INDUSTOWER - A bet on 5G infrastructure?
Indus Towers Ltd is India's largest listed telecom infrastructure company with a market cap of INR57,000cr.
Indus Towers Ltd offers a wide range of products and services to telecom providers in India including i) macro tower installation - sold as a leasing solution to telecom operators, ii) providing uninterrupted supply of power for telecom equipment, and iii) space for housing telecom and power equipment.
5G traction is a key ingredient for accelerated growth in telecom services and infrastructure
India is the second-largest telecom sector globally in terms of subscriber base. Notwithstanding a surge in demand for connectivity fueled by rising digitization and evolving technologies, Indian telecom is still very much characterized by its immense growth potential. In 2018, an average Indian consumed 1.5 GB per month and now that has ticked up 10x to 15 GB per month. Furthermore, DoT expects this to grow to 40 GB per month by the end of 2025.
Globally, 5G has emerged as a critical focus area to cater to the surging telecom demand and is set for accelerated penetration, which is helped by a corresponding evolution in 5G-compatible smartphones. 5G-compatible smartphones currently account for only 5-6% globally, but the US appears to be much ahead at nearly 60%. A beneficiary of aforementioned data consumption and 5G trends are telecom towers. India currently has 6.8 Lakh telecom towers in operation. The DoT expects to more than double the tally to 15 Lakhs telecom towers by the end of the fiscal year 2024 to support the traction in 5G.
Unlocking 5G is more layered than just ramping up towers
The 5G rollout will require a fairly robust network and meaningful capex. Two key things would drive this. First, the network of fiberized macro towers is expected to get denser. However, owing to practicality concerns, they cannot be installed everywhere. In that context, macro towers are likely to play an essential role in the generally low population density geographies such as city outskirts. This leads to the second growth driver, small cells technology. Small cells deliver high-quality, more densified coverage by complementing macro towers. Consequently, for a robust and sustainable 5G rollout, small cells will likely be a key focus area for building a network that is equipped to provide low latency and high-speed internet.
While INDUSTOWER has about 30% market share in the total passive tower infrastructure in India, their stance on small cells active infrastructure is somewhat blurry and such emerges as a key unknown. While management appears to be directionally bullish on the space, the lack of specifics when there are several moving pieces at play paints an optically uncertain picture. The below blurb from the latest analyst gives a broad overview of how management is thinking about 5G.
“We have also said in the past that the initial rollout of 5G will take place on our existing networks as we saw in the case of 4G and subsequently the densification will happen. Now if you actually look at 5G on existing sites equals the loading opportunity and I think this loading opportunity will also vary from customer to customer depending on what kind of equipment they bring including power and the space and, on the tower, and I think those are the things which are being finalized at the moment. So, yes a lot is going on. If your question was can we do more within the 5G domain? Answer is yes. We will share with you as our time passes by. At the moment I do not think I can go beyond this.”
Furthermore, global telecom companies like American Tower Company have been operating in India and exploring expansion plays, further making it tricky to call the INDUSTOWER playbook. It is worthwhile to note that ATC has been operating in small cells and fiberized towers in the USA giving it a competitive advantage from a tech knowhow perspective. ATC India operates a total of 75,000 towers in India, with a market share of 11%. Other big players in India include Aster Pvt. Ltd. and Tower Vision India Pvt. Ltd among others.
Healthy fundamentals but margins under pressure
INDUSTOWERS added towers at a CAGR of 3% over the past three years from 172k in 2019 to 184k at the end of 2021. Over this period, revenue grew at 0.5% as against 9.5% EBITDA growth, which was the effect of operational synergies helped by the merger with Bharti Infratel. At the end of the last reported year, revenues stood at 13,954 cr and EBITDA at 7,656 cr implying a fairly lofty 54.9% in EBITDA margin. However, the margins have been pressured after the merger with Bharti Infratel and amidst wider struggles at VI which perhaps paints a risky narrative around the pricing power of the business. Net profit margins have ticked down from 28% in 2020 to 21% in 2021. From a leverage standpoint, net debt to EBITDA stands at 1.07 times which appears to be fairly accommodative.
Valuation is reasonable, perhaps fully accounting for the execution risk
The stock currently trades at a P/E of 9.24x and EV/EBITDA of 5.27x. The domestic comp set for INDUSTOWER is however weak with only two listed competitors, Suyog Telematics with a market cap of 390cr+ is subscale versus INDUSTOWER and GTL Infra with a market cap of 9,000cr+, but has been burning cash. Suyog currently trades at a P/E of 11.77 and EV/EBITDA of 5.54x. However, beyond the domestic realm, the biggest like-for-like operator is US-based American Tower Company (NYSE: AMT) which trades at P/E of 41.57 and EV/EBITDA of 29.2x. The lofty valuation is perhaps reflective of 5G driven growth runway and higher pricing power.
Our take - Cautiously optimistic but prefer to stay on the sidelines for now
There are several unknowns around the story i) uncertainty around timing and nature of spectrum auction that could somewhat dictate the pace at which 5G rollout eventually takes place. ii) INDUSTOWERS’ untested ability to effectively build on small cells and other densification mandates from a tech and operations standpoint iii) capex outlook in light of 5G rollout iv) Pricing power in the business especially given Airtel’s presence on the cap table.
Given the unknowns, operational uncertainties and no clear playbook to play 5G, we prefer to sit on the sidelines for now despite being cautiously optimistic. We look for a more de-risked entry point into the stock.
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