Indus Towers Q2 FY24: Profit Recovery Meets a Heavy Investment Bill

Indus Towers entered the September 2023 quarter with a larger network, a recovering profit and a more demanding cash-flow equation. The company operates passive telecom infrastructure across India, leasing tower capacity and related services to wireless operators. Its scale is considerable: 204,212 macro towers and 353,462 macro co-locations across all 22 telecom circles at September 30, 2023.

For the quarter, revenue from operations was INR 7,132.5 crore, down 10.5% from INR 7,966.6 crore a year earlier. Yet EBITDA rose 22.9% to INR 3,455.9 crore and profit after tax rose 48.5% to INR 1,294.7 crore. The result was helped by a sharp reduction in other expenses, particularly versus a prior-year period affected by much higher doubtful-receivable charges.

The quarter therefore presents two valid, and contrasting, conclusions. Profitability improved materially. But cash conversion weakened as capital expenditure rose and receivables increased. For investors, the focus is not only on the earnings rebound. It is also on whether the company can improve tower utilisation, collect cash faster and earn acceptable returns on a larger asset base.

A Better Profit Result Despite Lower Revenue

Indus earns revenue mainly from tower sharing and energy reimbursements. Sharing revenue was INR 4,338.9 crore in the September quarter, while energy reimbursements were INR 2,793.6 crore. The mix was broadly 61% sharing revenue and 39% energy reimbursements.

The lower top line was not matched by lower operating costs in every category. Power and fuel expense increased 5% year on year to INR 2,855.4 crore. This cost alone represented 40% of revenue, compared with 34.1% a year earlier. Repair and maintenance expense also rose 5% to INR 349.8 crore.

But other expenses fell to INR 275.7 crore from INR 1,907.3 crore in the prior-year quarter. The presentation identifies INR 133.5 crore of allowances for doubtful receivables and advances in the current quarter, compared with much larger charges in the previous year. This change was central to the EBITDA recovery.

Finance cost, net of finance income, declined 37.2% to INR 246.4 crore. Profit before tax increased 48.7% to INR 1,746.7 crore. The result also benefited from higher finance income. Together, these movements lifted the net profit margin to 18.2% from 10.9% a year earlier.

The recovery should nevertheless be read in context. It came after an unusually weak prior-year comparison affected by provisions. It does not by itself establish that revenue productivity has recovered.

More Towers, but Lower Revenue Productivity

Indus added 5,928 macro towers in the quarter and 5,583 macro co-locations. On a year-on-year basis, macro towers increased by 16,286 and macro co-locations by 15,334. Lean co-locations increased by 789 during the quarter to 8,643. Lean sites are intended for densification, coverage gaps, low-population areas and local capacity needs.

The expansion aligns with India's 5G deployment cycle. The presentation notes that the top two operators had more than 50 million 5G users each, and that nearly 340,000 5G base transceiver stations had been deployed nationally. Airtel said its 5G services covered all states, union territories and districts. Jio launched JioAirFiber, a fixed wireless access service, in eight cities.

For Indus, this is a relevant demand backdrop. More data usage and higher-frequency networks can require added capacity and denser site grids. But reported operating metrics show that network growth has not yet translated into better monetisation per macro tower.

The average sharing factor was 1.74 at September 2023, down from 1.80 a year earlier. Macro sharing revenue per tower per month fell 16.0% to INR 71,336. Sharing revenue per sharing operator per month fell 13.1% to INR 40,940. Put simply, Indus had more infrastructure, but the average revenue earned from each tower and operator was lower than a year ago.

There were also 840 exits during the quarter. Site exits are an ordinary feature of the business, but they matter because occupancy determines the return earned from a tower base that carries significant fixed costs and capital investment.

Cash Flow Is the Main Counterweight

The largest caution in the quarter is cash flow. Capital expenditure was INR 2,289.7 crore, compared with INR 793.7 crore a year earlier. For the first half, capex was INR 4,503.1 crore, up 189.8% year on year. Cumulative investments reached INR 63,190.3 crore at September 2023.

Operating free cash flow was INR 398 crore in the quarter, down 68.8% year on year. Free cash flow was negative INR 1,027 crore. The company defines operating free cash flow as EBITDA, adjusted for lease-liability repayments, less capex. Its adjusted fund from operations, which excludes maintenance and general corporate capex from adjusted EBITDA, was INR 2,388.1 crore.

Working capital added to the pressure. Trade receivables rose to INR 6,186.3 crore at September end from INR 4,868.7 crore at March end. In the first-half cash flow statement, the increase in trade receivables absorbed INR 1,538 crore. This does not prove a collection problem, but it makes collection performance an important variable to monitor.

Net debt including lease liabilities increased to INR 20,353.7 crore from INR 18,886.9 crore at March 2023. The increase came alongside investment and working-capital demands. The balance-sheet picture is not uniformly weak: net debt to last-twelve-month EBITDA was 1.75 times and interest coverage improved to 9.01 times. Still, sustained negative free cash flow would limit flexibility if it continues.

Energy Efficiency and Contract Visibility

Indus is trying to reduce energy exposure. It operated about 3,363 solar-powered sites and about 74,392 low-diesel-consumption sites as of September 30. It has also initiated deployment of a lithium and valve-regulated lead-acid battery combination, and evaluated an aluminium-air energy-generation solution for a pilot at high-diesel-use sites.

These actions matter because energy remains the largest operating expense. Solar, electrification, advanced storage and reduced use of air conditioning can lower diesel consumption and emissions, while also improving cost resilience. The presentation does not quantify future savings from these measures, so their financial effect remains to be demonstrated in subsequent results.

The company also retains a meaningful base of contracted cash flows. Its average remaining service-contract life was 6.28 years, while future minimum lease payments receivable were INR 108,266.1 crore. Master service agreements are long-term and include annual escalation clauses. This offers visibility, although it does not eliminate the need to manage customer credit exposure, exits and occupancy.

The Quarter's Core Trade-Off

Indus Towers' September quarter was defined by improved reported profitability and higher investment needs. EBITDA margin rose to 48.5%, profit after tax increased sharply and interest coverage improved. The company also expanded its national tower base and grew lean co-locations.

But the investment bill was large. Revenue productivity per tower declined, energy consumed a larger share of revenue, receivables increased and free cash flow was negative. The next phase of the story depends on whether 5G-related activity raises co-location demand and whether new towers convert into stronger sharing revenue.

The company has scale, long-duration contracts and practical energy-efficiency programmes. The investor question is more specific: can that scale produce better utilisation and cash returns as the asset base expands? The answer will be visible in sharing factor, revenue per tower, receivable collections and free cash flow in the quarters ahead.