Indus Towers Ltd, India’s biggest telecom tower infrastructure company, has seen its shares decline about 14 percent in less than 6 months, in keeping with investor caution given the company’s strong market position. The stock has fallen into a correction following a period of rapid gains and market players are assessing the stock in light of an evolving company and market environment.
The decline has been attributed in large part to profit booking, earnings pessimism and an investor’s attitude to telecom infrastructure stocks. Indus Towers is still driving long-term growth in telecom connectivity but investors have been selective as valuations are under pressure.
One of the main reasons for the stock's decline is that investors seem to expect earnings growth to slow down after a strong performance in prior quarters. While cash flow continued to grow nicely and operating margin is strong, there are new growth catalysts that the company is searching for to justify premium valuation.
An additional factor weighing on sentiment is the telecom sector uncertainty. Data consumption and 5G deployment in India are growing but investors are still interested in the financial health and capital expenditure of telecom companies, which directly impact tower demand.
For Indus Towers, in the long run the introduction of 5G services will create long-term opportunities that telecom companies will look to invest in, such as taller towers and network densification to increase coverage and capacity. However, the financial benefits of large-scale 5G deployment could be accrued gradually rather than immediately, analysts say.
Indus Towers is still one of the industry leaders in India's telecom infrastructure sector that has the largest number of telecom towers and long-term contracts with the leading telecom operators. Its dependable business model, recurring rental income and cash generation keep it strong in times of market turbulence.
Market researchers say the recent decline also reflects broader market weakness in the equity markets, as investors now are gravitating towards companies with faster near-term earnings growth and are heading to companies that have a more immediate near-term profit. Infrastructure and utility companies are usually making the most profit booking from those stocks due to sell-off as investors re-align their portfolios.
Analysts remain optimistic about the long-term prospects of the company, as mobile data consumption grows, digital connectivity takes hold, rural networks grow and telecom infrastructure is still investing in it. This structural trend is projected to keep tower demand in check over the coming years.
Investors will closely monitor the company’s quarterly earnings, tenancy additions, revenue growth and management commentary on 5G expansion. That is the sort of things that will determine the stock in the near term.
While the 14% decline over the last six months may worry short-term investors, it may also convince long-term investors that the correction has helped a lot and the long-term investors who still believe the telecom infrastructure growth story is good for India. The company will still be able to exploit the ongoing digital transformation and nationwide 5G rollout as long as this is still a big driver for future performance.
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