Seoul/Singapore: India’s telecoms operators such as Bharti Airtel and Reliance are turning to sharing networks with rivals to keep costs down and boost profits as they battle the intense price competition and a surge in low-income subscribers.
The move is unlikely to hurt network equipment makers including Alcatel-Lucent and Ericsson, as some have feared, because lower rollout costs will encourage operators to foray into remote areas, analysts say.
India, the world’s fastest-growing mobile market with 166 million mobile phone users at the end of March, added more than 4 million new GSM customers in April. Only 15 in 100 people own a cellphone, compared with 36 in China.
However, the new subscribers are coming from provincial towns and villages, where 70% of India’s 1.11 billion population lives, as growth in urban areas starts to plateau.
India’s wireless sector, home to the world’s lowest local call rates at 1 US cent a minute, is inevitably suffering downward pressure on average revenue per user (ARPU), a key industry indicator.
“Infrastructure sharing among operators will definitely result in an improvement in the return ratio, while reducing the network operating costs significantly,” said Harit Shah, a sector analyst with Angel Broking Ltd.
“Going forward, this should result in significant margin expansion for the companies.”
The concept of infrastructure sharing only gained credence in India over the last two years as network development failed to keep pace with the rapid growth in subscribers, leading to poor service quality in many areas.
In April, the Telecom Regulatory Authority of India proposed the sharing of passive infrastructure to the Department of Telecommunications, as the cost of passive networks forms the bulk of capital spending by operators.
Passive or non-electronic network components include towers, air-conditioning systems, pylons, electrical supply, shelters and generators, and account for 60% of network roll-out costs.
Bharti Airtel, Reliance Communications and fifth-ranked Idea Cellular Ltd. are already sharing network infrastructure.
But the recent guidelines by the regulator is expected to give an impetus by making it transparent and broad-based.
Lower costs, better margins
“With the increasing prices of steel, real estate, cement and related commodities, the telcos would save 25-30% on capex and opex, which would translate into savings of billions of dollars over the next three years,” said Aravind Venkatesh, analyst with research consultancy Frost & Sullivan.
Macquarie Research Equities expects infrastructure sharing to lead to savings of 1.5% of revenue for operators.
Angel Broking said recently that the cost of setting up towers in rural areas was 30-40% higher than in cities as these had to be ground-based and would consume more steel.
The cost of setting up a tower and associated accessories ranges from about Rs300,000 ($7,335) to Rs350,000 ($8,557).
In April, Bharti said it would spend up to $3.5 billion in the fiscal year to March 2008 up from $2 billion last year, while rival Reliance Communications plans to spend about $2.4 billion up from $1.5 billion a year ago mostly on wireless networks.
The Telecom Regulatory Authority of India has forecast that India would require 330,000 towers by 2010, up from about 100,000 towers now.
The pooling of infrastructure networks would also boost Indian telecom firms’ profit margins, analysts said.
SSKI Securities said it expected operators’ EBITDA (earnings before interest, tax, depreciation and amortisation) margins to expand by 200 basis points in fiscal year 2007-2009 on the back of higher usage and cost benefits from infrastructure sharing.
Bharti has already increased its EBITDA margins by 97-129 basis points through infrastructure sharing, SSKI said. The carrier currently shares about 23% of its existing network of 34,000 towers.
“As the number of towers being shared increases, there could be further contribution to margins from this stream,” SSKI added.
Some telecoms firms have also de-merged their infrastructure units or spun them off into subsidiaries to facilitate the sharing process, analysts said.
De-merging the infrastructure business means fewer assets on the balance sheet, which improves return on capital and reduces costs in terms of site acquisition and preparation, which constitute around 20% of network rollout costs.
Bharti and Reliance have already done so, while unlisted Tata Teleservices Ltd. plans to follow suit and Idea is also considering a similar move.
“Apart from increased cost efficiency, infrastructure sharing also helps operators in quicker rollouts by reducing the time taken in acquisition of sites,” said Gupta of Gartner. “It will help increase the tele-density in rural and semi-urban areas.”