Valuation and govt relief to supercharge Indus Towers’ rally
5G network, capex rollout also positive
Tower infrastructure services provider Indus Towers has gained around 25 per cent over the past month, with half the gains coming in the last few trading sessions. The Street believes the telecom relief package announced by the Centre will keep Vodafone India (Vi) afloat, ensuring revenue visibility and remove the tenancy overhang for now.
The rollout of 5G networks, infrastructure sharing, and improved rating on environment, social and governance (ESG) parameters are other factors that may lead to higher investor interest in the stock.
The key trigger, however, is the telecom relief package that will ensure the survival of Indus Towers’ major client, Vi. Bhupendra Tiwari of ICICI Securities says Vi, which had an annual commitment of ~24,000 crore towards spectrum payment and AGR (adjusted gross revenue) dues, will be the key beneficiary.
The key issue to monitor, according to him, is the timing and the quantum of Vi’s tariff hike and fundraise to meet near-term commitments. Any improvement in Vi will raise the overall value visibility of Indus Towers. Tenancy ratios are expected to be stable, but the level of discounts will need to be monitored.
Valuations, too, favour Indus Towers, and Spark Capital believes the firm is the biggest beneficiary of the reforms package. Arun Prasath of Spark Capital said in a recent note that the company trades at 6.5 times its enterprise value to operating profit, implying a 1.2 times replacement capex, which is typically attributed to single tenant tower companies.
Prasath expects Indus Towers to re-rate substantially because of liquidity benefits for Vi, the government’s willingness to take equity in telecos, and increase in tower capex, thanks to the relief package. With the market share versus tariff hike dilemma going away, tariff hike has once again become the biggest growth driver for Airtel/jio, he adds.
Indus’ higher ranking on the ESG framework could attract investors. CLSA says Indus Towers is among the top 40 companies on ESG parameters across its coverage of 130 companies.
This is because 40 per cent of tower locations are ‘green sites’ and over the years it has seen almost 1 mt cumulative carbon emission reductions. Its ESG rating is 8-17 per cent higher than the country and sector average.
Another re-rating trigger for Indus is potential stake sales by telecos — Airtel is its biggest shareholder with a 41.73 per cent stake. While the stock has gained in the recent rally, brokerages (CLSA has a target price of ~330) see an upside of over 20 per cent from current levels. Additional gains will depend on capex intensity and stake sale news.