the 90 days.
Okay. And would it be possible to quantify if there is any number or any residual receivable outstanding from smaller operators that is yet to be charged off?
No, as I said, the policy is very clear. Beyond 90 days, we provide for it. Less than 90 days, we've seen some improvement on the payments that are coming from them. So I can't tell you specific about the operators. But these are very small players in our case. But there have been some payment delays that we've seen from there.
At this moment, I would like to hand over the call proceedings to Mr. DS Rawat for the final remarks.
Thank you very much. As Akhil cited, the quarter that went by had some important and unprecedented update for the Indian telecom industry. The hearing on AGR on February 3 will be critical for entire telecom industry, and we expect a positive outcome. With the positive net tower and co-location addition during this quarter, we remain optimistic on the future of Indian telecom industry. We believe that an improved financial environment with the support of the government for the operators will put the telecom industry on the much-needed growth path. On behalf of entire Bharti Infratel team, I thank all of you for your continued support. We are fully committed to make the most of the opportunities that are coming before us. I take this opportunity also to wish all of you a very Happy New Year. Thank you very much.
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.