New Delhi: The winding down of a small telecom towers firm from Gurgaon and last week’s buyout of an Indian tower start-up by American Tower Corp., a US company owning 23,700 towers worldwide, at a price close to what its costs to set up the physical assets are being seen by analysts as a sign that companies in the tower businesses are under pressure to scale up tenancy or face consolidation.
Several companies—some backed by big mobile phone services firms, and others, start-ups—in India are targeting demand for towers to mount telecom radios on, as phone networks expand at a rapid pace to meet demand in areas never served by phone firms. India, the world’s second-ranked market by mobile phone users, is also the fastest growing by customer additions every month.
The raison d’etre for the business is simple: sharing of towers among phone firms reduces capital spending and helps in faster roll-out of networks. “The need for tower sharing will increase immensely in the current liquidity-credit crunch and economic downturn as companies slow down their capex plans, reduce leverage and conserve cash,” Siddharth Shah of Mumbai based brokerage Kotak Securities Ltd wrote in a report published last month.
Gurgaon-based Independent Mobile Infrastructure Pvt. Ltd, a telecom tower company, is exiting the business after competition intensified in a crowded market, Mint reported on Wednesday. The company, which manages around 300 towers in 10 telecom circles, or licensed areas, plans to sell the infrastructure and cease operations, according to four persons belonging to the telecom industry, who did not want to be identified.
Just last week, American Tower announced its buyout of Xcel Telecom Pvt. Ltd that owned and ran 1,700 towers.
Analysts estimate India will need between 100,000 and 150,000 new towers added in the next two to three years, taking the total to more than 300,000 towers as the number of phone customers crosses the 500-million mark, up from the current almost 380 million.
Despite that healthy outlook for towers demand, the key to be able to be firmly on the path to break even for tower firms, they say, is to increase tenancy on each tower to 1.5 to 2, up from the current 1.1. Tenancy is the ratio between the number of telecom operators using each tower.
“A tower sharing firm needs to have a 1.7 to 2 tenancy ratio to break even,” said Sudhir Gupta, vice-president, marketing, for India’s largest tower company Indus Towers, a three-way venture between phone firms Bharti Airtel Ltd, Vodafone Essar Ltd and Idea Cellular Ltd.
Aiming for a return on equity of 15% may require a tenancy of greater than two, G.V. Giri, an analyst at the institutional equities division of India Infoline Ltd wrote in a report published in October last year.
Indus Towers, reckoned to be the biggest in the business, has close to 96,000 towers at present. Even with the business it gets from the likes of Bharti Airtel, Vodafone Essar and Idea Cellular, Gupta says the firm is at least a year away from a 1.7 tenancy; by March 2010, it will have between 115,000 and 120,000 towers.
Typically, the cost of setting up a tower is about $66,000 or Rs33 lakh, Sunil Kanoria, vice-chairman and managing director of Quippo Infrastructure Equipment Ltd said in January. The cost can vary depending on factors such as location, height and extent of power back-up. This does not include the cost of the electronics (called base transceiver station) or recurring costs such as rent for the premises it is mounted on.
So, for Quippo, which recently announced a merger with a tower unit of phone firm Tata Teleservices Ltd, its target of 50,000 towers by 2012 will translate into a capital spending of Rs16,500 crore.
Capital expenditure at other firms such as GTL Infrastructure Ltd, which is eyeing 25,000 towers by 2011, or Essar Telecom Infrastructure Pvt. Ltd will also be relatively high.
Delays in a new crop of telecom aspirants starting services means it will take longer than planned to recover these investments. Companies such as Swan Telecom Pvt. Ltd, Unitech Wireless Ltd and Loop Telecom Pvt. Ltd, have received telecom licences and spectrum allocations, but are yet to finalize tower sharing pacts with the tower firms.
Still, when they do, their decisions are expected to be a boost to the towers business. The new phone firms need to rollout their services in at least 10% of the districts in a circle, or telecom service area they have a licence to, within the first year of getting a licence, and 50% of the districts within three years, according to the roll out obligations given in the licence agreement.
Another quarter where fresh demand could come from is when at least two of India’s phone firms running CDMA (code division multiple access)-based networks shift to a rival standard (GSM), an industry executive said.
“With them launching pan-India GSM services, the demand for towers goes up as GSM services need more towers as compared to CDMA,” this executive with a leading telecom firm, who did not want to identified, said.