Indus Towers Ltd.'s risk-reward is likely to be favourable on better free cash flow and a potential special dividend, according to BofA Securities.
The risk-reward will be favourable despite issues such as increasing receivables, lowering Ebitda and a dividend cut.
The brokerage upgraded the stock to 'buy' from 'underperform' with a target price of Rs 270 from Rs 148, implying an upside return potential of Rs 26%. Things are anticipated to improve for the company, according to a note on Tuesday.
The research firm has two catalysts for upgrading the stock, first is potential reduction in capex at the tower company as investment reduce improving free cash flow. This would likely lead to improving dividends.
Second, the potential special dividend if Vodafone Idea reduces it provision.
"We expect Indus to continue to benefit from Bharti's 4G network expansion in Tier 2/3 cities and see 5G loading improve," BofA said. "We also expect investment in 5G to continue as telcos focus of FWA, and we estimate a FY24–27 revenue CAGR of 4%."
"We see room for FY25E EV/Ebitda of 5 times to re-rate as 5G rollout improves and telcos witness tariff hikes," it said.
India is one of the very few countries where the tower company trades at a lower multiple than telcos. The gap will narrow as the cash flow of Indus starts to improve, according to BofA.
VIL Payments
One of the issues in the past was that Vi was not paying Indus on time, leading to receivables rising to Rs 55 billion. But for the past six–nine months, Vi has been paying full against the monthly invoice, BoFA said.
"We expect this to continue given the improving cash flow at Vodafone Idea," it said. Any tariff hike or fund raise by the telecom operator will improve cash flow and further reduce debt.
Risks
Despite the 'buy' rating over a 12-month period, BofA remains concerned over Vi for the medium term.
Deterioration of Vi's cashflow and increase in competition are some of the key risks highlighted by BoFA.
Shares of Indus rose as much as 4.27% during the day to Rs 221 apiece on the NSE. It was trading 1.77% higher at Rs 215.70 apiece, compared to a 0.01% advance in the benchmark Nifty 50 as of 10:37 a.m.
The share price has risen 17.74% in the last 12 months. The total traded volume so far in the day stood at 3.2 times its 30-day average. The relative strength index was at 65.12.
Ten out of 23 analysts tracking the company have a 'buy' rating on the stock, seven recommend a 'hold' and six suggest a 'sell', according to Bloomberg data. The average of 12-month analyst price targets implies a potential downside of 10.4%.
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