I have been following this company for a long, If you want to understand Business Model I would highly recommend going through my two-part blog posts on Bharti Infratel -
https://dhruvapandey.wordpress.com/2018/12/23/my-assessment-on-bharti-infratel/
https://dhruvapandey.wordpress.com/2018/12/29/bhatri-intratel-ii/
This quarterly the biggest negative for me is the new MSA Indus signed from one of their customer (possibly Airtel) and this customer was able to negotiate a lower rental.
If you read between the lines, what he is saying is the new rollouts will not result in revenue growth but in offsetting the rental loss or discount given to the customer. Looks like bargaining power is back to telcos given only two of them are left.
And the 2nd disappointment was Indus management has no vision or clue about the below question on possible growth strategy (most of the conf call they were beating around the bush like below answer)
One possible way to survive for Indus is to strategically replace VI with JIO but they aren’t even thinking about it which is disappointing to know.
Rentals going down is a huge disappointment, Rentals suppose to beat inflation but here first it gets locked for 10 years with a 3% increase every year (not even at the inflation rate) and after 10 years it’s been revised down by how much we don’t know. Per tower economics of this business has been rather poor (not beating inflation) and business has been able to grow with inflation due to the addition of new towers, which is not happening post 4G Capex and we see 5G Capex far into the future with one of their significant customer going bankrupt in near future.
Given all of this, In this blog post, we will try to value Indus Towers considering VI as a bankrupt company. That’s possibly the most pessimistic scenario for Indus tower and obviously, if VI survives it’s the bonus.
Today consensus is to trending toward VI going bankrupt, given last year VI struggled to pay money to Indus and they were able to pay some of it by Vodafone Plc selling Rs 3800 Cr worth of Indus Tower shares to Airtel at Rs 187 per share with the condition to infusing it into VI to paydown Indus receivables.
Despite all of this Indus ended this year Fy22 with record receivables of Rs 7,059, almost 26% of their revenue, and Given VI financials are deteriorating it’s hard to see the receivables improving going forward most likely it’s going to get worse.
Indus tower never discloses what percentage of its revenue is from VI but I think it’s fair to guess around 40% must have been coming from VI and Majority must have been from Airtel 55-60% and then maybe a very small 0 to 5% from Jio.
What will happen when VI goes bankrupt? There are 2-3 things which we will have to consider.
a) As per MSA - the rental cost of remaining customers will go up.
b) Electricity/Energy costs that are pass-through - will get passed to the remaining customer. (As VI taking off its Cells won’t going reduce the overall electricity consumption of the tower in proportion)
Although this component (energy cost) is Neutral as they include it into the revenue and then deduct it from the expenses.