PT Indosat Ooredoo Hutchison Tbk (ISAT) Earnings Call Transcript & Summary

Good day and thank you for standing by. Welcome to PT Indosat Tbk FY '23 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the call over to your host today, Pak Indar. Please go ahead.

Thank you, Desmond. Good afternoon, everyone, and welcome to the call today. With us, we have Pak Vikram, our CEO; Pak Nicky, our CFO; and Pak Ritesh, our CCO. I will now hand over to Pak Vikram for his opening remarks. Over to you, sir.

Thanks, Indar. Good afternoon, everyone, and thank you for joining the call today. I'm pleased to report that we had a good year in 2023, delivering our strategic objective of what we set out to achieve for the year. We saw continued improvement in financial metrics in 2023, which I will talk more on. We saw positive ARPU momentum where our Q4 ARPU is close to IDR 38,000 and we continue to realize synergies of around USD 380 million for the year 2023. Thus, 2023 was a record year for Indosat Ooredoo Hutchison where we saw both revenue and EBITDA increase by double digit and EBITDA growing more than 2x faster than the revenue. For the financial year 2023, our revenue increased 10% year-on-year to IDR 51 trillion and our normalized EBITDA grew by 21% year-on-year to close to IDR 24 trillion. We have also managed to deliver a consistent net profit of IDR 1.3 trillion this quarter, bringing the normalized net profit to IDR 3.56 trillion. This is our 12th consecutive quarter of generating a strong normalized net profit. We closed a landmark transaction this quarter with our purchase of the home broadband customer from MNC, a unique and strategic partnership with Asianet. With this, we are laying the foundation for our future scale up as we aim to get to 8% to 10% of home broadband market by 2026. We will do this by multi-partner future scale-up, delivering the most reliable customer experience, which we now have a strong team in place to deliver both and support our future growth aspiration. And finally, we have FWA, Fixed Wireless Access, as an option as well to increase our penetration. We also strengthened our data center alliance this quarter through a sale and leaseback transaction, which will further enhance our partnership with BDx. This brings scale to our alliance and more importantly, we can leverage expertise and cooperation with more partners to bring a world-class data center experience for Indonesia. Finally, let me talk about our 2024 and beyond objectives. We want to double down on growth on our core mobile business where we still see massive upside from rural Indonesia as well as the ARPU potential in this market. We will scale up our home broadband enterprise business further and we will grow our adjacent revenues in AI cloud, security and platform play. With these initiatives, we will continue to realize value for all our stakeholders while we remain committed to our larger purpose of empowering Indonesia through the spirit of Gotong Royong, which is collaboration and which is very unique to Indonesia. I will now hand over to Nicky for further more detail on financial presentation.

Thank you, Pak Vikram, and good afternoon, everyone on the call. Delighted to present yet another set of strong results for Q4 2023. Our overall revenue for full year '23 grew 9.6% from IDR 46.8 trillion to IDR 51.3 trillion. This growth was underpinned by robust demand for data and connectivity services across Cellular, MIDI and Fixed Telecom. More details will come later. On the back of strong revenue momentum, realization of synergies and optimal cost management; EBITDA after normalization for oneoffs is up by 21.3% from IDR 19.8 trillion to IDR 24 trillion. The EBITDA margin escalated by 4.5% from last year achieving 46.8% for full year 2023. As mentioned by Pak Vikram, our normalized net profit after stripping out power and data center sale gain and other oneoffs jumped almost 2.5x from last year. This massive improvement was driven by both top line growth as well as cost synergies realization. Our net debt-to-EBITDA reduced sharply from 0.61x to 0.4x reflecting strong cash flows generated from operations as well as cash realized from sale of noncore assets. If we move on to the next slide focusing on our fourth quarter performance against that of the third quarter. You will notice revenue grew strongly by 7.7%. Demand driven improvement is coming from both Cellular and MIDI. EBITDA up by 6% raised to IDR 6.5 trillion. We were also able to bring all the EBITDA improvement to the bottom line thereby taking the net profit to IDR 1.3 trillion. As I mentioned earlier, if we go to the next slide, all of our 3 business segments did well in 2024 with year-on-year growth ranges from 8.7% to 28.4%. Fixed Telecom revenue fell quarter-on-quarter. It has no significant impact on our results as the movement relates to very low margin in wholesale [indiscernible] business. Let's take a look at our cost. Our OpEx is flat on a year-on-year basis and is up by 9% quarter-on-quarter due to a combination of volume driven spending, cost of services and higher marketing expenses in Q4. There are a few reasons on why we are spending more on marketing expenses. The most significant reason is on seasonal basis, we tend to spend the most in Q4 for marketing. As a reference, the increase on marketing expenses quarter-on-quarter for 2022 was 40%. Secondly, we are also consciously putting more resources into the rural areas and added many new service distribution point and kiosks throughout these areas in order to strengthen our distribution network. Pak Ritesh will elaborate more on this in his section of presentation. Lastly, the knock-on effect of some of the distribution changes also caused a small change in our accounting for such cost to be on a gross basis rather than on a net basis as how we treated it in Q3. But the impact of this [ 0.4% ], I'm highlighting this for the sake of transparency. In terms of other operating expense, we booked a one-off profit for data center sale last year amounting to IDR 3.5 trillion whereas the one-off gain for this year was only IDR 1.3 trillion. So that explains the movement between the 2 years. Let's take a look at our CapEx. We have catchup on booking of CapEx spending in the fourth quarter to bring it pretty in line with our guidance of IDR 13 trillion for 2023. Our CapEx to revenue ratio continues to trend in the right direction, it is around 25%. Net debt is trending down as reflected in the reduction from IDR 11.8 trillion to IDR 9.6 trillion year-on-year, cut of almost 19%. This also drives our net debt-to-EBITDA ratio at the end of 2023 to shrink significantly from 0.61x in 2022 to 0.4x this year. And that's the end of my presentation. I will hand over the time to Pak Ritesh.

Thanks, Nicky. Good morning, good afternoon. So as Vikram and Nicky always talked about the revenues, we have 10% revenue growth. Our customer base in 2023, we saw 3.4 million decline. If you remember, last time we talked about we are increasing the SIM card prices and this year we have done 8 million lesser gross add and this also helped us saving cost and being more efficient. Our home broadband customer, we saw an increase of 331,000. And as we continue to drive our journey towards being more customer-centric and giving power in the hand of consumer, our self-care application which also serves as a digital lifestyle; we have seen 8.6 million increase during the year 2023. Our data traffic grew by 10% and I think after many, many years, it has happened for the first time that traffic growth and revenue growth are in line. So as a company, we have been able to maintain our prices. Can you go to the next slide, please? As we talked about digitalizing the customer journey and making things simple contributed in increasing our customer satisfaction score for both the brands significantly, 4 percentage point for IM3 brand and 3 percentage point for 3ID brand. And we also saw a growth of ARPUs to customer by 13.4%. Can you go to the next slide, please? As Nicky talked about, marketing cost increase in quarter 4. As we see here, we continue to invest in network so you saw increase of around 42,000 BTSs in 4G. Primarily these sites are coming into deep rural areas and we are actually expanding our distribution reach and we are opening up on small shops wherein customer can actually go and replace their SIM card, get the basic services done. And any additional digital services will be launched through this kiosk and also this kiosk will also be responsible for distributing SIM card and recharge into deep, deep rural areas at village level. And we believe this is the strategy which is going to improve our reach in deep rural. As Vikram said, we see huge opportunity available in rural areas and this will be vehicle for us to get us there. So that's all from my side. I'll hand it back to Vikram.

Thanks, Ritesh. Now on the final slide from my side on the guidance for 2024. I think we see a good momentum on our side. What this merger has done has given us the scale and after 2-year completion of merger and all the integration things getting done before time and first time right, we feel more optimistic on our revenue. That is why we have put better than market because of our reach in rural market, we believe that we'll be able to grow the market. On EBITDA margin, we are on the right track. We are heading towards close to 50% and CapEx spend will be same like last year. And then most of the investment is going on rural area in terms of making sure that we are able to give contiguous coverage and good experience to our existing 100 million customers.

Thank you, everyone. Can we go to the Q&A session now?

[Operator Instructions] First question comes from the line of Piyush Choudhary from HSBC.

Congrats for a strong set of results. Few questions. Firstly, could you talk little bit about the outlook for mobile ARPU? What drove such a good expansion this quarter and how sustainable it is? Secondly, on the subscriber side, we still saw some softness sequentially quarter-on-quarter. What is driving it? Because we thought as you're expanding in rural areas, we could see some stabilization or improvement in subscriber base. So any color over there? And thirdly, on the margin side. Sequentially margins have dipped, but you're guiding for increase to close to 50%. So could you call out the key levers for margin expansion in 2024?

Good question, Piyush. Thanks a lot for asking these questions. On ARPU increase, we have started doing very targeted customer value management and that's where we have seen a high value customer base growing on our overall base. And the prices of the recharge is IDR 100,000 and above, the contribution is going up. Number one. Number 2, as we see that digital services contribution is also going up and that is also adding to the increase in ARPU. And the third one is we have done some price changes and that is also helping us increase the price. And the most significant improvement is coming from acquisition ARPU. Acquisition ARPU when we increased the price, it was around IDR 16,000. Now it has gone up to IDR 29,000. That is also contributing towards ARPU growth. As we talked about softening subscriber growth in Q4, Piyush, I think I just talked to you about we have done 8.4 million lesser gross add in 2023 as against 2022. Despite that, our VLR has gone up by around 2 million and our data unique users has gone up. What does it mean? It means that we have been able to control the rotational churn into our system, the customer who are actually coming and buying and using it because we have increased the SIM card prices and any recharges are cheaper than buying a SIM card. So that's where we see. So I think you'll appreciate that 8 million lesser gross add. Despite that, we have increased our VLR and data unique user and that also reflects into our saving also. EBITDA has increased faster. That is also one of the savings material. Margins, I will hand it over to Nicky to talk about.

Ritesh, if I may ask just on this. On the ARPU, these are excellent levers, right, for last year. Going forward, how should we think about the ARPU improvement? Would all these levers still continue to deliver strong ARPU growth next year?

Yes, Piyush. I think these are the journeys, this is not the destination. We'll continue to keep on finding out opportunity to increase prices, increase data services penetration and bringing more digital services. As we talked about the 3 kiosks and SDP in rural areas, we are planning to launch many digital services through those channels. So that's a significant improvement as a strategy which we are going to make in there.

Right. And on the subscriber base since it's been almost a year, right, where you are reducing the rotational churn and that's a great strategy. But is the base now stabilizing and should we start seeing normalized subscriber growth now?

Yes, yes. It is stabilizing and latter part of quarter 4, we have seen positive net adds already.

Sorry. Nicky, over to you.

Piyush, thank you for your question on margin. I think there are a few factors contributing to the movement in a small drop in our EBITDA margin. First of all, we have a very strong growth in our top line and on a 7.7% growth, if you look at the details I presented, we get 28% revenue growth from MIDI, which has a lower margin. So the first reason is a different revenue mix. And secondly, on seasonal basis, as I mentioned in the earlier part, we're also spending more money on our rural distribution, kiosk and service distribution point. And the third factor, I highlighted in the last quarter that we did around IDR 130 billion of accruals in Q3 that kind of helped Q3 number. And so these are the key reasons why you see a drop in the margin overall for EBITDA from Q3 to Q4. But if you look at it on a full year, we are definitely able to bring the incremental revenue to EBITDA and also to the bottom line and we don't see that the movement in Q4 would have a bearing on that.

So Piyush, just to add to what Ritesh and Nicky said on ARPU and base, I want to reiterate that we stay committed when we started our last year journey on the guidance of getting to IDR 40,000 ARPU by Q2 2024. So I think now we see the trajectory, we are heading on that direction. Also on base December, what Ritesh said, December we saw a positive net add in spite of taking all the corrective action. One is the SIM rotational, second is also channel commission. We want to make sure that there is no misuse of any incentive in terms of any of our SIM reaching the market where the SIM is below the recharge price. So all those corrective actions was taken in quarter 3 and all those things are getting stabilized. So you will see both base and ARPU growing going forward. On Nicky's point on margin, what will take us to closer to 50%? What merger has done? It has given us a scale network in rural and with all these investments which we are doing, which you see in our marketing cost, on sales and delivery point and then serving those rural customers. So we want to make sure that both top line and still on synergy values, we still have detail left. While we have done close to USD 385 million of energy realization, but still there are opportunities left there. We'll continue to work upon and also we will double down on core. So it's a mix of both opportunities on synergy and sustainable revenue growth, which will flow to EBITDA and will take us closer to 50%.

Right. And may I just clarify that this guidance of 50% is baking in the broadband expansion also because that mix will come at a lower margin profile, right?

So that mix in terms of margin at EBITDA, but at net profit and all because it is a CapEx-light model. So if I do a broadband at 25% EBITDA also, 80% of that flows into net profit. Yes, we have factored all those things and we feel very confident that our approach on an asset-light model on looking at home broadband is now ready to scale up.

Next question comes from the line of Marissa Putri from UBS.

I have 3 questions. Firstly, in terms of your marketing costs, I think it continues to go up on absolute basis and on also per revenue. So what would be the new baseline going forward and is there more exercise that needs to be done on marketing side? Secondly, in terms of your fixed data, I guess the jump here just kind of also contributed from the MNC Play acquisition. Is it possible to kind of give kind of a color or maybe dissect this revenue a little bit more? And in terms of the operating metrics as well, is there anything that you can share aside from the number of subscribers? And lastly, in terms of capital allocation given that your gearing level has come down a lot, is this probably time to kind of look into the shareholders' return? That's it.

Marissa, thanks a lot for this question. Marketing cost if you look at quarter 4, primarily we have rolled out around 400 new retail stores in rural areas wherein we are doing branding and we are setting up our manpower there to make sure that we are catering to those areas. And those areas will also be responsible for giving basic customer service, for example SIM replacement and digital literacy because if you really want to increase the ARPU in digital areas, the customer needs to be told how to use Internet and how they can use applications. So that's the investment I would say. And despite all this cost, I think we are very competitive in the market in terms of marketing cost. And second one is to handle those distribution points, we're also having some money invest on giving the distribution the salesman to cover those markets because every sales, service and distribution point, which Vikram talked about, will be given 10 to 15 sites and those 10 to 15 site distribution will be done through salesperson. So that's the cost which we are actually getting into. On fixed data, yes, it is inorganic growth. We have acquired customers so most of the customer, 330,000 alone coming from MNC Play. And our existing Hifi, we were the fastest to reach to 20,000 when we launched our own Hifi services. But yes, to answer you, the jump is coming from MNC Play acquisition primarily. Third question, maybe Vikram, you would.

Marissa, these are very important questions. So yes, our marketing cost as a percentage of revenue is below 3% and it will stay in that range. So it is not a cost. These are investments to monetize our CapEx and rural infrastructure, but we will be very much within the range of 2.5% to 3% as percentage of revenue and you will see this getting stabilized as we move forward. On FTTH, I think now we have the scale, we have close to 330,000 customers. So moving forward, you will see progressive base EBITDA and we are also working on ARPU. We see lot of opportunity of growing the ARPU by getting the FMC play right with our 100 million customer. So all these metrics you will see quarter-on-quarter and we are very confident it will be very progressive as we go from here.

On capital allocation, I think going forward we will need to cater for investment in 5G spectrum. We do not know the exact timing for that, but we have to reserve our capital for some extra investment going forward.

Got it. If I may just follow up a little bit on the fixed data part. Because I think if you just see Q4 '22 versus Q3 '23 for example, it has kind of come down a bit. So aside from the inorganic acquisition, what kind of trend that we're looking at for Q4 for the revenue part?

This is very good. What you see in Q3 versus Q4, it is all on getting to a more tighter reporting, how we report our base and all. So these are all -- when we are doing integration, these are corrective actions which we have done. So it has nothing to do with base and all. We are just putting everything together as we integrate everything under home broadband umbrella. So here onwards, you will see a more stable and clear number. And our integration got completed. It was not an easy job to integrate the whole MNC Play acquisition; the customer, the employee; so last month we completed that and now we are looking towards making sure how we grow this.

If I can add to what Pak Vikram explained. For Fixed Telecom, we have [indiscernible] which take care of wholesale transaction. So these are traffic that we get at the wholesale level and then we would do refiling and we are earning -- typically for this kind of business, the margin is very, very low. So like I said in my section, this is not the -- maybe you are relating it to fixed network data services, but this is not the case. So we got quite a bit of such wholesale level transaction, which would kind of inflate the revenue a bit in the Fixed Telecom segment, but it is not to do with mobile broadband.

Our next question comes from the line of Arthur Pineda from Citi.

3 questions, please. Firstly, can you get some color on the broadband business? What's the glide path target for market share and what are the margins that you experience for these services currently? Second question I had is with regard to the earlier question on dividend. I mean your balance sheet gearing remains very low at 0.4x as you point out in the slide, why take such a conservative approach to capital return? Is there such a big concern that 5G CapEx would be very high? Is that what you're concerned with? Because I do think there's more than enough room on your balance sheet to do both. Last question I had with regard to synergies. When do you expect to fully complete this? Should this finish by 2024 when you're seeing nearly 50% EBITDA margin or is there more to be realized into 2025?

Let me start with home broadband, Arthur. As I said earlier also so moving forward, you will be able to see clearly the base revenue. We are looking at getting to 8% to 10% of home broadband because we believe that it is important to get to scale quickly by 2026. And now with our strategy what we did with MNC Play and how we have been trying to grow organically. So it's a bit of a hybrid strategy; organic, inorganic, both. And we have the whole team, the whole organization which is needed; that has been put in place in last 3 months specifically post the acquisition of MNC Play. So you'll have to wait for the following quarters to come. And in terms of margins, it's an asset-light model. So at an EBITDA level, we see 24%, 25%, but the good thing is there is less below EBITDA so everything flows into net profit.

On dividend, I think we paid dividend for the last 2 years and the question that was raised earlier is not specifically on that. So what we would intend and continue to do would be to reward shareholders with dividend going forward. But on 5G, I think just to clarify, it's not about CapEx, it's also the cost of spectrum. There are quite a bit of uncertainties around the timing and the quantum of the spending required to be made on the spectrum. So that's what I'm trying to make -- the point I'm trying to make in relation to the earlier question. But on dividend, we plan to continue paying dividends to the shareholders.

Just to add to what Nicky said, we want to make sure first year of merger, we paid dividend; second year, we paid dividend. We want to stay progressive on that also. And then we are working on a clear dividend policy and we are looking at Capital Market Day happening in 2024 so we'll be able to give you more color and guideline. But what Nicky said is true, we want to make sure we have a good balance because our current balance sheet, the net debt and all is quite healthy. On the 5G, I think the most important point is we see a very constructive work from the government and the regulator on how 5G can help Indonesia. So in fact we are expecting the learning coming from the other especially in Asia market, that the spectrum fees will be more lower. But in terms of planning and all, we take a conservative approach. But we see more constructive and progressive approach from the regulator and the government officials on how 5G spectrum cost need to be looked at. Synergy value, I think at least by end of 2024, we will be able to realize everything. There are some IT initiatives which might continue in 2025 also. But I think 90%, 95% of the synergy value which are linked to merger, we'll be able to complete it by end of 2024.

Our next question comes from the line of Henry Tedja from Mandiri Sekuritas.

Congratulation, gentlemen, for the strong results. 2 questions from my end, please. The first question, perhaps if we can go back to the discussion on the retail touch point and distribution network developments. Understand that the increase in the marketing expenses could be attributed to the expansion in the rural areas and et cetera. So just curious on what kind of metrics that we should follow to ensure or to get a sense that basically all these investments will have a good return to the shareholders and also to the companies. So what kind of operational metrics, whether it's in the subscriber base, the apps users or the other metrics? And then the second one, if we can ask about the fixed broadband business. You mentioned that the market share target will be around like 8% to 10% by 2026 and you plan to scale up this business this year. Any like fixed target in terms of the subscriber addition for this year until 2026? So those are my 2 questions.

If you look at the areas wherein we have rolled out our STP and 3 kiosks, we have seen 2.7x more revenue increase as compared to national average in the areas of Sumatra and Balikpapan and those kind of areas wherein we wanted to follow our strategy. So that's a good indicator. And also the ARPU increase is higher as compared to national average in the areas where we rolled out our sales and distribution point, service and distribution point. And we continue to follow that KPIs and that's a significant increase in our direct distribution. And let me remind you this is our direct distribution. It's not that we are going through subchannel. And we are finding out [indiscernible] kind of business person there and who is actually running the business and people can actually relate to in that particular area. In home broadband, I think we are focusing more on take-up rate. So whatever we are rolling out, we are focusing how we can connect them faster and only 2 simple strategy which we are following in home broadband category is if the customer is requiring any connection, we should be the fastest company to connect; and if there is some issue in case arises in terms of network challenge, we should be the fastest company to resolve the complaint. So these are 2 strategies which we'll follow very significantly. And we don't guide specifically subscriber target. But I think the most important thing is that whenever we are launching a home pass, we should be the fastest company to connect them and we keep on improving our take-up rate. But ideally we should have around IDR 280 million to IDR 300 million revenues by 2026. That's the target which we are taking.

Our next question comes from the line of Niko Margaronis from BRI Danareksa.

And congratulations to the management for the good strong fourth quarter. My first question is on the rollout in rural areas. If we can walk back on your earlier comments. So can you reiterate how many gross adds you had on the fourth quarter and how many of those are from the new locations? I understand that you're reducing your rotation of customers in your existing coverage and all the new gross adds is coming from the new areas. If you can confirm my understanding. And what is the CapEx for 2024, the IDR 12 trillion. If we can break it down into based on your coverage currently, how much is this going to those new areas? And additionally, this new distribution points, how many of those we are talking about and is this under your cost structure -- this entire new distribution basis under your cost structure or is it some outlets that you are partnering with?

Thanks, Pak Niko, for the important question. We don't give detail in these things, how many gross add on rural and all these things. I think fundamentally what Ritesh is explaining and Pak Henry also asked. These are investment to monetize our large network presence in rural. These customers used to travel 50 kilometer, 40 kilometer to get SIM card, get their SIM replaced. So we want to give them the right kind of service. And also recharge were getting reached to this customer through not direct channel, it was coming through wholesaler and all. So when it goes through wholeseller, it is marked up by 15%, 20%. So if I'm selling something for IDR 25,000, they get it for IDR 30,000. So we want to make sure they get it for IDR 25,000. So it is about making sure we serve the rural customer. You will see the measure in terms of our base growing and that is where in 2024, you will see that all these investment is helping us grow our base. So that is what we can talk about the investment in rural in terms of marketing and monetizing our asset. Talking about CapEx, again we don't give so much of detail into -- but what you saw on marketing increase is mainly on investment on rural area to monetize our enhanced network presence. Hope you are satisfied with our answer.

I'll try to do the most with it, yes. Maybe 1 more additional question, Pak Vikram, in terms of the savings. Can you hear me?

Yes, I can hear you.

On your savings, you mentioned about USD 380 million, if I'm hearing correctly, synergies. What is your estimate? How much higher can it be in 2024?

Pak Niko, I think we don't give too much of forward guidance, but we are expecting at least 15%, 20% more in 2024 especially coming out of synergy activities.

20% additional from this number you're quoting, yes?

Yes.

Maybe if I can ask Pak Ritesh. What the competition landscape currently? So you are going ex-Java, you are going to these new rural areas. I presume that Telkomsel is already present there. So how the market is settling? Do you see some kind of pushback maybe in the next quarters given your recent rollout?

We focus on our strategy and we are very mindful of giving best service in terms of network and in terms of distribution. As Vikram said, the rural customer requires the actual pricing and transparent pricing. A customer in Balikpapan should be getting IDR 25,000 recharge at IDR 25,000. It should not happen because wholesaler is sending stock, they should be paying 10% more. And we will follow our strategy and make sure that customers don't have to walk more than 1 to 2 kilometers to get his SIM replacement. So that's the strategy which we are following. And overall, we see the market is going into the right direction and I think there is a rational behavior we see in telecom industry in last year and we hope that will continue in 2024 as well.

Our next question comes from Ranjan Sharma from JPMorgan.

A couple of questions from my side. Allow me to take them one by one. The first question is on the MNC customers acquired. If you could share details of how much is the amount paid to acquire these customers and what is the wholesale access fees that you have agreed to pay for the access to that alliance to support the customers?

Ranjan, this is Vikram. So for sure I will request Indar to give you those details. But I think one important point I want to highlight, which is very unique. This is not like a traditional wholesale deal. We had made sure that partners like Asianet had a skin in the game. So it's a model of fixed and variable. Especially we want to make sure that the partner who is working with us on this, especially on providing home passes and all those infrastructure, is completely aligned on the objective of risk and reward on ARPU and giving good experience. So this is very unique. First time we have been able to achieve so which is very different from a traditional wholesale deal. But all the other detail, I'll request Indar to share it with you separately.

And just to confirm, these wholesale costs are as part of OpEx, right? They're not capitalized.

First of all, it is not wholesale actually, it is not a traditional wholesale. But yes, whatever it is, it is a part of OpEx. So there is very little below EBITDA. This is what I was trying to explain. This business if we do it at 25%, 28% EBITDA, everything flows into net profit. So it's a CapEx-light model, nothing is below EBITDA.

Got it. The next question is on impact from accounting changes and sales and leaseback deals. So you had a pretty robust growth in ARPUs. In the fourth quarter, if you can share like if this has been impacted by some change in accounting to gross revenues I think, which management mentioned earlier. And on the margin guidance given of 50%, are you factoring in further capitalization of certain leases? I see you've done a data center deal, you might have done some tower deals. So if the margin is benefiting from capitalization of costs?

Ranjan, this is Nicky. I'm trying to point out the capitalization, as I said, more for transparency sake more than explaining because the impact is minimum. The number is only 0.4% and the movement is 40%. So that's the kind of difference we are talking about. It's not something we want to achieve to achieve certain objectives. It's just that when we make certain changes, all it does tell us that this is the right way of doing that. So unless there are other changes which would call for a different accounting treatment, we do not have any plan to orchestrate any gross-up accounting.

Sure. And on the margins from the sales and leaseback deals?

On the margin, what we are guiding is closer to 50% not exactly 50%. We believe we should make progressive steps to improve our margin and already we feel, yes, 50% is in the shooting distance and we work towards that. But again it has nothing to do with changes in accounting so please do not mix up the 2.

No, no. What I meant is like if you sell, let's say, towers or data centers and you lease them back, the OpEx gets recorded below EBITDA line, right, and that has a positive impact on margins. So I'm just trying to understand like what is the impact if let's say there was no sales and leaseback?

So it has no impact, Ranjan. What Nicky is trying to explain that the EBITDA growth which you have seen, we have got good movement in last 12 months and going forward, will be more organic coming from revenue and getting even more opportunities on our integration opportunities and the way we are running it. So it is more organic where we see that we will -- we are already at close to 47%. So we are very confident we'll be progressive quarter-on-quarter as you see us.

And Ranjan, if I can add to what Vikram just explained. If there is any impact on the EBITDA margin, it will be negative for sale and leaseback transaction. But it's not a very, very significant impact we're talking about. We have different accounting treatment for different types of transactions...

I believe that we just lost the audio from the main speaker. They probably just placed on mute. Please stay on line. Thank you, speakers. You may now continue. Please continue with the answer. Mr. Ranjan, your questions again, please.

So we're just discussing the impact of sales and leaseback on margin because for every other telco, we have seen that it has a positive impact on EBITDA margin and I believe the management was explaining like what...

Desmond, can you hear us now?

Yes, we can. Please continue. We're just addressing the technical issues here and we will be connected shortly.

Desmond?

Please continue. We now have the questions from Piyush. I have the line from Piyush.

Piyush, I think we have come to the hour. But maybe if you just have 1 brief question so we can just take.

Just very quickly. Just on the mobile coverage side, could you talk a little bit about your network coverage expansion objective in 2024 and '25 like how much population coverage expansion you're looking? And for your current network like what's the peak capacity utilization? Just trying to understand from a customer experience perspective.

Piyush, good question. So I think what we are trying to do is build a more contiguous coverage in rural. So what merger has done, it has really given us a scale network into deep rural and what is important is there are still pockets where we are under. So the first market which we picked up was Nusantara, [indiscernible] and there are 7, 8 more pockets like that. So we are going one by one. And while we are going there, we want to at the same time build our capability on the sales and distribution so that we are able to monetize all our investments which we are doing. So this is one. Second, I would argue that we are in a good place in terms of our spectrum holding with all the sites now getting enabled to use the combined network spectrum which we have. So overall on the capacity side, we are in a good place. In most of the location, we are in our range on capacity planning and that is a very healthy place. And back when Ritesh presented, both the brands especially 3 brand have seen significant improvement on indoor network experience. And also IM3 have seen improvement on indoor and 3 brand is seeing significant improvement on new coverage, which is coming out of this integration.

Thank you for the questions. We now have no more questions from the phone line. I would like to hand the call back to management for closing.

Thanks, everyone. Apologies for that slight disruption at the end. Hope everyone got good inputs from today. And if you need anything else, please do reach out to us. Otherwise, we'll speak to you next quarter. Thank you, everyone.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect your lines.