Rating Rationale
June 08, 2020 | Mumbai
Indus Towers Limited
Long-term rating continues on 'Watch Negative'; short-term rating reaffirmed 
 
Rating Action
Total Bank Loan Facilities Rated Rs.11500 Crore
Long Term Rating CRISIL AA+ (Continues on 'Rating Watch with Negative Implications')
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.2500 Crore Bond CRISIL AA+ (Continues on 'Rating Watch with Negative Implications')
Rs.2500 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL rating on the long term bank facilities and bond of Indus Towers Limited (Indus Towers) continues to be on 'Rating Watch with Negative Implications'. The short term rating and commercial paper has been reaffirmed at 'CRISIL A1+'.
 
CRISIL had, on March 11, 2020, placed the long-term rating on 'Watch Negative' following the potential impact on Indus Towers' business if there is discontinuity or sustained weakening in the credit profile of a large tenant (contributing over 40% of the revenue). Telecom operators (telcos) have been asked to pay the adjusted gross revenue (AGR) related dues by the Supreme Court (SC). Further, on March 18, 2020, the SC issued a directive that telcos should not be allowed to self-assess AGR liabilities and should pay the amount as stated by the Department of Telecommunications (DoT), including interest and penalty. Therefore, clarity over the final amount to be paid is still pending. The SC hearing with regards to deferment of payment was scheduled for the first week of April, which however has been postponed on account of the Covid-19 outbreak, and this remains a key monitorable.
 
The consolidation in the telecom industry over the last couple of years has increased Indus Towers' dependence on its tenants. However, despite a potential weakening of the business risk profile, the company's overall credit profile should sustain in the 'CRISIL AA' rating category driven by healthy cash accrual and strong balance sheet. CRISIL will remove the rating from 'Watch Negative' and take a final rating action once there is clarity with regards to the AGR issue and its potential impact on Indus Towers' largest tenant.
 
Furthermore, the DoT has approved the proposed merger of Indus Towers with Bharti Infratel Ltd (Bharti Infratel; rated 'CRISIL A1+'). However, the board of Bharti Infratel has extended the long stop date of the merger to June 24, 2020. The proposed merger should benefit the business risk profile of the merged entity, which will have a pan-India presence.
 
The capital expenditure (capex) requirements are expected to remain at current levels. Indus Towers did not pay any dividend for fiscals 2019 and 2020 and has recently declared a dividend of only Rs 1,000 crore as against earlier annual dividend of Rs 2,500-3,000 crore. The company's dividend policy and any large dividend pay-out post the merger with Bharti Infratel will be monitored.
 
Further, the lockdown imposed to contain the Covid-19 outbreak has had little impact on the operations of Indus Towers, as the passive infrastructure as well as operations of the company's customers are covered under essential services, and therefore continued to function.
 
The ratings continue to reflect Indus Towers' leadership position in the Indian telecommunication (telecom) tower market, and its strong financial risk profile. These strengths are partially offset by high customer concentration and the capital-intensive nature of operations.

Analytical Approach

CRISIL has combined the business and financial risk profiles of Indus Towers and Bharti Infratel and its subsidiary.
 
Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description
Strengths: 
* Robust business risk profile
Indus Towers has an established market position, with 126,949 towers across 15 circles (mostly in the lucrative Metro, Category A, and Category B circles) as on March 31, 2020. The proposed merger with Bharti Infratel should further strengthen the market position, with a combined portfolio of about 1.69 lakh towers and expanded reach (to all 22 circles). Given its presence across India, the dependence of Indian telcos on Indus Towers should remain high thereby strengthening its business risk profile.
 
* Strong financial risk profile
Healthy capital structure and comfortable debt protection metrics keep financial risk profile strong. Adjusted interest coverage and gearing remained over 7 times and below 0.3 time, respectively, as on March 31, 2020. No dividend was declared for fiscals 2019 and 2020 against earlier annual payment of Rs 2,500-3,000 crore. Moreover, to conserve cash, a dividend of only Rs 1,000 crore has been declared during the first quarter of fiscal 2021. Any large dividend pay-outs and its sustained impact on the debt protection metrics will remain a key rating sensitivity factor.
 
Weaknesses:
* Capital-intensive operations
The telecom tower industry is capital intensive. Capex required for erecting a ground-based tower is Rs 20-25 lakh and that for roof-top tower is Rs 15-20 lakh. The company has added over 6,000 towers in the past five years. Though tower addition is expected to remain moderate in fiscal 2021 due to consolidation and the lockdowns imposed, Indus Towers is likely to continue investing in maintenance and upgrade of towers and also in energy-efficient initiatives to cut down on diesel consumption.
 
* High customer concentration
Massive consolidation and exits in the Indian telecom industry have constrained tenancies of Indus Towers over the past two years, resulting in high customer concentration. The average tenancy ratio has declined significantly from 2.35 as on December 31, 2017 to 1.85 as on March 31, 2020. This might lead to higher bargaining power for customers. Accordingly, consolidation in the industry and its impact on the business of Indus Towers will therefore continue to be monitored.
Liquidity Strong

Liquidity remains strong with cash and liquid investments of the combined entity above Rs 4,000 crore as on March 31, 2020. Net cash accrual - expected to exceed Rs 1,500 crore in fiscal 2021 - should be sufficient to cover annual debt obligation of Rs 1,300-1,400 crore. Capex of Rs 3,000-4,000 crore expected over the medium term should be funded through a prudent mix of debt and accrual.

Rating Sensitivity factors
Upward factors
* Improvement in tenancy and revenue, leading to higher profitability such that earnings before interest tax depreciation and amortisation (EBITDA) margin sustains above 45% or return on capital employed (RoCE) is above 30%.
* Technological changes requiring roll-out of new cell sites by telecom operators.
 
Downward factors
* Significant decline in operating performance owing to the exit of large tenant such that EBITDA margin sustains below 25%.
* Sustained weakening of the debt protection metrics on account of higher-than-expected debt-funded capex or dividend payout.
About the Company

Indus Towers provides passive infrastructure services to telecos. The company was formed as a joint venture between Bharti Infratel (a subsidiary of Bharti Airtel Ltd ('CRISIL AA/Stable/CRISIL A1+'), which also provides passive infrastructure services), Vodafone India Ltd, and ABTL (a subsidiary of the erstwhile Idea Cellular Ltd). The promoters had shareholding in the ratio of 42:42:11.15, respectively. In fiscal 2017, ABTL transferred 4.85% of its holding to P5 Asia Holding Investment (Mauritius) Ltd.
 
At the time of merger of Vodafone India Ltd and Idea Cellular Ltd, the shareholding of Vodafone India Ltd was transferred to Vodafone Group Plc and its subsidiaries, and of ABTL to Vodafone Idea Ltd.
 
As on March 31, 2020, Bharti Infratel operated 42,053 towers with 75,715 co-locations in 11 telecom circles, while Indus Towers operated 126,949 towers with 235,396 co-locations in 15 telecom circles. After the proposed merger, the combined entity will have a nation-wide presence, with operations in all 22 telecom circles (overlapping in four circles).

Key financial indicators (Indus Towers Ltd - Standalone)
Particulars (as on/for year ended Mar 31) Unit 2020 2019
Operating revenue Rs crore 18,859 18,517
Profit after tax (PAT) Rs crore 3,287 2,422
PAT margin % 17.4 13.1
Adjusted debt/adjusted networth Times 0.28 0.46
Interest coverage Times 7.33 11.98
Please note that Indus Towers has adopted Ind AS-116 w.e.f. April 1, 2019. Hence, financials for year ended Mar 31, 2020 may not be comparable to previous year

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs crore) Rating assigned with outlook
NA Bank Guarantee NA NA NA 150 CRISIL A1+
NA Overdraft* NA NA NA 1050 CRISIL A1+
NA Proposed Long Term Bank Loan Facility NA NA NA 4750 CRISIL AA+/Watch Negative
NA Short Term Loan NA NA NA 1550 CRISIL A1+
NA Short Term Loan* NA NA NA 1000 CRISIL A1+
NA Short Term Loan^ NA NA NA 300 CRISIL A1+
NA Term Loan -1 NA NA May-21 1500 CRISIL AA+/Watch Negative
NA Term Loan -2 NA NA May-21 500 CRISIL AA+/Watch Negative
NA Term Loan -3 NA NA May-23 700 CRISIL AA+/Watch Negative
NA Commercial paper NA NA 7-365 days 2500 CRISIL A1+
NA Bonds# NA NA NA 2,500 CRISIL AA+/Watch Negative
*Interchangeable with Working Capital Demand Loan
^Interchangeable with overdraft
#Yet to be issued
 
Annexure - List of entities consolidated
Names of entities consolidated Extent of consolidation Rationale for consolidation
Smartx Services Ltd Fully consolidated Wholly-owned subsidiary of Bharti Infratel Ltd
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Bond  LT  0.00
08-06-20 		 CRISIL AA+/Watch Negative  11-03-20  CRISIL AA+/Watch Negative  31-05-19  CRISIL AA+/Stable  07-05-18  CRISIL AA+/Stable  31-05-17  CRISIL AA+/Stable  CRISIL AA+/Stable 
                15-03-18  CRISIL AA+/Stable       
Commercial Paper  ST  2500.00  CRISIL A1+  11-03-20  CRISIL A1+  31-05-19  CRISIL A1+  07-05-18  CRISIL A1+    --  -- 
                15-03-18  CRISIL A1+       
Short Term Debt  ST                  31-05-17  CRISIL A1+  CRISIL A1+ 
Fund-based Bank Facilities  LT/ST  11350.00  CRISIL AA+/Watch Negative/ CRISIL A1+  11-03-20  CRISIL AA+/Watch Negative/ CRISIL A1+  31-05-19  CRISIL AA+/Stable/ CRISIL A1+  07-05-18  CRISIL AA+/Stable/ CRISIL A1+  31-05-17  CRISIL AA+/Stable/ CRISIL A1+  CRISIL AA+/Stable/ CRISIL A1+ 
                15-03-18  CRISIL AA+/Stable/ CRISIL A1+       
Non Fund-based Bank Facilities  LT/ST  150.00  CRISIL A1+  11-03-20  CRISIL A1+  31-05-19  CRISIL A1+  07-05-18  CRISIL A1+  31-05-17  CRISIL A1+  CRISIL AA+/Stable/ CRISIL A1+ 
                15-03-18  CRISIL A1+       
All amounts are in Rs.Cr.
 
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee 150 CRISIL A1+ Bank Guarantee 150 CRISIL A1+
Overdraft* 1050 CRISIL A1+ Overdraft 550 CRISIL A1+
Proposed Long Term Bank Loan Facility 4750 CRISIL AA+/Watch Negative Proposed Long Term Bank Loan Facility 3950 CRISIL AA+/Watch Negative
Short Term Loan 1550 CRISIL A1+ Short Term Loan 1550 CRISIL A1+
Short Term Loan* 1000 CRISIL A1+ Short Term Loan@ 1300 CRISIL A1+
Short Term Loan^ 300 CRISIL A1+ Term Loan 4000 CRISIL AA+/Watch Negative
Term Loan 2700 CRISIL AA+/Watch Negative - 0 -
Total 11500 -- Total 11500 --
@Overdraft is a sub-limit
*Interchangeable with Working Capital Demand Loan
^Interchangeable with overdraft
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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