In a significant development, brokerage firm BoFA Securities has granted a “double upgrade” to Indus Towers Ltd., shifting its rating to buy, citing a favorable risk-reward proposition. The brokerage has not only upgraded its stance but also raised the price target for Indus Towers to ₹270 from ₹148, indicating a potential upside of 29% from the closing levels on Tuesday. This revised target stands as the highest among street predictions for Indus Towers.
According to BoFA Securities, Indus Towers has weathered challenges such as increasing receivables, Earnings before Interest, Tax, Depreciation and Amortisation (EBITDA) decline, dividend cuts, among others. Despite these hurdles, the brokerage foresees an improvement in the tower company’s fortunes.
One key catalyst identified by BoFA Securities is Indus Towers’ continued benefit from Bharti Airtel’s 4G network expansion in tier-2 and tier-3 cities. As part of the upgrade, BoFA has raised its Compounded Revenue Growth Rate estimate for Indus Towers by 4% for the financial years 2024-2027.
The double upgrade is underpinned by two major catalysts highlighted by BoFA Securities. Firstly, the potential reduction in capital expenditure (capex) is anticipated as investments decrease, contributing to improved free cash flow for the company. Currently, capex constitutes 29% of overall sales. Secondly, a potential special dividend is on the horizon if Vodafone Idea, a significant customer, reduces its provisions.
BoFA Securities notes that Vodafone Idea’s delayed payments had led to receivables rising to ₹5,500 crore. However, over the past six to nine months, the company has been settling its monthly invoices in full, hinting at improved cash flow. BoFA expects this positive trend to continue, driven by the enhanced cash flow at Vodafone Idea, especially with potential tariff hikes or fund raises, contributing to debt reduction.
Despite the buy rating for a 12-month period, BoFA Securities expresses medium-term concerns over Vodafone Idea, highlighting risks such as further deterioration in cash flow and increased competition. It is noteworthy that Brookfield recently surpassed Indus Towers to become India’s largest tower company post the ATC deal.
On Tuesday, shares of Indus Towers closed 1.5% lower, having gained 14.5% over the last 12 months.
