Rating Rationale
December 18, 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.6000 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL's rating on the long-term bank facilities and bond programme of Indus Towers Ltd (Indus Towers; erstwhile Bharti Infratel Ltd, which got rechristened as Indus Towers Ltd with effect from December 10, 2020) ) remain on 'Rating Watch with Negative Implications'. The short term rating have been reaffirmed at 'CRISIL A1+'. CRISIL has migrated its rating on the Rs 11,500 crore bank facilities and Rs 2,500 crore bonds of erstwhile Indus Towers Ltd to Indus Towers, following amalgamation of the two entities and on receipt of the letter of novation.

Following the amalgamation of erstwhile Bharti Infratel Ltd and erstwhile Indus Towers Ltd and at the request of Indus Towers, CRISIL has withdrawn its ratings on the commercial paper of erstwhile Indus Towers Ltd. The withdrawal is in line with CRISIL's policy of withdrawal of ratings.
 
Merger between erstwhile Bharti Infratel Ltd and erstwhile Indus Towers Ltd was completed on November 19, 2020. Effective this date, all rights, liabilities and obligations therein (past, present or future) of erstwhile Indus Towers Ltd stand fully transferred to Indus Towers.
 
The parties to the merger have agreed for a security package which could be invoked in the event Vodafone Idea Ltd (VIL) is unable to satisfy certain payment obligations under its Master Services Agreement (MSA) with Indus Towers.
 
The security package includes a prepayment in cash of Rs 24 billion which was made at completion of the transaction by VIL to Indus Towers in respect of present and future obligations under the MSA; a primary pledge over shares owned by Vodafone Plc in Indus Towers with a value of Rs 40 billion and a secondary pledge over shares owned by Vodafone Plc in Indus Towers with a maximum liability cap of Rs 42.5 billion.
 
While the security package helps cushion Indus Towers against any immediate impact of the weakened credit profile of the large tenant however the 'watch negative' for the long-term rating factors in the potential impact of any further consolidation of infrastructure or likely discontinuity of operations by the large tenant (contributing around 30% to revenue) on Indus Towers' business.
 
The rating reflects Indus Towers' established market position in the Indian telecommunication (telecom) tower market and strong financial risk profile, supported by expectation of healthy cash accrual. These strengths are partially offset by high customer concentration and large working capital requirement.
 
Over the past couple of years, consolidation in the telecom industry led to concentration of Indus Towers' revenue among the remaining tenants. Further consolidation along with discontinuation by Indus Towers' key tenant, may significantly impact the business and financial risk profiles, and hence, remains a key monitorable.
 
As per the Supreme Court directive dated September 1, 2020, telecom companies have been provided a 10-year period from April 1, 2021, to March 31, 2031, to make payments related to adjusted gross revenue. The amount is now payable by March 31 of every successive fiscal, along with upfront payment of 10% of total dues by March 31, 2021.
 
Capital expenditure (capex) requirement for Indus Towers should remain stable over the medium term. As per the merger agreement, Indus Towers would pay dividend of Rs 4,800 crore within three months of completion of the transaction. Any significant dividend thereafter weakening the financial risk profile will remain a key rating sensitivity factor
 
Further, the lockdown imposed to contain the spread of Covid-19 pandemic had a minimal impact as the passive infrastructure and customer operations fall under essential services, and hence, continued undisrupted.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of Indus Towers and its subsidiaries, as all the entities, collectively referred to as Indus Towers, operate in the same business and have a common management.

Earlier, CRISIL had combined the business and financial risk profiles of erstwhile Bharti Infratel Ltd and erstwhile Indus Towers Ltd, and their subsidiaries. All these companies have amalgamated into Indus Towers effective November 19, 2020.

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:
* Established market position in telecom tower business
Indus Towers has established a strong market position in the industry with 1.72 lakh towers and over 3.14 lakh co-locations as on September 30, 2020; it is well spread in all 22 circles. The entity has become India's largest telecom tower company, with over one-third of the industry's telecom towers. It is also the largest tower company globally, outside China.
 
* Strong financial risk profile
Financial risk profile is marked by a healthy capital structure and comfortable debt protection metrics. Net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) ratio is expected to remain below 1 time over the medium term. Sizeable dividend payout or any large, debt-funded capex, which may constrain the capital structure, are key rating sensitivity factors.
 
Weaknesses:
* Large working capital requirement
The telecom tower industry is capital intensive, though capex is largely build to order. The company has added over 15,000 towers (net) in the past five years. It may further add towers in under-penetrated areas and will also continue to invest in maintenance and upgradation of existing towers, and undertake energy-efficient initiatives to curb diesel consumption.
 
* High customer concentration
Massive consolidation and exits in the Indian telecom industry have constrained Indus Towers' tenancies over the past two years, leading to high customer concentration. Prior to the merger, the average tenancy ratio declined significantly to 1.78 times as on September 30, 2020, from 2.29 times as on March 31, 2018. Accordingly, further consolidation in the telecom industry and its impact on the company remains a monitorable.
Liquidity Strong

On a pro-forma basis, Indus Towers had strong cash and liquid investments at over Rs 3,700 crore as on September 30, 2020. Furthermore, cash accrual from operations should suffice to fund capex over the medium term. 

Rating Sensitivity factors
Upward factors
* Improvement in tenancy and revenue, leading to higher profitability such that EBITDA margin steady at over 45%, or return on capital employed ratio above 30%
* Technological changes requiring roll-out of new cell sites by telecom operators
 
Downward factors
* Significant weakening in operating performance, driven by exit of any large tenant such that the margin remains below 30%
* Any substantial debt-funded capex or dividend payout, constraining debt protection metrics
About the Company

Indus Towers provides tower and related infrastructure, and deploys, owns and manages telecom towers and communication structures for various mobile operators. Bharti Airtel Ltd and Vodafone Group Plc own 41.66% and 28.12%, respectively, in the company. Rest of the shareholding is being held by the public. 

Key Financial Indicators - (pro-forma*)
Particulars (for year ended Mar 31) Unit 2020 2019
Operating revenue Rs crore 25,597 25,339
Profit after tax (PAT) Rs crore 5,033 5,201
PAT margin % 19.6 20.5
Adjusted debt/adjusted networth Times 0.29 0.26
Interest coverage Times 16.5 18.6
Note: The company started adopting Ind AS-116 with effect from April 1, 2019. Hence, financials for fiscal 2020 may not be comparable with that of fiscal 2019. Furthermore, these are CRISIL-adjusted numbers and may not compare with actual numbers reported by the company.
* not adjusted for the merger

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments and are included (where applicable) in the Annexure -- Details of Instrument in this Rating Rationale. For more details on the CRISIL complexity levels, please visit www.crisil.com/complexity-levels.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity
date		 Issue size
(Rs crore)		 Complexity Levels Rating assigned
with outlook
NA Bank guarantee NA NA NA 150 NA CRISIL A1+
NA Overdraft * NA NA NA 1050 NA CRISIL A1+
NA Proposed long-term
bank loan facility		 NA NA NA 4750 NA CRISIL AA+/Watch Negative
NA Short-term loan NA NA NA 1550 NA CRISIL A1+
NA Short-term loan * NA NA NA 1000 NA CRISIL A1+
NA Short Term Loan^ NA NA NA 300 NA CRISIL A1+
NA Term loan -1 NA NA May-21 1500 NA CRISIL AA+/Watch Negative
NA Term loan -2 NA NA May-21 500 NA CRISIL AA+/Watch Negative
NA Term loan -3 NA NA May-23 700 NA CRISIL AA+/Watch Negative
NA Commercial paper NA NA 7-365 days 6,000 Simple CRISIL A1+
NA Bonds# NA NA NA 2,500 NA 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
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
18-12-20  		CRISIL AA+/(Watch) Negative    --    --    --    --  -- 
Commercial Paper  ST  6000.00  CRISIL A1+  30-11-20  CRISIL A1+  05-07-19  CRISIL A1+    --    --  -- 
        30-07-20  CRISIL A1+               
Fund-based Bank Facilities  LT/ST  11350.00  CRISIL AA+/(Watch) Negative/ CRISIL A1+    --    --    --    --  -- 
Non Fund-based Bank Facilities  LT/ST  150.00  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
Term Loan 2700 CRISIL AA+/Watch Negative -- 0 --
Short Term Loan 1550 CRISIL A1+ -- 0 --
Short Term Loan* 1000 CRISIL A1+ -- 0 --
Short Term Loan^ 300 CRISIL A1+ -- 0 --
Proposed Long Term Bank Loan Facility 4750 CRISIL AA+/Watch Negative -- 0 --
Bank Guarantee 150 CRISIL A1+ -- 0 --
Overdraft* 1050 CRISIL A1+ -- 0 --
Total 11500 -- Total 0 --
* Interchangeable with working capital demand loan
^ Interchangeable with overdraft
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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