Indus Towers Limited (INDUSTOWER) Earnings Call Transcript & Summary

Good afternoon, Ladies and Gentlemen. I'm Sunitha, the moderator for this conference. Welcome to the Indus Tower Limited First Quarter ended June 30, 2024 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 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 the speaker of the day Mr. Prachur Sah. Thank you, and over to you, Mr. Sah.

Thank you, Sunitha, and a very warm welcome to all participants. Joining me today are my colleagues Mr. Vikas Poddar, CFO; Mr. Tejinder Kalra, COO; and Mr. Dheeraj Agarwal, Head Investor Relations on the call. I am pleased to present our business performance for the quarter ended June 30, 2024. We are happy to see the robust performance we delivered in the previous financial year, continuing the first quarter of this year as well. Our tower additions continue to be strong, driven by our ability to maintain our high share in the rollouts of one of our major customers. We would also like to highlight that we have made collections against the past overdue for the third consecutive quarter from a major customer, while sustaining 100% collection against the monthly base [Technical Difficulty] Vodafone Plc has indicated monetizing its stake in Indus Towers in the past and sold off its 18% stake during the quarter. One of our major customers, Vodafone Idea has successfully raised amount equity funding and has also announced its plan to raise debt. Given these developments, we remain confident of collection of our past dues and participating in the network expansion of this end customer. Before I dive into specific areas of the business, I would like to take a moment to appreciate the perseverance and commitment of our field force towards helping Indus achieve its vision of enabling connectivity across the nation. During the quarter, our teams on the ground, we have challenging weather conditions, including heavy rains in [indiscernible] towers in the hilly regions of Idukki and Wayanad in Kerala among others. Their spirit truly embodied our mission of transforming lives through the enabling communication. On the regulatory front, the government continues to take measures to speed up the deployment of telecom to structure across the country while keeping sustainability in view. During the quarter, certain clauses of the Telecommunications Act 2023 were notified, including both related to public safety, SIM ownership and right of way for telecom infrastructure and came into effect on 26th June. As per the recent announcement, government plans to notify all rules and provisions of the Act within 180 days. The Green Open Access policy introduced last year has been adopted by more than 15 states, and we continue to work with various ministries for faster implementation of the same. We will also engage in discussions with the Ministry of Petroleum and Natural Gas, IGL and GAIL to implement 5 natural gas solutions at our sites in order to reduce our diesel consumption. Moving on to 5G. The total number of 5G base transceiver stations or METIS has deployed now stands at almost 450,000 after an accelerated rollout by the operators within 2 years of 5G spectrum auction. We are pleased to see our loading revenues continue to increase and acts as connect to our growth. After reaching the certain level of penetration probably over the next 2 to 3 years, 5G rollouts would require addition of towers primarily in the form of small cells to address network the condition, which would aim the growth. We believe that we are well placed to leverage our expertise in order to capitalize on this opportunity. The adoption of 5G by the end customer is also expected to be in swift as highlighted by statistics mentioned in the Ericsson Mobility Report. As per the report, global 5G subscriptions are expected to reach almost 5.6 billion by 2029, accounting for approximately 60% of overall mobile subscriptions. In India, subscriptions reached 119 million by 2023 and are estimated to touch 840 million by 2029, accounting for approximately 65% of total mobile subscriptions. Fueled by the rapid rollout of 5G and the continuous shift of users from 2G to 4G networks, data consumption continues to experience significant surge. For the top 3 operators, the total data conduction grew by 29% year-on-year for the March quarter. The highest growth business in the last 8 quarters. The average data consumed per user per month grew by 18% year-on-year, 25 GB in the same period. The rapid growth in data usage, coupled with the widespread adoption of 5G, tethers a growth opportunity for the passive infrastructure sector. Being the leading passive infrastructure player in the country, we remain well positioned to address the resulting demand. Moving to operational performance. We are pleased to see that our tower additions continue to be strong, underpinned by robust demand from one of our major customers and our efforts towards sustaining our market share in the business of the customer. We added 6,174 micro towers and 6,340 corresponding co-locations in Q1. The total macro towers and co-locations increased by 13.9% and 7.8% each on a year-on-year basis. 2,25,910 and 3,74,928 respectively. Our tenancy ratio continues to be industry leading at 1.66. Addition of co-locations of Indus Towers stood at 492 in Q1, and the overall base increased to 11,178 co-locations. Including relay towers, our net co-location additions were at 6,832 in Q1 versus 8,601 in Q4. Shifting gears to the progress we have made on our 4 key strategic priorities, namely market share, cost efficiency, network uptime and sustainability. Firstly, regarding the market share. As highlighted earlier, our quarterly macro and co-location additions continue to be robust. We remain our customers' preferred partner for their rollouts, which coupled with the initiatives we have been taking have helped us sustain our market share. During the quarter, we continued to work towards strengthening our partner ecosystem further supplemented by the digital solutions we have been implementing. To increase our penetration in urban areas where space is a constraint, we took steps towards tailoring our product offering to offer the best value proposition to the customer. We anticipate continued network expansion by our major customer in the term, providing us with growth opportunities. In addition, we are making progress on deployment of in-building and small cell solutions, enabled by urbanization change and capability building to deliver in a quick turnaround time. Moving to cost efficiency wherein we continue to take initiatives towards optimizing our operating and capital expenses. Reducing our diesel consumption has been one of our key focus areas, and we managed to reduce our diesel consumption by 7% in Q1 on a year-on-year basis. Driving this reduction was a continued focus towards expanding our renewable energy portfolio. After setting up 14,000 solar sites last year, we continued the momentum and set up close to 7,000 solar sites in Q1. Supplementing this was the electrification of non-electrified sites and conversion of site from indoor to outdoor. Additionally, prudent site and product selection continues to be helpful and help us tighten our energy costs. Continuous improvement in network productivity and technological interventions are also helping us optimize our network basis with cost. With regards to CapEx, we are working towards using more cost-efficient batteries with greater longevity in order to reduce the overall cost. Thirdly, network uptime, an important metric for the customer. We continue to improve the uptime and delivered a high level of uptime of 99.97% despite weather disruptions in Q1. We saw severe cyclones and heavy rains in the areas of West Bengal, Kerala and the Northeastern states. I would like to reiterate the dedication and commitment of our field force, which continued to raise the benchmark for itself. Now moving to ESG, focus for the organization. On the environment front, we continue to make progress in our journey towards limiting our GHG emissions. As I alluded to earlier, our strong solar site additions during the quarter has taken the overall count to over 21,000. We continue to take initiatives to encourage the transition to electric vehicles for the business travel needs for both our employees and partners. We also recently introduced a carpooling application for employees for their work commute to reduce their carbon footprint. To ensure sustainable practices across the value chain, we continue to monitor the disclosure practices of our partners and happy to see improvements in the same. With regards to our focus on diversity and inclusion, we are pleased to see gender diversity remain strong at 11.2% in Q1. In addition to the numbers, we are looking to create equal opportunities for women across all levels from field operations to the management. As part of our CSR activities, we've partnered with local NGOs to conduct the cleanup drive to Rispana River in Dehradun where almost 200 kilograms of plastic was collected. Our digital transformation ramp in association with NIIT Foundation continues to educate and skill disciple in engineers. Before I hand over to Vikas, I would like to state the buyback proposal that is approved by the Board is an indication of management's belief in the sound fundamentals of the business, its future outlook and our commitment to generate value for our shareholders. I would now request Vikas to take you through the financial performance of the quarter ended June 30, 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 quarter ended 30th June 2024. So to begin with, I would like to reiterate our robust operational performance, wherein we added 6,832 co-locations on our towers, including lean towers during the quarter. Moving to the financial performance for quarter 1 FY '25. Gross revenues increased by 4.3% year-on-year to INR 73.8 billion, wherein the core revenues from rental grew by 7% year-on-year to INR 46.4 billion, driven by the strong co-location additions and loading. On a quarter-on-quarter basis, our reported gross revenue and core revenue from rentals were up by 2.6% and 1.3%, respectively. Our reported EBITDA increased by 29.4% year-on-year and by 10.8% quarter-on-quarter to INR 45.5 billion. EBITDA margin was up by 11.9 percentage points year-on-year and 4.5 percentage points quarter-on-quarter to 61.6%. In line with the trend witnessed in the past 2 quarters, we collected a sum against the past overdue, along with the collection of 100% of the monthly build amount from a major customer. This has resulted in a write-back of provision for doubtful debt and aided our profitability for quarter 1. Adjusted for an overall provision write-back of INR 7.6 billion, EBITDA increased by 5.5% year-on-year and was largely flat quarter-on-quarter due to higher seasonal energy costs in quarter 1 as electricity outage increases in summer months. Reiterating what Prachur had said earlier, we continue to take initiatives to reduce our diesel consumption and work towards addressing the reconciliation issues, which should help minimize our energy costs. Reported profit after tax grew 42.9% year-on-year and 3.9% quarter-on-quarter to INR 19.3 billion. Please note that quarter 4 of last year had the higher finance income due to the clearance of interest receivable of a major customer. Adjusted for the provision write-back, profit after tax was largely flat year-on-year and declined 10% quarter-on-quarter. The reported pretax return on capital employed and post-tax return on equity for the rolling 12 months were at 20.9% and 25.7%, respectively. We generated free cash flow of INR 18.7 billion in quarter 1 on account of higher collections and lower CapEx. Our trade receivables decreased by INR 7.3 billion, primarily due to better collections. We continue to engage with our major customers to finalize our payment plan and are seeing a regular collection of our past overdue. We are also having positive discussions with the customer on participating in the network expansion plan following its fundraising and expect to see co-location additions this year. In summary, we are pleased to see the momentum in tower additions witnessed last year and continue to grow in this quarter as well. Our financial performance continues to be aided by strong additions and collection of past dues. We remain optimistic about our growth outlook in view of the network expansion and 5G rollouts by our major customers. Our cash flow situation should also improve further with a sustained collection of past overdue. 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 on a good set of numbers. My two questions are, first question. Again, just wanted to understand on this buyback a bit more. One way to look at it is we have still not received full dues from Idea. And there was this intention to return back cash to shareholders whenever we receive full dues from Idea. So is it fair to say that whenever let's say Idea raises [indiscernible] returns in the past dues to Indus. Indus could think about another dividend or another potential buyback to return cash back to shareholders. Is that a fair assessment or something has changed after the recently announced buyback?

Sachin, thanks for the question. I think just to give you a bit more details on the buyback. Of course, there are a couple of reasons, but the -- I think the overall objective of this buyback is, of course, to basically distribute cash. So as you know, we have not been able to pay dividend in the last 2 years. But the fact that we have started collecting our past dues gives us the confidence in the free cash flow improvement going forward. So that's one of the important reasons. The other reason is also the fact that we do see buyback as a tax-efficient way of distributing cash for a large group of our shareholders, especially in the current tax regime because from 1st of October, with the change in tax regime, things may not be the same. From a company perspective, it certainly improves the financial ratios for us. And it also helps us in preserving our distributable reserves to some extent for any future dividend. On the second part, basically, I mean, as far as -- after this buyback scenario is concerned, obviously, I mean, like I said, there is more confidence in our free cash flow generation going forward. Our dividend policy continues to be linked to free cash flow. So at the end of the year, we will continue to assess our free cash flow situation. And if situation permits, then there is a possibility of considering a dividend again.

My second question is, again, wanted to understand. I know you guys can't speak on any forward-looking statement. But in a very simplistic manner, the way to look at it is your core revenues for the last few quarters have grown in the range of 7% to 8%. And this is mainly on the back of one customer giving good business. So is it fair to assume that whenever business picks from Idea, we should see an acceleration on the growth from current levels and that should also be a bit margin accretive because this is at the end of the day, an incremental tenancy improvement, which we've been seeing.

Sachin, I think all our customers may not are restricted to the two customers that you mentioned. I mean, we are looking at opportunities across all the customers. So I think from -- as I mentioned in my commentary, I think the growth looks strong. We have a strong order book for both for the towers and depending on how we progress with other customers in terms of tenancies as well. Yes, while I cannot give you a percentage, but I think I'm looking forward to continuing strong growth in our top-line.

And Sachin from a margin perspective, of course, I mean, second tenancy onwards is high operating leverage for us. So certainly, it's going to be margin accretive.

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

First one, on the energy margins, you did mention that there was a problem this quarter, but in the past, what we've seen is that you recovered some of this money due to lag. So would you expect this to happen because this quarter energy margins were significantly more negative compared to what you typically see?

Yes, Kunal, I mean, let me just put some perspective on this. I mean, like I had explained earlier also, I think our negative margin is a result of various issues that arise largely because of the difference between our expected cost and what the actual cost is. And like I explained earlier, I think these costs can vary because of several factors, right? There's always seasonality. There is sometimes high diesel consumption due to weather disturbances. There are some timing differences in electricity billed and so on. So it is possible that we will have these fluctuations on a quarter-on-quarter basis. However, I think what is really best to do is look at energy from a full year perspective. So this quarter, quarter 1, particularly, we certainly have seasonality issues because of EV availability and some of the cyclone and flood situations in some states and so on. But at the same time, as Prachur said, I think we are sort of still driving a lot of costs out in terms of diesel and so on. So I think from a full year perspective, we will try to achieve whatever our ambition is but certainly, first quarter is a bit of seasonality issue.

So on a full year basis, you will expect what like slight negative number? Or would you -- do you think it's possible to get to a breakeven on energy?

Well, I mean, I think certainly, the long-term ambition would be to sort of reach a breakeven, but there are, obviously, operational issues and so on that we need to keep sorting. So to that extent, I think there will be some negative always. We will just try to build up on that and try to improve that situation year-on-year.

Understood. And second, do you see any synergy benefit between tower business and data center business? There have been some news reports that Airtel might look to merge these businesses. I'm not asking about your thoughts on the merger, but just wanted to understand your thoughts on whether there is any synergy benefit at all between the data center and the tower business?

So to be honest, I think, Kunal, it's a bit premature or early to discuss because I don't have any -- we have not done any analysis per se from the tenancy at the end I mean we are an infrastructure company. So we'll evaluate whatever opportunities are there. If there is something that we value add. But at this time, I won't be able to be in a position to tell -- I mean because we have knowledge [indiscernible] from a synergy and opportunity point of view.

Understood. Okay. And just one last one, if I can. You've seen receivables decrease this quarter. As things normalize at Vodafone Idea, where do you see the receivable days stabilizing?

Well, like we said, Kunal, we are working on finalizing our payment plan. Obviously, for the last 3 quarters, we have seen collection of past dues Sometimes, there are also timing differences in the receivables. So I think where we see this stabilizing is probably a few months down the line. But it's very difficult to put a very concrete timeline because the discussions are still ongoing.

I just wanted to understand like normal receivable days like where do you see the normal receivable days? I mean it might take 2 quarters, 3 quarters, 4 quarters, whatever. But what will be the aspiration in terms of receivable days once things normalize?

Kunal, our aspiration is always to get it done right away. But I think we are working with our customers to see how we can do this quickly. So again, as I said, I won't like to put a date of it but as you've seen good progress in the last quarter. I think we expect to gain more momentum in the coming quarters and hope to unwind as quickly as possible.

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

My first question is on the new tower orders from the Vodafone. So they have indicated they will be expanding data base by 20, 30, 40 whatever the 40,000 numbers that they are talking about. So apart from the RoFR that we have with these customers, what is -- our right to win? Because for your competition -- for your major competition also, it's a very high operating leverage play. So they can also offer a lower rate. So how -- what is your strategy to bring maximum market share from this -- expansion from this customer?

See, I think our strategy remains for all the customers. Even for our current major customer, our strategy is to make sure we deliver a commercially competitive offer from a tower point of view. And then for a service that offers a robust uptime and a delivery to them. So I think that remains our focus in terms of delivery and of course, the third element is the turnaround time from the time. Any customer ask us for delivery and we're able to transact now. So not specific to any customer. I think we have made a good impact in FY '24 in our market share compared to FY '23. We significantly changed that way. And I think we want to continue the momentum for all our customers.

What is realistically market share that we can expect from these new tower orders from the customer?

I won't give you a number. I mean -- as a company, our target remains to gain the maximum market share possible, but I would not like to quote a number on either [indiscernible] or tenancies.

But what I'm trying to understand, is this the way to gain market share -- retain the market share is by discount gain because the other party is also fairly good in turnaround time and upkeep time and every parameters that we are talking about. So how we are -- is the discount is the only way to retain the market share?

No, I don't think that's the only way. I think, again -- I think it's a competitive business, so we'll do whatever we can to gain market share.

Just to kind of add a little more to what Prachur just said. So while commercial, of course, is one way of addressing the opportunity. I mean we have a performance that we have delivered over the years to the customer. We have a total cost of ownership that we address to our customer. I think and the speed of delivery and speed to market is another strong element that we have demonstrated to all our customers in the past. So given, all this is a comprehensive package, which Indus brings to the table, and that is the differentiation the customers also see and the reason why they have given that kind of business to us. So we are banking on that, and we are very confident that we -- this should be a win-win -- win proposition for us as we go forward as well.

Understood. Just to understand, at least in the past, can you share what is the market share on the macro tower side, our market share gains?

Market share, you mean -- currently, I think if you see at an overall tower count perspective, current tower count, we are probably 50% to 60% of the total towers in India. I think that's the number that I would be looking for a more .

45% to 50%.

45% to 50%. I mean that's what the team is telling me here. I think that's the number that we have currently made.

That's on a Pan-India footprint. All put together.

Pan-India footprint as of now.

So your tower endeavor is to maintain this. That's what I can understand from your comments.

That's the current status, I mean there.

I'll move on to my second question. So secondly, if I look at your sharing revenue per operator, it's been constantly decreasing quarter after quarter. But where we can expect this number to be stabilized on a -- at a portfolio level.

See, I mean, there are various moving parts why the ARPT number moves. It's not that it has been declining significantly every quarter. I just want to comment on the movement in this quarter versus last quarter. And particularly in this quarter, the reason is in quarter 4, we get a lot of these taxes from municipal corporations and property-related taxes and so on. And that gets passed on to the customer. So that gets billed to the customer. And accordingly, the ARPT has some uptick from these rates and taxes. In quarter 1, there is a slowdown in these rates and taxes billed back to the customer. So as a result, there is this nuance where there are these minor changes from a quarter-on-quarter perspective. And like I said, there are several other moving parts which may not have impacted this quarter, but there's also the mix angle because we don't make only one type of towers. We make several types of towers. So recently, as you know, we have been making towers which are lower CapEx, more frugal, et cetera. And obviously, those have lower rents and so on. So I think there are various things. But broadly, if I were to single out a reason, that's because of the seasonality in rates and taxes.

Right. And regarding the remaining contracts that you saw, it will be -- where the new rate will be passed on, will we complete by this year or there will be some pending in the next year as well?

Sorry, your question is not clear, Arun?

I was asking about the new contracts where the yields were lower, the remaining contracts. So that is also contributing to the reduction in...

Not in this quarter so much. Like I said, I mean, there are -- every quarter has its own reason. This quarter, the primary reason is the rates and taxes seasonality.

So coming to your -- what is the pending amount of contracts which is yet to be renewed? Because two years before, we had around 1/3. And then over the last 2 years, we have renewed a majority of that. So what is the background?

We have answered this in the past Arun, there are basically some contracts that come up for renewal every year. So if you refer to the past calls, you'll get the answer.

The next question comes from Mr. Aditya Suresh from Macquarie, Mumbai.

My first question is more on the competitive dynamics. But in the context of Brookfield looking to acquire or consolidate ATC's operations and given that they are also sponsors for Summit, I was just curious to understand what the dynamics have been for you in terms of tenancies from Jio on your network? And how should we think about this going forward?