Tower Industry
The genesis of the tower business in India is slightly different from that in the West. The operators themselves, like Reliance and Bharti, for their own use, have built most of the towers in the country. It’s only now that these companies have wisened up to the possibility of finding other operators as tenants on their towers. It’s a win-win situation for both the operator and the tower provider increasing the profit margins of both.
Indian telecom players have huge plans for growth in the tower business. Already Bharti has 45,000 towers, which makes it two times the size of American Tower. But the most important is how many operators are sharing these towers. Currently sharing is at a minimum level that is operators peg it at fewer than 25 per cent as against 90 per cent in the West and some operators don’t even share towers at all.
The hive-off of the tower business to an independent entity is a new trend like Bharti’s Bharti Infratel is a strategic step to become the largest tower company in the world. Resulting in an asset base of USD 5.3bn – USD 5.6bn for Bharti Infratel. Reliance Communications is unlocking value by going for listing of its tower business. R-Com’s tower plans could also scale up considerably if its GSM plans get going.
In Europe, Vodafone and Hutch share their infrastructure largely because of the small size and density of population covered. This is the case in Asia, with China as an exception. Experts opine that India too could go the China way, due to the geographical spread and population density. In America, independent tower companies have become what they are by acquiring towers of operators gradually. The area and the population covered make it unviable for an operator to run a tower company with itself as a sole tenant. Sharing thus becomes a natural outcome of the need to cover the Indian landscape at a cost that doesn’t cost the earth.
The high capex in towers is one scary part of the business. (A few US companies have a debt-equity ratio as high as 8:1.) Typically, a ground-based tower costs Rs 25-30 lakh. A roof-based tower can be built for Rs 13-14 lakh. On having a look at the additional 1,10,000 towers that are expected to come up by March 2008—at a conservative cost of Rs 15 lakh per tower—some Rs 16,500 crore would have been sunk into them as capex. Industry insiders say a debt-equity ratio of 1.5-2 would be comfortable, and is not impossible. Also tower companies are valued at a multiple of earnings before interest, depreciation, taxes & amortisation. Companies operating in mature markets such as American Towers are valued at 16-17 times the EBITDA. We expect Indian tower companies to trade at a much higher multiple as compared to global peers in view of strong growth in the subscriber numbers.
Currently the Indian Telecommunication market is valued at around $100 billion i.e around Rupees 400,000 crore. Two telecom players dominate this market – Bharti Airtel with 27% market share and Reliance Communication with 20% along with other players like BSNL and AT&T.
The Outlook:
Indian telecommunication Industry is one of the fastest growing telecom market in the world. The mobile sector has grown from around 10 million subscribers in 2002 to reach around 180 million by 2007 registering an average growth of over 90% yoy. It is estimated that India needs 300,000 towers right now. So, what these operators now want is to get other operators to place their equipment on the existing towers for a fee. That gives it a clear revenue stream from a business where there was none till quite recently. Also if more than two operators are co-located on a single tower, it reduces everyone’s capex. India has 120,000 tower sites, having 136,000 Base Transmitting Station of different telecom companies. Bharti Airtel has the largest tower portfolio with 40000 tower sites and around 1.26 occupants per tower. Reliance Communications has 14000 towers. All other operators’ towers have lower occupancy ratios and face challenges in facing competition from larger players.
It is estimated that by 2010, India would have have 42.5 crore mobile subscribers thus creating demand for 4.5 lakh Business Telecom Systems (BTS), with major demand coming from rural areas. Estimates say that Bharti would have 33% market share followed by R-Com with 18.3% market share. Thus, the tower business of telecom companies will put them follow a rapid growth path leading to higher valuations.
