Indus Towers Limited (INDUSTOWER) Earnings Call Transcript & Summary

Ladies and gentlemen, I am Sunita, the moderator for this conference. Welcome to the Indus Towers Limited Fourth Quarter and Year Ended March 31, 2024 Earnings Call. [Operator Instructions] After the presentation, the question-and-answer session will be conducted for all the participants on this call. 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 Indus Towers, Mr. Prachur Sah, MD and CEO; Mr. Tejinder Kalra, COO; Mr. Vinod Rao, Business Controller; and Mr. Dheeraj Agarwal, Head Investor Relations. Before I hand over the call, I must remind you that the overview and discussion 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. Thank you, and over to you, Mr. Sah.

Thank you, Sunita, and a very warm welcome to all participants. Joining me today are my colleagues, Vikas Poddar, CFO; Tejinder Kalra, COO; and Dheeraj Agarwal, Head Investor Relations on the call. I'm pleased to present our business performance for the quarter and year ended on March 31, 2024. We are pleased to have delivered the stellar year with our yearly tower additions being one of the highest, in fact, the highest ever in our history. This has also helped us surpass the milestone of 200,000 towers in our portfolio. The progress we made on each of the strategic priorities, which we had outlined at the start of the year, centered around market share, cost efficiency, network uptime and sustainability, has been pivotal to this achievement. Keeping with the momentum observed during the year, tower additions in Q4 were of the highest ever quarterly rollout. The strong additions continue to be aided by the accelerated rollouts by one of our major customers, especially in rural areas and significant increase in our share of customer rollout. With regards to collections from our major customer, we sustained 100% collection against our billing during the year and also made some collection against the past dues. We are pleased to see the recent positive developments at the customer's end around its fund raise, and we remain engaged with the customer for clearance of our past dues. Before we delve into the details of our core business areas, I'd like to express my sincere gratitude to our field forces for their commitment towards helping Indus bridge a digital divide. In the quarter gone by, our field force exhibited exceptional courage and perseverance to install 2 towers in the mountainous regions of Nilgiris District, which is situated at the highest altitude above sea level in Tamil Nadu. Enabling connectivity in the remotest of areas and difficulty terrains by installing a huge tower is a truly remarkable and reflects on the commitment of our people on the ground. The year gone by saw several encouraging developments on the regulatory front and reemphasizes the government commitment towards facilitating the swift rollout of telecom infrastructure across the country, keeping sustainability in view. The landmark Telecommunications Act 2023 aimed at easing Right-of-Way challenges and ensuring network and infrastructure security among other things, came into effect during the year and was notified in Q4. The Green Open Access policy aimed at incentivizing the use of cleaner sources of energy has been notified by more than 12 states. Additionally, the composite billing scheme for multiple power connections, the option to apply for a power connection for telecom infrastructure through GatiShakti Sanchar Portal and mapping of different ministries to the GatiShakti Portal to apply for Right-of-Way were other key highlights of the year. On the topic of 5G, rollouts by the top 2 customers or operators continued at an accelerated pace in Q4 as well, taking the total count of 5G base transceiver stations or BTS deployed towards 435,000. The large rollout of 5G services by operators during the year have added to our loading revenue and helped us deliver a strong growth. The wider adoption of 5G is expected to spur the demand for newer sites in order to facilitate network decongestion. We remain confident in our ability to make the most of the opportunity on offer, given our leadership in the passive infrastructure space. The accelerated pace of 5G infrastructure deployment is expected to be supported by swift adoption by users and statistics mentioned in the Nokia MBiT Index Report 2024, give credence of the same. As per the report, the total 5G subscribers stood at 131 million in 2023 and are expected to grow to 575 million in 2026. The device ecosystem for 5G is also progressing well, with 17% of the active 4G devices now capable of offering 5G. The contribution of 5G to total user traffic has increased from 1.7% in 2022 to 15% in 2023. The data consumption trend remained strong, underpinned by both the swift proliferation of 5G and the ongoing migration of users from 2G to 4G. For the top 3 operators, the average data consumed per user per month grew by 14% year-on-year to 24 GB in the December quarter, and the total data consumption grew by 24% year-on-year in the same period. The confluence of robust data usage and surging 5G adoption presents a compelling opportunity for the passive infrastructure industry and given our core position in this space, we believe we are well positioned to cater to this demand. As touched upon earlier, we delivered our highest ever tower additions in Q4 as well, in line with the trends of the year. Our macro tower and co-location additions for Q4 more than doubled compared to the same period last year, and our full year additions were more than 3.5x compared to the previous year. In Q4, we added 7,961 macro towers and 7,909 corresponding co-locations supported by a combination of strong customer demand and our ability to increase our share in the business of the customer. Total macro towers and co-locations in Q4 increased by 13.9% and 7.5% each on a year-on-year basis, to 219,736 and 368,588 respectively. On a full year basis, tower and co-location additions were at 26,862 and 25,757, respectively. Our industry-leading tenancy ratio stands at 1.68. In terms of leaner towers, co-location additions were at 692 in Q4, resulting in the overall base increasing to 10,686. Including leaner towers, our net co-location additions were at 8,601 in Q4 compared to 8,568 in Q3. Moving on to a progress update on our 4 key strategic priorities, namely market share, cost efficiency, network uptime and sustainability. Firstly, our market share, as I alluded to earlier, our quarterly macro tower and co-location additions more than doubled over the same period last year. This was underpinned by a substantial improvement in our share in the business of our major customer whose aggressive rollouts continued in this quarter as well. At the beginning of the year, we focused on improving time to market of our products further in order to increase our competitiveness. To this end, we formed a dedicated team to expedite the deployment process through continuous monitoring and proactive logistics management. Supplementing this have been our efforts towards strengthening our partner ecosystem, systematic resource planning, streamlining of product offering and the digital interventions we have been taking across our value chain. We expect the rural rollouts of our major customers to continue in the near term, at least, providing us with significant headroom for growth. Secondly, regarding cost efficiency, we remain focused on optimizing both operating and capital expenses. One of the major contributors to our operating costs is diesel and we have taken various initiatives to reduce consumption. These measures include augmentation of our energy storage solutions, increasing the ease of renewable energy solutions and conversion of sites from indoor to outdoor, which helped us reduce our diesel consumption by 6% in Q4 on a year-on-year basis. With a sharp focus on expanding our renewable energy portfolio, we more than doubled our quarterly run rate and added more than 8,000 solar sites in Q4. In terms of CapEx, we have been focusing on various aspects such as product standardization, resource planning to optimize spend per site and refurbishing existing infrastructure for efficient upgrades. Supplementing this were the technological interventions, including the automation of processes and use of artificial intelligence and machine learning to enhance the life cycle of the equipment. Thirdly, moving to network uptime, a metric which is critical to customer satisfaction. In Q4 of this year, we managed to further improve our industry high uptime to 99.97%. We were able to achieve these numbers despite the heavy rains seen in areas of Uttar Pradesh and Northeastern states as well as the power outages caused by severe heat in the areas of Punjab and Haryana, which underscore the perseverance and determination of our field force. Coming to ESG, a strategic priority for the organization. We want to create an agile and future-ready business model that will preserve the environment, promote inclusive culture, strengthen communities and create resilient value chains. To this end, in the year, we launched a Zero Goal Hai or zero is the target campaign with the aim of achieving zero emissions, zero harm, zero waste, zero bias, and zero tolerance to non-compliance. On the environment front, we are driving multiple interventions to reduce our GHG emissions by increasing the share of renewable sources of energy in our overall energy portfolio and reducing our diesel consumption. During the year, our solar portfolio increased more than tenfold to 14,731 sites. We reduced our diesel consumption by about 7% during the year despite increase in overall energy consumption. We also participated in the CDP that is Carbon Disclosure Project survey, which is a snapshot of company's performance and environmental action. We are pleased to have scored B minus, which underscores that we are addressing the environmental impacts of our business and ensuring good environmental management. We are pleased to see a gender diversity almost double from 6% at the beginning of the year to close to 12% at the end of the year. We have always been dedicated towards creating a workforce where women thrive through our focused hiring programs, inclusive policies and supportive work environment. And we will continue to work in this space, along with our entire partner ecosystem to continue driving this program. Our CSR initiatives have helped us positively impact more than 40 million lives across India through our flagship program, Saksham and Pragati, which focused on girl child education, digital literacy and livelihood promotion amongst others. To create a safer work environment, we launched electrical and road safety campaigns for our field force and ESG training for entire workforce, including partners. During the quarter, we also launched a sustainable procurement policy, which reiterates our belief that the sustainability practices of our business partners would play a major role in the long-term success of our business. We believe these programs will promote safe practices and a deeper appreciation of Environment, Social and Governance issues. Our efforts towards ESG are being recognized, as we were judged Best Emerging Company of the Year at the prestigious Transformance forums. We are also pleased to have won the Gallup Exceptional Workplace Award for the 11th connective year. I will now request Vikas to take you through our financial performance for the quarter and year ended on March 31, 2024, 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 the financial results for the quarter and year ended 31st March 2024. Before presenting the financial performance, I would like to reiterate our exceptional operational performance during the year with a large number of tower additions recorded each quarter. Coming to the financial performance for quarter 4. Our reported gross revenues were at INR 71.9 billion, growing by 6.5% year-on-year. The core revenues from rental grew by 7.7% year-on-year to INR 45.8 billion, aided by strong tower additions and 5G loading. On a quarter-on-quarter basis, our reported gross revenues were almost flat, while core revenues from rentals were up by 2.2%. Moving to profitability, the reported EBITDA for the quarter 4 grew by 19% year-on-year and 13.3% quarter-on-quarter to INR 41 billion. EBITDA margin was up 6 percentage points year-on-year and 6.7 percentage points quarter-on-quarter to 57.0%. Similar to the previous quarter, we recognized collection of more than 100% of average monthly billing against the past overdues from a major customer, resulting in write-back of provisions for doubtful debt. Adjusted for these factors, EBITDA increased by 8.5% year-on-year and 3.3% quarter-on-quarter. Energy margins improved sequentially from negative 2.7% to negative 2.1% in quarter 4, driven by seasonality and also initiatives we have taken to reduce our diesel consumption and other energy expenses. Our reported profit after tax stood at INR 18.5 billion growing 32.5% on a year-on-year basis and 20.3% on a quarter-on-quarter basis. Please note that quarter 3 FY '24 PAT, profit after tax, was impacted by matters pertaining to entry tax resulting in an increase in depreciation and interest cost. Normalized for this and other aforementioned factors, the profit after tax increased by 5.2% year-on-year and 4.3% quarter-on-quarter. I will now move to the full year performance for fiscal 2024. Please note that FY '24 included the one-offs, I mentioned before. And as a reminder, FY '23 included onetime revenue recognition of about INR 11 billion from settlement of old dues and its profitability figures were marked by the provision for doubtful debt of about INR 53 billion, an impairment of revenue equalization reserve of INR 4.9 billion. On a full year basis, our reported gross revenues grew 0.8% year-on-year to INR 286 billion and core revenues were up 1.7% year-on-year to INR 177.3 billion. Adjusted for one-offs, gross revenues and core revenues were up by 4.7% each on a year-on-year basis. On a reported basis, EBITDA increased by 50.4% to INR 146.9 billion, and profit after tax grew to almost 3x to INR 60.4 billion. Again, adjusted for one-offs and provisions, EBITDA was up by 4%, and profit after tax was down by 1.2% year-on-year. The reported pretax return on capital employed and post-tax return on equity for the rolling 12 months were at 19.4% and 25.1%, respectively. We generated free cash flow of INR 3.3 billion in quarter 4, and our total free cash flow stood at INR 1.8 billion for the year. On account of accelerated rollouts by our major customer, our CapEx remained elevated in Q4 as well. We believe that the investments we have made to capture this growth opportunity will stand us in good stead for the future given the long-term nature of our business and will help create value for our shareholders. Our trade receivables increased by INR 4.3 billion, mainly due to the timing difference as the provision write-back occurred in quarter 4, while the collections against the past dues were made in April. With regard to the outstanding overdues from a major customer, we are pleased to see progress in its fundraising. We expect that these developments will help the customer clear our past dues and also provide us with a growth opportunity, given the customer is planning to make investments in its network expansion. To conclude, we are excited to have delivered a solid operational and financial performance during the year, with the latter being also aided by steady collections and past -- part clearance of the past dues from a major customer. We expect the rural expansion of a major customer and 5G rollouts to continue to act as significant levers of near-term growth. The positive development around the financial situation of one of our major customers is another pleasing aspect that we expect to benefit from. So with this, I would now request the moderator to open the floor for question and answers, please. Thank you.

[Operator Instructions] The first question comes from Mr. Sachin Salgaonkar from BofA, Mumbai.

Congrats for a great set of numbers. I have 2 questions. First question, I just wanted to understand, and you guys mentioned about one of your customers raising fund. So from that aspect, any changes in outlook, any color you could give in terms of how tenancies and rentals for you guys could improve? And as far as the pending dues are concerned, should we expect some kind of an amount to come every quarter with an interest agreement? Or is it that you might get one-off amounts on a regular basis? And second question is, I would love to know your thoughts on outlook for CapEx as well as dividends.

I'll take the first question and then I will ask Vikas to take the second question on dividends. So on the customers question on dues and tenancies, at this point of time, I think we are currently working with the customers to define how this is going to work, but we expect our dues to be cleared, right? I think the [indiscernible] in touch with our customer to do that. And of course, as we -- as the dues are getting cleared and the network expansion activities will happen, we expect the tenancies to grow positively. At this time, it's too early to commit on the numbers as we are in discussion with the customer. Vikas, you may want to..

Yes, sure. So on the CapEx outlook, I think the -- we have seen sort of almost 3 to 4 quarters of very strong tower rollouts. I think the momentum has not slowed down. So we do expect the momentum to continue for a few more months and quarters. So from that perspective, I think there will be sort of a high CapEx fees for some more time. On the dividend outlook, I think, as you can see from the results, our -- the free cash flow performance for the FY '24 has been low and that is largely because of the elevated CapEx, which in a way is a good thing because CapEx is really for the long-term growth of the business. It's an annuity business, as you know. So whatever we invest today will certainly give us the cash flow for the next 10 years. And because it's a long-term contract, and it's always good to capture the business upfront. So I think this year has been a year of low cash flow, but as Prachur said, I think we are engaging with the customer and especially after their good development on the fundraise and so on. There is a possibility that our cash flow situation might improve in FY '25, in which case, certainly dividend will be an important consideration. And our Board will take the call at the right time when the time comes, Sachin.

Just a follow-up out there. By what time could we get more clarity in terms of the incremental business you guys are getting or when the pending dues will be cleared? Is it a few months? Or there could be a risk that this might move on to maybe a few quarters?

So I think it's again, we will -- we are working with the customers, so I can't commit a time. But from our point of view, now that the fundraises occurred, we expect the discussions to happen sooner than later. So I think we are already in touch with them. So we'll keep you posted as it comes. I can't give you a timeframe right now, but it should be quick.

The next question comes from Mr. Manish Adukia from Goldman Sachs, Mumbai.

My first question is when you comment around market share where you mentioned that you've had an increase in market share. I just wanted to understand this is pertaining to one large customer of yours or is it at an industry-wide level? What I'm trying to understand is, are you also seeing share across the #1 customer also in the industry? Is it specific to let's say Bharti Airtel from market share standpoint, that's one. And the second question on new rollouts from Vodafone Idea post their fundraise. Is it safe to assume that most of these new rollouts will be in the form of incremental tenancies and you are unlikely to need to set up new towers for Vodafone Idea? Just your thoughts on that.

So Manish, on the first question, I think the market share comment stands for the entire market. I think, to be honest, all the new tower growth is primarily be driven by the one major customer, right? I think -- so I would say the market share comment is holistic. So I think whatever new builds have been built in the market, we have taken a larger portion of the share because it's been driven by that one major customer. From a second point of view, I think as I told earlier to Sachin as well, that I think it's too early to say whether the rollout will be new towers or new tenancies and when the dues will get cleared. So I think let us understand what the customer strategy is, and then we'll be able to give you a better position in terms of whether it's going to be new towers or tenancies. So I think we -- once we have the clarity, we'll come back to you.

Sure. Thank you for the color. Just a clarification on the first response of yours. So from our understanding the last 12 months have also been a period of incremental rollout on 5G for Reliance Jio as well. So basis your comment, like I'm just trying to understand because you also would have rolled out a number of towers in last 12 months. And your rollouts are pertaining to only one customer. So how will that translate to industry-wide market share, just trying to reconcile that?

So I think -- Manish, I think there are 2 separate aspects. One is the new build rollout, which is not driven -- which is not that driven by the 5G rollout. There are 2 aspects of the rollout. One is the 5G rollout, which typically happens on the towers that are already on the ground, so which comes in the form of loading. That exists -- that happens on the existing towers, so whichever customer be on our towers, we have rolled out 5G for both the customers wherever we have tenancies. When I'm discussing market share, I'm talking about the new build rollout, which is not directly correlated to a 5G, but a regular rollout, which serves the 4G and 2G customers. So I think that's the market share I'm talking about, is the new build towers.

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

Sir, my first question is on the -- you mentioned that there is a receivables increase mainly because the collection happened in April. So can you just clarify, isn't the case in the last quarter also, you will do the billing by quarter end and the collection will happen in the next. So is the recurring phenomena or is there anything onetime, which has led to the receivable increase?

Yes. So Arun, I think just to sort of refresh the memory, last quarter, there were sort of 2 things that happened. We collected some part of the overdues or the backlog and at the same time, there was an interest adjustment. And as a result, there was basically an increase in receivables on account of that interest adjustment as well. So this time in this quarter, there is basically -- there is not much of that interest adjustment. It's more about the collection, which has happened in April. But the implication of that on our provision has been recognized in quarter 4 itself. So that is why you see some amount of receivables increasing, but that's only timing because we have already collected the amount in the month of April.

Okay. Just to get better clarity. Suppose your billing is for INR 100 and if the customer is paying, say, INR 105, INR 100 you will collect it in current -- towards the current invoice and INR 5, you will reverse the previous provision. Directionally, is it the right way to think?

Sorry, could you just repeat that again, Arun?

So if the billing is happening for, say, INR 100. And the collection is happening for INR 105. That INR 5 will be the reversal in the provision. Is that the right way to think directionally?

Yes. So anything which is more than 100% is basically applied towards the old receivables for which we are carrying provision. So that leads to write-back of provisions.

So your 100 percentage calculation is on the amount due or of the amount invoiced?

Yes. Arun, I think basically, this 100% is based on the average billing. So there are certain nuances in this. I suggest maybe we can take you through the reconciliation offline, but all I want to mention is in this quarter, we have collected more than 100%, and that has resulted in some provision write-back, as you can see in our P&L.

And cumulatively so far in the last -- since this receivable issue started, we had provisions cumulatively around INR 5,500 crores. Of that, we have collected around INR 370 crores in this quarter. That is the bottom line, right? And we'll expect to collect more out of this INR 5,500 crores in the coming quarters?

So I think broadly and directionally, you're right. But like I said, I mean, if you want a very specific recon of the numbers, we can take it off-line. But yes, directionally, you're right. There is a reduction in our provisions. The original number was INR 57 billion. It is now down to INR 54 billion.

Understood. Now secondly, if you look at the -- one of the large customer, if you look at the RHP document, which is talking about the utilization of the funds. It doesn't talk about the repaying operational vendors like us. It is talking about future CapEx. So where is this confidence that we will be able to collect? Is it because -- it doesn't look like it will be paid through the fund raised. So it has to come from the naturally operational cash flows for the customer? Or we have some other, say, way of collecting this?

Arun, to be honest, I think I would not guess on behalf of the customer in terms of how the overdues will be cleared. I think, we are working with them on how the overdues will be cleared, but where the cash comes from, yes, I don't think we will be able to comment on that one. So our confidence comes from the fact that we are engaged with them to see how the overdues can be cleared, and we'll keep you posted.

Okay, okay. And lastly, on the growth that we are anticipating because the customer will do more CapEx on expansion. From our side, all our towers, which we have done in the past, does it require some additional CapEx to support the more loading in anticipation of this customer expanding or that part of the CapEx is done and we just will be -- our CapEx is more towards new sites?

No, Arun, I think even in loading, based on the site configuration, there may be some CapEx required. So I think there is not a general statement that I can give. It is based on a site-by-site configuration on what is required on the site to provide the additional loading. So I think in some sites may be lower, but some sites may be higher as well. So I think it's a mix.

Yes. Arun, just to add on to what Prachur said. Obviously, very tower has a certain loading capacity. And with various tenants on the tower, different loading capacities are utilized. So depending upon what new requirement comes from this customer, either we strengthen or a little bit of incremental CapEx or no CapEx could be a situation, but it depends upon tower to tower.

Understood. Understood. So all this means that we are kind of nearing peak CapEx and possibility of, say, the dividend will also be there given that the uncertainty is more or less now reduced. That's the fair assumption?

No. I think for the dividend, Vikas already answered the question. I think -- as we said, I think our elevated CapEx remains, and I think we have a visibility for the next few quarters as well where the rollout momentum will continue. And depending how your overdues clearance -- or when the overdues clearance happens, I think that will be a discussion that will happen in the Board in terms of how we can view the dividends.

The next question comes from Mr. Kunal Vora from BNP Paribas, Mumbai.

Sorry I was on mute. Sir, my first question is on the average rental per tenant for FY '25. How should we look at that number trending? Directionally, will it be stable or increase or decrease if you can just tell us based on like whatever renewals are coming up and your expectation on average rental?

So I think ARPT, Kunal, has been fairly stable. I think except for 1 factor, which is the -- within our macro also, we have different designs of towers. And as a result, there is a mix impact that we see. And obviously, the new rollout is leaning more towards designs that are more agile and nimble, and as a result, carry a lower rental. So to that extent, there are some minor movements in the ARPT. But otherwise, ARPT, other than the mix is fairly stable so no major movement anticipated there.

So for the old macro towers, are you like seeing some rental escalation every year? I understand the mix part that new towers are coming with like slightly lower rentals, but for the older towers?

The older towers are basically following the MSA construct, and we have the normal contractual escalations built in. So they go through the normal MSA process.

Which is what, around 2.5% annual escalation?

That's right.

Understood. Okay. And on CapEx, I understand you already discussed, but like just if you can provide like what kind of visibility do you have at any point in time? Is it for 3 months, 6 months, 1 year? So like do you look it -- at the beginning of FY '25, it will get likely orders for 15,000, 20,000 towers put together, which are like the key tenant might be willing to add over the next 1 year? So if you can provide what kind of visibility do you have for FY '25 compared to FY '24? And also if the tower addition gets back to the run rate which you had earlier, which is what you had in FY '21, '22, '23, would the CapEx also come down sharply like, say, 50% maybe in second half of FY '25 or FY '26? What kind of decrease you can see as and when the tower additions moderate?