Indus Towers Limited (INDUSTOWER) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. I'm Vandana, the moderator for this conference. Welcome to the Indus Towers Limited Third Quarter ended December 31, 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. And over to you, Mr. Sah.

Thank you, Vandana, 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'm pleased to present business performance for the quarter ended December 31, 2023. This month marks the completion of my first year at Indus, and I'm truly honored to be a part of a great organization and contribute to its commitment towards putting India first. Coming to the quarter. In line with the trajectory of the previous few quarters, we are proud to have delivered the highest-ever tower additions in our history. This momentum continues to be underpinned by strong demand from one of our major customers, especially in rural areas. Another update is that the collection from one of our major customers slightly improved in Q3, with some collection against the past overdue. Before I apprise you of the developments within the key facets of our business, I would like to take a moment to acknowledge and appreciate the contribution of our field force, as they continue to work relentlessly towards Indus' goal of enabling pan-India connectivity. During the quarter, our teams on the ground overcame formidable geographical challenges to install 13 solar-powered towers in Ladakh's Zanskar Valley. Being situated at 7,700 meters above sea level, the team enabled connectivity along the entire 250-kilometer-long route. Moving to the regulatory landscape. The government continues to take steps to help accelerate the rollout of telecom infrastructure in the country, while being cognizant of the environmental aspect. During the quarter, the landmark Telecommunications Bill was passed in Parliament, and we are optimistic that its progressive provisions will help maintain a robust telecom network. The recognition of telecom infrastructure as critical telecom infrastructure ensures network security with punitive consequences for damage, which is a commendable aspect. Additionally, we remain hopeful that this bill will play an important role in eliminating the burden of multiple levies, taxes, Right of Way challenges, while ensuring uniformity across the diverse landscape of India and promoting ease of doing business. After the Green Open Access policy was notified in the September quarter by the Ministry of Power, the same has been adopted by Karnataka, Madhya Pradesh, Maharashtra, Punjab and Uttarakhand. Additionally, the composite billing scheme for multiple power connections, which was introduced a couple of quarters back, has been adopted in Madhya Pradesh and select discoms of Rajasthan and Uttar Pradesh, amongst others. Moving on to 5G. Rollouts by the top 2 operators continue to proceed at an accelerated pace, with 5G services now available to customers located across the country. The industry-wide total number of 5G base transceiver stations, or BTS, deployed stands at almost 400,000, with more than 7,000 BTS being deployed per week in November. Therefore, we continue to see good traction in our loading revenues. We expect the 5G loading revenues to be gradually supplemented by a demand for new sites once a certain penetration level is achieved to aid the network decongestion. Given our expertise in the passive infrastructure space, we believe that we are well-placed to capitalize on these opportunities. The swift deployment of 5G infrastructure is expected to be complemented by a rapid uptake of 5G by the end consumer as well, as per statistics mentioned in the Ericsson Mobility Report. As per the report, the 5G subscriptions are expected to reach 860 million in India and over 5.3 billion globally by 2029. During the September quarter, global 5G subscriptions grew by 163 million compared to the 110 million additions in the corresponding quarter of the previous year and have touched 1.4 billion. The rapid uptake of 5G, in conjunction with the ongoing migration of users from 2G to 4G, is providing a boost to data consumption within the country. For the top 3 operators, the total data consumption grew by 23% year-on-year in the September quarter, and the average data consumed per user per month grew by 14% year-on-year to 23.6 gigabytes in the same period. The robust data consumption story, coupled with the swift uptake of 5G, is expected to spur the demand for passive infrastructure, and we remain well-positioned to address this demand. In terms of the operational performance for Q3. We are excited to have recorded the highest-ever tower additions in our history, as I alluded to earlier. Please note that during Q3 FY '24, we increased our macro tower and co-location additions more than 5x compared to our addition in Q3 FY '23. We managed to add 7,563 macro towers and 7,217 corresponding co-locations, underpinned by robust demand from one of our major customers, coupled with our efforts towards significantly increasing our share in the business of this customer. Total macro towers and co-locations at the end of Q3 stood at 211,775 and 360,679, respectively, each growing by 11.8% and 6.3% on year-on-year basis. Our industry-leading tenancy ratio stands at 1.70. Co-location addition on our leaner tower was the highest in the 4 quarters at 1,351 in Q3, and the overall base increased to 9,994 co-locations. Including leaner towers, our net co-location additions were at 8,568 in Q3 as against 6,372 in Q2. Shifting now to a progress update on our 4 key strategic priorities namely market share, cost, efficiency, network uptime and sustainability. Firstly, regarding the market share, as I had mentioned earlier, our quarterly macro and co-location additions increased more than 5x over the same period last year. This indicates significant improvement in our share in the business of our major customer who has been rolling out extensively. The proactive measures we have been taking to cater to this huge demand for tower additions have helped us increase our share. Our robust partner ecosystem, coupled with meticulous resource planning and continuous product harmonization, has helped us improve time to market for our -- of our products further. These efforts continue to be supplemented by digital interventions we have been implementing. We expect our major customer to continue with the rollouts in rural areas in the near future, and we are confident of being its preferred and trusted partner for its network expansion. Secondly, on cost efficiency. Our initiatives towards reducing our operating and capital expenses have continued in Q3 as well. Diesel accounts for a large part of our operating costs, and we have been constantly reducing diesel consumption, despite the increase in energy requirement from addition of new sites and 5G equipment. We reduced our diesel consumption by 7% year-on-year in Q3 through ongoing measures, including use of renewable energy, electrification of nonelectrified sites and operational efficiency. We are accelerating addition of solar sites every quarter, and we added more than 3,300 solar sites in Q3. Regarding CapEx. Our sharp focus on product standardization and resource efficiency is helping us optimize our spend per site. Negotiating with vendors and reusing existing infrastructure after redesigning it for upgrade activities are also under focus to keep a check on the cost. Thirdly, our network uptime, which is an important aspect for the customer. We managed to deliver a higher uptime of 99.97%, despite challenging weather conditions, including cyclones and heavy rains in the areas of Tamil Nadu, Andhra Pradesh and West Bengal. The determination of our field forces, coupled with a robust response framework for adversity, go a long way towards delivering such performance. Moving on to ESG, which is a key focus area for the company. We are pleased to see what -- that we continue to make steady progress within each dimension of ESG. With regards to the environmental aspect, our initiatives towards reducing our GHG emissions continue to bear fruit. We have been increasingly using cleaner sources of energy to power our sites. We have significantly increased our solar sites to 6,665 from 1,496 at the beginning of the year. As I mentioned earlier, the continuous reduction in diesel consumption is helping us reduce our emissions. We are also taking steps to promote use of eco-friendly solutions in the transportation activities and employee travel. On the social front. Our resolute approach towards improving gender diversity is yielding impressive results. It has increased to 11.3% from 6.3% at the beginning of the year. Our focus hiring programs across levels and co-locations, policy interventions and a conducive and inclusive working environment are helping us attract and retain female employees. Ensuring the health and safety of our employees and partners remains at forefront of our thinking. And to this end, we launched an electrical and road safety campaign during the quarter to create awareness of safe practices among our field force. We've also been providing ESG training to our workforce, including partners to inculcate the behavioral change among our people. I would now request Vikas to take you through our financial performance for the quarter ended December 31, 2023, and I look forward to your questions. Over to you, Vikas. Thank you.

Thank you, Prachur, and good afternoon, everyone. I'm pleased to share with you all the financial results for the quarter ended 31st December 2023. I'll briefly touch upon our operational performance before moving to financials. Strong addition of 8,568 co-locations, including those on leaner towers, have really helped the overall operation -- the financial performance of the company. Coming to the financial performance for quarter 3 FY '24. Total revenues increased by 6.4% year-on-year to INR 72 billion, wherein the core revenues from rental grew by 7.3% year-on-year to INR 44.8 billion. On a quarter-on-quarter basis, our reported gross revenue and core revenue from rentals were up by 0.9% and 3.2%, respectively. The core revenue quarter-on-quarter growth was also aided by the base effect of deferment of revenue recognition for a transaction in the last quarter. In terms of profitability, our reported EBITDA increased by over 2x year-on-year and 4.8% quarter-on-quarter to INR 36.2 billion. EBITDA margin increased by 32.8 percentage points year-on-year and 1.9 percentage points quarter-on-quarter to 50.3%. Please note that the EBITDA of quarter 3 last year was impacted by provision for doubtful debts of INR 22.7 billion. With regard to the provision for doubtful debts of INR 0.6 billion reported in the current quarter, I would like to explain the transaction with a major customer and the treatment of the same in the books. We have collected and recognized INR 3 billion against the past overdue, in addition to the 100% monthly collection, which resulted in reversal of provision for doubtful debts of the same amount. Additionally, we have adjusted a part of the monthly collection with interest receivable to the extent of INR 3.3 billion during the quarter. That has resulted in an increase in interest income in the quarter. And correspondingly, a similar amount of provision for doubtful debts has been created. The reported provision for doubtful debt in the books, hence, reflects the net effect of the additional provision created and the reversal of INR 3 billion. Normalized for provision for a major customer, EBITDA grew by 5.3% year-on-year and 2.4% quarter-on-quarter. Energy margins were at negative 2.7% in quarter 3 FY '24 against negative 1.2% in quarter 3 last year and negative 2.1% in quarter 2 of FY '24. Given the nature of our energy business, we work on reconciliation with our customers. In quarter 3 FY '24, we had an impact of a settlement for the past period. After adjusting for the impact, the energy margins are similar to quarter 2 FY '24. Quarter 3 last year had benefits from reversal of certain provisions. As touched upon by Prachur, we continue to work on reduction in our energy expenses. Our reported profit after tax grew by 19% quarter-on-quarter to INR 15.4 billion as against a loss of INR 7.1 billion in the corresponding quarter of the previous year. Quarter 3 FY '23 PAT was impacted by the substantial provision for doubtful debts and an exceptional item relating to impairment of revenue equalization assets. Please note that with regards to pending matters on entry tax before the courts, we have reassessed our contingent liabilities. And based on the reviews emanating from various judicial bodies, we have provided for them in quarter 3 FY '24. Accordingly, there's an increase of INR 1.3 billion in depreciation and INR 0.5 billion in interest cost. In addition to the interest adjustment that I explained earlier, overall finance income was also aided by cash interest collection on overdue from a major customer. After normalizing for the one-off impacts of provision for doubtful debts, entry tax and impairment of revenue equalization asset, our profit after tax increased by 4.6% year-on-year and 15.8% quarter-on-quarter. Reported pretax return on capital employed and post-tax return on equity for the rolling 12 months were at 19.2% and 24.8%, respectively. In terms of the cash flows, free cash flow for the quarter was at INR 8.7 billion, despite CapEx remaining elevated at INR 26.5 billion. As I stated in the last earnings call, subsequent collection of delayed payment for quarter 2 from a major customer aided the free cash flow in this quarter. The CapEx continues to be high on account of strong tower additions by one of our major customers. We believe that these investments will aid business growth and help us generate long-term value for the shareholders. Our trade receivables increased -- I'm sorry, decreased by INR 1.7 billion due to higher collections from one of our major customers. The full impact of the higher collection is not reflecting due to some timing differences as INR 3 billion was collected in January. With regard to the past overdue, we remain in constant discussions with the customer for clearance of the same. To sum it up, we are pleased to have delivered a robust operational and financial performance during the quarter. In addition to the business growth, the financial performance was also aided by unwinding of the past dues. The strong operational performance was underpinned by an accelerated rollout by one of our major customers in rural areas. We expect its network expansion and 5G rollouts to continue to support our business growth in the near future. I would now request the moderator to open the floor for questions and answers, please.

[Operator Instructions] First question comes from Mr. [ Sohan Joshi ] from Mumbai.

Am I audible?

Yes, Mr. Joshi, you are audible.

Yes. I want to ask what is the status of a tower fiberization? Have we achieved 100% coverage on tower fiberization?

So Mr. Joshi, the tower fiberization, of course, is being done by the operators. As of now, as per the data available from various sources, particularly the Indian tower fiberization for most of the customers is in the vicinity of about 30% to 35%. So there's still a long way to go for tower fiberization, barring some -- one of the operators, which has recently, last few years lost the services. The fiberization is at a little higher level. But overall, there's still quite a gap.

So by what duration are you expecting to cover a larger part of the coverage for the fiberization maybe within 2, 3 years?

See, I would not like to hazard a guess on this because this is something which is being driven by the operators. But all we know is that in the advanced markets where 5G has scaled up pretty much, fiberization eventually needs to go to about -- anywhere between 80% to 90% for a good end-user experience. So I'm sure the operators are going to be covering the journey quite fast if they have to give a good experience.

Okay. My second question is if you closely look at the subscribers' data released by TRAI each month, there has been a greater addition by Jio each month. So are we witnessing demand of more size from Jio? Or is the growth mainly coming from Airtel side only?

I think this information, we will have limited input to this. I think it's probably best answered by the operators themselves. We don't have any inputs on this matter, per se.

Okay. Okay. And just one last question, if may I ask, if it's possible to take one more question?

Sure. Go ahead.

Are we -- I mean, once the demand starts to lower its pace, are we looking at a broader digital spaces like data centers, especially on the enterprise IT side, since the demand for the enterprise 5G will be more on enterprise IT? Are we balancing for it, maybe a couple of quarters later?

I mean, as of now, it's too early to say. I think but if an opportunity presents itself, we'll consider it.

Are you talking about enterprise 5G? Is that the question?

Yes, yes, yes. Are we looking at a broader digital space once the demand for the addition sites starts to lower in space, like say data centers and everything, something like...

Yes. So if you're asking about additional business opportunities, yes, we are evaluating. I don't want to be any specific this one, but we're looking at all the opportunities where we can participate as an infrastructure provider. And at the earliest, we'll come and let you know.

The next question comes from Mr. Arun Prasath from Avendus Spark, Chennai.

I have a couple of questions. First on the receivables, just -- I just want to understand if the operator is paying, the one with the overdues, if he is paying during this quarter, will it be first accounted towards past pending payments and hence the provisions is reversed or will it be accounted towards the current invoice? How do we do that?

Well, as far as the settlement is concerned, the payments are basically first accounted towards the old invoices. So it basically, pretty much, largely moves on a FIFO basis.

FIFO basis. Okay. Understood. So which means the large party of the reversal on the provisions is because of this accounting type. So whatever they are supposed to pay in this quarter or this period, still -- it is still not crossing certain threshold limit, it is still accounted as good receivable, right?

Yes. So the way we provide is anything which is overdue more than the credit period that's agreed in the MSA is as per our current ECL policy is provided in the books. So if there is any reduction in the receivables because of better collections, then that really results in or leads to unwinding of the provisions.

Understood, understood. So if I look at the last -- so far, we have, I think, provisioned close to INR 5,000 crores, even after reversing of this. So at this point of time, what is the kind of levers we have to collect this, apart from, say, restricting the access to the operator. Do we have any other levers at this point of time?

No, I don't think -- I mean, we are currently working with our customer to see how we can unwind quickly, and we've seen some progress now. I think the idea is to see how we can sustain that and unwind the dues. I don't want to talk anything specifically about any levers per se, but I think that's -- we are working with our customers to make sure that we continuously get paid for what we are doing today and unwinding of the past dues.

Understood. And then secondly, on the loading revenue because 5G is currently, we feel, most operators are rolling out the 5G. But oddly, this is not reflecting in our sharing revenue data, either on a per-operator basis or per-tower basis, this loading revenue is still not reflecting. Is it very insignificant? Because a few quarters before when we asked this question, you said that it will take some time to reflect, but it is still not reflecting in this. What we are missing? Can you just guide us?

Yes. So Arun, I think the revenue that we report is a sum total of various elements, right? So there is also the upside coming from the loading. There is upside in terms of the rollouts that we are doing. But at the same time, there are a few downsides because if you remember, in the same quarter last year, we had basically taken an accounting position with regard to the lease accounting or the straight-lining of lease rentals with regard to one of our customers. So we have not recognized those long-term revenues based on the Ind AS lease accounting, which obviously is basically a bit of a drag on the revenue line. Apart from that, we also have been renewing the towers and the tenancies with our customers with some discounts, so there is also that sort of a drag on the revenue line. So basically, there are growths and there are -- I'm assuming you are talking at a per tenancy level, there are upsides and downsides both, and they are sort of offsetting each other.

Given there's so many variables, can you give a little bit more disclosure on this front? Going forward, what we should be assuming as an upside from the loading revenue or this downside will also continue in the upcoming quarters?

Well, like we had disclosed in the past, I think the upside from the loading revenue is broadly in the range of 5% to 10%, depending on how much load is there on account of 5G on each site. So anywhere between 5% to 10% is the sort of upside that we are seeing on account of 5G loading.

And on the downside that you spoke about that -- some of these downsides will also offset this upside going forward.

Yes. So there is -- we had basically made some disclosures with regard to the renewals that was almost a year back, so that continues. And as and when more portfolio is coming up for renewal, although bulk of the renewal was done in FY '23, there is some bit which is happening every year. To that extent, the same sort of renewal discount is reflected in the numbers.

So what part of the portfolio is still not yet renewed, assuming that, that will renew at the lower rates? So what part of that is still to renew?

Well, I think back in FY '23, we had renewed almost 1/3 of our portfolio. And thereafter, we didn't have any major bulk renewal in the subsequent periods. But I would say, probably, anywhere between 50% to 60% portfolio will be coming up for renewal in the forthcoming years.

Understood. And lastly, on this leaner towers, can you just give some indication of what is the cumulative CapEx we have spent on this leaner tower?

That -- so I think we will have to really take it offline, Arun. We will basically need to compute that separately because I don't have that number readily at hand.

Okay, no issues. What I'm trying to understand is that from the operator's perspective, is it -- is a small cell more advantageous as compared to leaner tower, and from a tower company, that is from our perspective, which is more beneficial? Obviously, we will be working on ROC, but from an operator perspective, how it differs? So that's what we want to -- we are trying to understand.

So the -- see, the operators, depending upon their network needs and their network plan will decide whether a small cell will fit the need or whether a leaner site will fit the bill because both of them have different coverage characteristics and load-taking capacities. So depending upon the network plan of the operator, they clearly decide. I don't think each is replaceable by the other. It's more from a network-demand perspective as a solution fitment that will go in there. So I don't think the operators are also blindly trying to put in small cells or the lean sites because they are more cost-efficient.

Okay. And on other numbers doesn't need to be -- we do not have small cell portfolio, right?

Again, first of all, the structure that we provide is given loading capacity that the operator has asked us. In some cases, the operators may be putting up high-powered small cells or the higher -- high-power BTS'. It's again, as I said, the type of the structure is what we provide to them. What they are putting on top there into those sites is depending upon the network requirement.

Understood. And you also spoke about the lean tower co-locations. Is the tenancy ratio very different from the macro tower, our macro tenancy ratio? Or is it more towards one in the leaner portfolio?

The lean tower currently is more towards a single tenancy. And they are -- like we had explained in the past, also, they are modular structures. So as and when the second tenant comes with a very small, probably, investment, we'll be able to enable the second tenancy also.

Understood, understood. And this is geographically spread or is it more consolidated in urban areas?

It's geographically spread, Arun.

[Operator Instructions] The next question comes from Mr. Sanjesh Jain from ICICI Securities, Mumbai.

First, again on the leaner towers, we have seen that a lot of regional players have become quite aggressive in the leaner towers. And in my discussion with them, they suggested they are more agile. They can put up the tower and deliver it in a much lower lead time than the established players. How do we want to protect our market share in the leaner tower market where a lot of regional players are cropping up who know the geography better, who can deliver the structure faster? How are we placed in that markets?

Sanjesh, thanks for the question. I think leaner towers when the portfolio started, we probably started a little bit slower. I think -- but we have caught up. I think both our commercial offering and execution ability is as comparative as anybody else. And I think we have ramped up our TSP third-party infrastructure as well to support that. So in all the markets, we are quite competitive. And as you can see from our results, we've been increasing our leaner portfolio year-on-year, and we are equally present geographically for them. And at the end of the day, one of the things that we offer is the better uptime to the customers, which is a differentiation that the customers have started seeing. So I believe, we will remain competitive, agile, and will continue to grab the market share even in the leaner portfolio.

And then talking about leaner portfolio, power is less of a problem because we are talking of more like an urban infrastructure. And I don't think these towers comes with a power solution. Will uptime really play a differentiation there?

I think it's a combination of things. As I've said, if you are commercially competitive, if you are able to deliver on time and you can provide an uptime, I think that's the best solution that a customer can get.

Fair enough. Fair enough. Second question on the tower tenancy addition, which looks phenomenally strong. Now again going by what the operators are commenting on their side, it appears that FY '24 could be peak of CapEx and then we may see a material moderation in the addition, and then tenancy will take some time from the 5G to prop up. We will have a period of more of a loading growth. Do you agree with this thought process?

Sanjesh, I don't want to forecast on behalf of anybody else. I think what we are looking at is we currently have an order book that we are executing. I think we expect the order book to remain strong for the coming quarters. And if there is any moderation, we'll deal accordingly. But as of now, for the next 2 to 3 quarters, I have not seen a reduction in the order book. So we will address that if there is any change or reduction from the operators accordingly.

That's good. Just on the growth side, the growth in the rental revenue is almost 7% plus, volume-wise 5%. Is that more single tenancy towers is moderating the growth on the revenue side versus -- on the EBITDA side versus the revenue growth on what we are seeing?

So I think, of course, I mean, tenancy ratio certainly has an impact on the profitability, Sanjesh. So of course, if there's higher tenancy ratio, then that will -- given that we have a very high operating leverage, that would certainly boost the EBITDA. But I think talking specifically about this period, I think apart from the revenue flowing into EBITDA, there is -- there are other factors. So there is basically the provision for doubtful debts that we create, which also has a bearing on the EBITDA. And then there are some seasonality-related things. So for example, quarter 3 has certain impact from higher rates and taxes, which we recognize on cash basis as and when we get those property and municipal tax bills and so on. So -- otherwise, I think if you look at the underlying performance, both revenue and profitability are pretty much in tandem.

Got it. And just last question on the reimbursement margins which continues to remain negative. You have said this earlier also that we are making efforts towards reducing these losses. Do you see this materially reducing in FY '25? Or do you think it will take more time than that?