Indus Towers Limited analyst Q&A

Thank you very much, sir. We will now begin the question and answer interactive session. The first question is from the line of Sachin Salgaonkar from Bank of America.

Two questions. Number one, I just wanted to double -click on management's point of not returning cash back to shareholders in the near term. On two aspects, one, what has changed in terms of management thinking in terms of stability of that one particular customer? Because we know for a fact that the customer has been clearing dues on time, paying backlog. So, if anything incremental has changed in the last 3 to 6 months, I would love to actually understand that. And second subpart of the question is management did mention on certain inorganic growth opportunities. Any broad aspects we could get clarity in terms of how management is thinking? So that's question number one. Question number two is, when we look at the tower additions this quarter, maybe there's a bit of a seasonal impact where the tower additions are a bit slow. But on an annual basis, is it fair to say that the growth for this year in terms of number of tower adds will be lower as compared to last year because that one particular customer is not adding that many towers and going ahead, the growth could slow down to a new normal. So, any clarity in that direction would be helpful.

Thanks, Sachin. So the first question was - I think when the committee made a decision, it was not just based on one factor. There were many factors that were considered which included the stability of the customer. And the opportunities that you mentioned. So I think there was no specific change per se, but I think it is a conscious call that the Board has taken in terms of conservation of cash, and they will revisit the decision at the end of the financial year . From a tower additions point of view, there are two aspects. One is the seasonality, as you mentioned in Q1, it did impact the tower additions. But at the year level, we expect the growth to remain robust. I think we have a visibility on our order book today. And based on the order book availability today across all the customers, we believe the tower additions will continue to be very strong for Indus even in this particular financial year. In terms of the other opportunities, I think as we look at the overall industry scope, we started some bit of consolidation when we took Airtel Towers in the last quarter. And hence, any other opportunities that are there to consolidate the towers, we'll b e considering during the course of the year. So I think these are the broad 3 answers to the question that you raised.

Got it. Just one small follow -up out there. Clearly, if nothing has changed per se from the stability of a customer and there are multiple factors which are being looked by management, I think the broader question which comes is, is there some kind of a re instatement of dividend policy, which could be expected, if not in the near term and medium term? Because quite frankly, the stability of the customer will be an issue now, will be an issue a year down the line and perhaps after that as well. So as a shareholder, should we not expect any dividend going ahead? Or is there a certain policy which one coul d expect from management going ahead? And of course, one understands a near-term issue, but this is more like a particular framework in terms of how to think about cash returns to shareholders in a medium -term perspective.

No, but I think, Sachin, I don't think there is -- this is more a policy discussion. It is just a call that the Board has made. I think the Board remains committed to rewarding the shareholders as per the policy. The dividend policy requires the Board to consider certain predefined parameters, including future cash requirement of the company before distributing its free cash. So as I mentioned in my commentary, I think Board will be relooking at the decision at the end of the financial year. And it definitely is keeping the interest of the shareholder in mind. So I think there's no large level policy change that is being discussed here. I think it will evolve - we will continue to monitor the situation closely and make the assessment at the end of financial year.

The next question is from the line of Sanjesh Jain from ICICI Securities.

Just touching upon again on the inorganic growth, Prachur, you mentioned that it's largely because of industry consolidation -- the scope of inorganic infrastructure business, which is TowerCo. or does the scope expand beyond this and you may look at entering any other businesses, allied or non-allied? Any thoughts there will be helpful. That's one. Number two, on the tower addition...

I'm not able to hear you very clearly. I think your line has a little bit of a breakup happening. So we couldn't hear the question properly.

So first on the inorganic growth, Prachur, you mentioned that you would look at further industry consolidation if any opportunity comes around this. But is inorganic limited to the tower industry or we are open for doing inorganic in a non-allied business, any other businesses other than the tower industry? That's number one. Number two, on the tower growth for FY26 and the capex for this number, the capex appears to be higher. Is that indication that we couldn't deploy while we had an order book and that's where the inventory lying with us and Q2, Q3, we may see an acceleration as th e weather conditions normalize. Will that be a normal reading for us which we are writing? And third, on the energy margin, though we had challenges, but on a year -on-year basis, our energy margin losses have come down by 160 basis points. Will it be fair to assume that at least 160, 200 basis points reduction in the losses is quite feasible for this year?

Okay. I'll try to remember all the questions. So in the first question, from an inorganic point of view, I think when I said inorganic opportunities, I think it's both organic and inorganic, especially in the tower space . So the idea is to see how we can capture the maximum market share when it comes to towers in India. So as of now, the focus remains the tower business growth. So I think that clarity we have. The second question that you had was...

On the capex and tower growth...

Elevated capex, right? So the capex, to be honest, I think capex is a factor of multiple things. It's a factor of what we are spending on growth, what we are spending in replacement, what we are looking at an aging infrastructure in terms of deployment, in terms of making sure the towers are strengthened and have a robust setup. It's a combination of that. So I think that's the reason of the capex that you see. And as coming quarters continue, the capex will continue to be distributed in these 3 parts. The last question was energy margin. I think, yes, compared to last year, the energy margin has improved by 160 basis points, and it has been through concerted actions in terms of how we can improve our cost programs and deployment of solar and lithium -ion batteries across our sites. While I cannot comment on an exact number, but of course, the intention is to improve this energy margin as we move forward.

Got it. Just one follow-up on the capex part. One is growth. Second is the maintenance. Third is the replacement of the capex, which we are rolling out. Can you break the capex in the 3 buckets for us in this quarter?

So Sanjesh, if I may take that. I think we already in the investor pack gave a split of maintenance and other than maintenance. Basically, what we have in the other than maintenance is while the understanding that you have is it's all towers, but we are also doing a lot of sites which are solar and also replacing our batteries and upgrading batteries to lithium-ion, adding DGs and all that. So there are various upgrades that happen to the towers, which don't add to the tower count, but nevertheless incur a capex. And you're also right in understanding that the first quarter was obviously seasonally impacted in terms of rollout and all. So we do carry work in progress, which will show up as rollout in the subsequent quarters.

The next question is from the line of Aditya Suresh from Macquarie.

Just on the macro tower addition comments, given that you mentioned that you have a backlog, which is fairly robust, are you able to provide any range of how your footprint could look like in the next, say, maybe 1 year or perhaps in 2 years? And I guess the related question to that is, would these kind of tower additions be all largely single tenancy?

No, I think while I cannot provide you the numbers, because it all depends on the customer plans, we have a strong order book. So as I said, the tower rollout will remain robust, at least we have visibility in the next 4 to 6 quarters, it will remain robust. What was the second question?

No, I think it's going to be a combination. I think as you saw in this particular quarter, we had a rollout of close to 2,800 towers and 6,000 tenancies. So we expect both tower and tenancies to grow. I don't know the ratio in which they will grow, but the se towers will continue to have an option to have a second tenant, and we believe tenancy will come through.

Okay. And in terms of the sharing revenue per operator per tower, can you speak about the trends there? There's been a gradual moderation in that ratio over the past couple of years. It seems to be still moderating. Any thoughts, color here on this as you kind of add towers, will this improve?

Aditya, let me take this. So I think even in the previous quarter, I had sort of clarified this. While we look at the ARPT trends, but somewhere, I think it is very important to understand that the ARPT trends are not really reflective of the health of the business. There's not a very strong correlation or close correlation in terms of margin growth and all. Let me give you an example. When, let's say, we have more sharing as we had in Q1, we had almost 2 -plus sort of tenancy, incremental tenancy on the new towers. So whenever we have new sharing, that really brings down the ARPT, but that really adds to the margin because we get a lot of operating leverage and a lot of that revenue, sharing revenue actually flows down to the margins. So somewhere talking about Q1 trend, I think sequentially, the decline that you see is driven by, of course, more sharing because we had a significant sharing growth, co-location growth. And second is, as I mentioned in my commentary earlier, we had some non -recurring one-off reconciliation revenue benefits in the previous quarter, which are obviously missing in Q1. So to that extent, we had some benefit. And finally, I think what also happens in our business is, we pay rates and taxes to various municipal corporations, and we charge back those rates and taxes to our customer. And typically, rates and taxes are billed by most of the municipal corporations in Q3, Q4, typically in the second half of the year. So first half of the year sees a dip in the rates and taxes and to that extent, the chargeback of those taxes as well. So there are basically these factors. But obviously, I mean, it does not impact the margin is what I would like to emphasize.

If I can just check in terms of rent erosion as contracts coming up for renewal, are you seeing much deflationary pressures there?

Well, as of now, it is pretty much the same. The framework that we had agreed 2 or 3 years back, I think we are still sort of working on the same framework. So there's no incremental impact of any renewal. I mean I would like to reiterate that renewal is always a win -win because we get visibility of 10 years cash revenue, etcetera, with a small decrease. So I think there's no major change, I mean, as far as that is concerned. In any case, I mean, most of the portfolio has already been renewed by now. There's very little left for subsequent renewals in the next couple of years.

The next question is from the line of Vivekanand Subbaraman from Ambit Capital Private Limited.

Yes. So I have 2 questions. One is the maintenance capex that you had in calendar year 2024, that was INR 11.9 billion. But in the first half of this calendar year, you have almost spent that much on maintenance capex, INR 11 billion to be exact. So could you explain to us the factors why maintenance capex has gone up so much? You have added some network sites by acquiring them from Airtel, but that does not seem to explain this jump in maintenance capex? The second question I have is your attitude towards debt. Now while delaying cash return, you highlighted that one of the reasons why you chose to delay cash return and re -evaluate it is perhaps opportunities in the tower space, both organic and inorganic. My question is, is debt now completely ruled out as far as capital structuring is concerned? How should we think about the long-term balance sheet structure? Because previously, you had given indication and even shareholder voting for the Airtel towers, you had clearly specified that you wanted to fund that transaction using debt. It seems tha t now you are not pursuing that? So an explanation on this front would really help.

Vivekanand, I'll take that question. So I think, first of all, on the maintenance capex, your observation is right. I think the important point to note is, obviously, we have an aging portfolio. And there are basically years when we will see a lot of focus on tower strengthening, maintenance etcetera. So this is one such year where we are focusing a lot on strengthening our towers and basically making those towers ready for any tenancy growth and so on. So that is one. Two, I think as we had shared earlier also, I think as part of our strategy, we are t ransitioning from the old tech batteries to more lithium -ion new tech batteries, which have a higher upfront capex involved. But from a TCO perspective, the total cost of ownership is much lower because they have longer life. So that is, again, part of our strategy. Which is reflecting in the higher maintenance capex. Coming to the discussion around debt, I think the reduction in debt that you see is largely reflecting the cash management that we are doing. I mean it is part of the cash preservation. And of course, as and when the Board decides to distribute, all that will be used. So this is basically parking the cash as part of our cash preservation strategy, and that is showing up. I mean of course, there's a lot of leverage headroom and there is absolutely no attitude of having any averseness to increasing our debt as and when required.

All right. I have one follow-up on the maintenance capex explanation. Thanks for the color. So what you are suggesting is that there is some onetime or perhaps periodic maintenance capex that has now been undertaken, which is resulting in a very big spike. And perhaps this could also normalize once you are done with the augmentation of your legacy towers and maybe this cycle of replacing lead acid with the lithium-ion batteries. Is that how one should think about it? Because the question that investors are looking to answer is what is the recurring maintenance capex that one can assume in a rupee million per tower or on a recurring basis, how should one think about maintenance capex?

Yes. See, just to give you a sense, typically, we would replace, let's say, almost one-fourth or one-fifth of our portfolio in terms of batteries. So you could probably expect 3 to 4 years of sort of high maintenance capex and then things will obviously subside because then the useful life sort of takes over.

The next question is from the line of Arun Prasath from Avendus Spark.

My question is on the energy margins. If we have to see how the energy margins are -- how much contribution or the loss in the energy margins coming from, say, diesel pilferage and say, versus the reconciliation of the units between you and the clients, which bucket is contribut ing more to this energy margin? Second, if by doing more and more solar, directionally, are we planning to reduce the energy margins because of the diesel pilferage that's happening? And third, how do we charge back this to the customer? For example, if in solar, obviously, the operating cost is very lower after the capex is done. So will the benefit passed on to the customer or we will be showing this in the energy margins?

Arun, from energy margin, I want to clarify. I think there is a factor of timing. There is a factor of reconciliation. There is a factor of different commercial model that we have the customer with. So I don't think we should be looking at a split of where the energy margin is coming from. I think we have a holistic plan that we are working towards to make sure that we are more energy efficient towards the customer and we improve our margins. As far as solar is concerned, I think solar is service revenue for us, because we are deploying a capex and we are getti ng a service revenue out of it. Hence, the energy generation is part of the energy units that the customer gets if they are on the pass-through or if it's a FEM, whatever be the structure be. So from a solar point of view, our revenue is similar to our loading revenue in our IP fee.

Sorry, one clarification. We keep saying that the energy margins are negative because of the timing issues, but this never seems to get reversed. It's always only piling up. Can you please help us understand this?

So I mean, see, the energy margin is not only the timing issue, as we have explained in the past, it is basically the difference between what the expected cost is and what the actual cost is. And as we've also explained in the past that there is a difference because sometimes our energy costs are higher because of weather disturbances. They are also sometimes higher because of the DISCOMs not billing us correctly and giving us abnormal bills. So there are various reasons because of which we get into these reconciliation issues between what it should be and what it is. So it is not only timing, which basically should get reversed over the next few quarters. It's not always that case.

But what is a structural solution for this reconciliation issues? We have so much tech and at some point of time, because we are talking about INR 1,500 per tower per month, which is almost like a very big amount for our portfolio. So how we are planning to address this reconciliation issues?

Yes. So I think, again, there is reconciliation, there's operational efficiencies. As we said, from an operational point of view, as you mentioned yourself that there is a deployment of solar. We have changed our strategy to move to lithium-ion batteries, which are more robust. So one is the operational reduction of cost, hence, reducing the gap between should be and what the actual cost is. And secondly, on the reconciliation issues, one effort that is currently ongoing and which we are working with the different DISCOMs is how we can get smart meters installed at our sites. What the smart meters do, they provide you the accurate billing that is reflected on that site. So I think that is a little bit of a longer-term project. However, the progress has started. We have started deploying in a few states more aggressively than the others . So I think enabling the connectivity on the sites along with smart meters, plus whatever efforts we are putting on the renewable side, and our storage solutions is what is going to be making a positive change on the energy margin over the next few years.

The next question is from the line of Aliasgar Shakir from Motilal Oswal Mutual Fund.

Just a follow-up on the dividend policy. So last call, you had indicated that the amount was lying idle and therefore, being used for the acquisition instead of funding it through the debt, that is the normal route that was indicated. And as the Board deci des, this acquisition will be routed through the debt and the cash flow will be given for dividend payment. Now that we are, I mean, shifting this to '26, should one assume that basically the '25 cash flow that was used towards the acquisition will now remain there or that will also be available along with the cash flow being made in FY26 for the dividend payment whenever it comes through after the Board decision?

I think there's no change in the stance. I think, like I said, the cash has been generated. We have collected all the backlog receivables, most of it. And as part of our cash management, instead of keeping that cash idle, we have either reduced our debt or used it for a very strategic acquisition. But as and when this decision of distribution happens, I think all that will be utilized . So it is only a cash management thing that we are doing. I mean there's no change in our stance from that perspective.

Got it. So both '26 cash flow generation as well as what was available in the previous year will be available for dividend payment?

Thank you very much. At this moment, I would like to hand the call over to Mr. Prachur Shah for the closing comments.

Thank you. To conclude, we are encouraged by the strong start to the year marked by healthy co-location additions, and we remain focused on executing our strategic priorities with discipline and agility. We are also sharpening our emphasis on automation, AI, laying the foundation for a more agile and intelligent operating model. At industry level, structural growth drivers like rising data consumption, increasing 5G adoption and the network gap between operators continue to create meaningful growth opportunities. With our scale, strength of execution and readiness to adapt, we bel ieve we are well positioned to lead in this evolving landscape. Thank you all for attending this call. See you next quarter. Thank you.

Thank you.

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