The challenge facing telcos in India—the need to grow rapidly in a country that, despite having 160 million mobile phone subscribers, still has a teledensity of 17.5%, and where per-user revenues are only around Rs350 (approximately $8) compared with $16-20 in China and $40-50 in the US and Europe—has engendered a new breed of companies. These are tower companies—firms that build cellular telephony towers and then lease them out to telcos for a fee.
“Until now, we have covered nearly 30% of the country where 70% of the people live; we cannot use the same model to cover the remaining 70% where only 30% of the people live,” said Arun Kapoor, CEO, Quipo Telecom Infrastructure, which, three years ago, decided that it would become an independent tower company serving the needs of multiple operators.
More telcos are realizing the benefits of sharing infrastructure. Vodafone Group, which acquired 67% of Hutchison Essar has announced that it is considering an infrastructure-sharing arrangement with old ally Bharti Airtel. Bharti, which owns 34,000 towers, and Reliance Communications, which has 13,000, have both announced plans to spin off their tower businesses into separate companies.
Many of the towers that will be built in India in 2007-08, however, will not belong to telcos but to tower firms. Apart from Quipo, Essar Telecom and Tower Infrastructure and GTL Infrastructure are in the business; by the end of March 2007, they will have 3,000 towers. Next year, the three firms expect to build 15,000-20,000 more, with an investment of Rs4,000-5,000 crore.
“They seem to be banking on the fact that the operators would want someone to share the huge cost of setting up networks in the rural areas,” said Alok Shende, head of the information, communication and technology practice at consulting firm Frost and Sullivan, India. “Letting someone else buy the land and put up the towers and then paying them a monthly rent allows operators to spread out their capex (capital expenditure) costs over the long term,” added Shende.
According to the regulator, India had 90,000 towers as of end-2006. It estimates that the country will need an additional 2,40,000 towers by 2010 to increase the number of mobile telephony subscribers to the targeted 450 million, which is the government’s target. At the current rate of Rs25 lakh a tower, this works out to a capital investment of Rs60,000 crore (approximately $14 billion).
Tower companies are also pitching another benefit to telcos—that of serving consumers in smaller towns, cities, and even villages without having to pay for the entire cost of reaching out to them. The firms recoup their capital expenditure and running costs through a monthly rental from telcos, said Pinakin Gandhi, head of strategy for GTL Infrastructure, adding, “their (the telcos’) monthly expense comes down by more than 50% because the running costs are shared between two or three operators.”
Unlike Essar and Quipo, which install towers only in those areas where at least one telco has signed up for the service, GTL has chosen to tread a more adventurous path. Almost 25% of its towers will be built first; the company will then look for operators who want to use the infrastructure.
While the desire to control costs may encourage telcos to share tower infrastructure, the need to keep valuations high could act as a deterrent. Ebitda, or earnings before interest, tax, depreciation and amortization are used fairly commonly in telecom valuations, Essar Telecom and Tower CEO Ajay Madan said.
Companies are usually valued as a multiple of this. “Opting to lease out towers against rolling out your own will increase operational costs and decrease interest, amortization and depreciation,” he added. That could result in lower valuations for telcos that choose to rent or lease rather than build and own.