Telecom tower firms adopt strategies to stay afloat in a flat market

Proshant Mohapatra, a civil contractor in West Bengal, doesn’t get much work these days. Six years ago, amidst the mobile boom happening in the country, he had started taking up jobs to erect cellular towers in the State for various companies. He would set up as many as 20 towers a week in 2006 as mobile companies were aggressively expanding their networks. But now, with the entire telecom sector in gloom, Mohapatra has moved back to taking up low paying, small repair work from local builders.

Once a lucrative sector that caught had the imagination of many like Mohapatra, the telecom tower sector is in trouble these days. Hit hard by slowing growth in network roll out by operators and policy paralysis at the Centre, tower companies are bracing for the worst.

If the scrapping of 122-odd licences by the Supreme Court is turning out to be the biggest nightmare for tower companies (who were betting on the roll out by new operators to boost revenues), the prospects of being brought under a unified licensing regime is making them lose their sleep – a stark contrast to earlier days.

Data speak

A report from Research & Markets had pegged a compounded annual growth rate of 30 per cent for the period between FY 2006 and 2011 for the tower industry. Tower numbers went up from 85,000 to 4,00,000, markets sources suggest. In comparison, only 8,000 towers have been rolled out between 2010-11 and 2011-12 at a growth rate of just 2 per cent.

“The expansion is on a standstill due to uncertainty created by 2G licence cancellation, lack of clarity of National Telecom Policy and spectrum re-farming,” says Hemant Joshi, Partner, Deloitte Haskins & Sells.

The country’s largest tower network company, Indus (1,12,000 towers and tenancy ratio of 1.95), makes no qualms about the uncertain business environment.

“License cancellation has resulted in lower roll out in 2012-13. Tower roll outs will continue once certainty prevails. The industry will focus on sharing and less on new built sites,” BS Shantharaju, CEO, Indus Towers said.

The gloom in the market is evident. As market whispers of buyouts keep running amok, tower companies continue to put up a brave face.

While Viom, as per market sources is going slow on roll outs, Reliance Infratel is seeking to recover Rs 1,200 crore from Etisalat DB Teleco for the use of its telecom infrastructure in the past. Reliance Infratel has also, so far, made no headway in its attempts to find prospective buyers. While Reliance is tight-lipped about the reasons for the delay in closing a deal, sources say that valuations have dropped for the tower company.

Key players in the market - such as Indus, Viom, GTL, Reliance Infratel, Bharti Infratel, American Towers - admit that licence cancellation has hit their topline.

“Cancellation of licences may impact our consolidated monthly revenue by approximately Rs 7 crore or 6 per cent of our consolidated revenues,” Milind Bengali, Co-Chief Operating Officer, GTL Infra Ltd, said. GTL, the only listed tower entity in the country, has 32,578 towers and tenancy ratio of 1.45.

“Operators affecting our portfolio are established ones in the Indian market. Therefore actual impact may be much lower,” he adds.

Viom says that it will take a near 20 per cent hit in revenues if Uninor winds up India operations. Viom, a joint venture between the Tatas and Srei Infrastructure, is the second largest tower firm with 41,000 towers and tenancy ratio of 2.5. Uninor has rented out its tower requirement in entirety from Viom and if its licences are cancelled come September 7, Viom will be in deep trouble. Current impact on revenues has been neglible – at a maximum of 1 per cent – due to cancellation of services by S Tel.

Indus Towers, with three big anchors – Vodafone, Bharti Airtel and Idea – claims to be the least affected due to having established players as tenants. But even in the case of Indus, the number of new towers being rolled out has come down drastically.

Possible remedies

But tough times call for desperate measures. Tower companies are looking at new revenue opportunities to make up for the losses. Viom, for instance, is already scouting overseas – in Africa, the Middle East and South East Asia - to manage telecom networks for foreign players. It will take up third party tower maintenance for a fee-based income. The company’s top officials also confirm to pruning jobs in the ongoing restructuring exercise.

The gloom is also forcing rival telecom tower firms to collaborate in a bid to cut costs and improve efficiency. As part of this partnership, the tower companies share business opportunities from potential clients with one another.

For example, if tower company X gets a call from an operator for 100 towers in Bihar and if there's another tower company that has better presence in that State, then the business is passed on to that second company.

Companies have also begun using common contractors and resources to manage operational expenditure for towers located in proximate regions – a complete change from the time when tower companies would cut down on rentals and fight hard for the same operator's business, even if it meant rolling out new tower sites.

Tower firms, including Viom, are in talks with Government agencies to co-locate projects such as the Common Service Centres and the UIDAI.

“Tower companies have access to power in rural areas and also have space at the tower locations. We are offering this to Government-funded schemes for a fee,” said Mr Umang Das, Director General, Tower and Infrastructure Providers Association (TAIPA).

For example, the Common Service Centre scheme envisages e-governance projects reaching the rural areas. The Government has approved the scheme for providing support for establishing one lakh Common Services Centres in six lakh villages in India.

Tower companies have already located infrastructure in most of the villages in which they now want to offer to such schemes. The UIDAI scheme, for instance, has been initiated with the objective of reaching a number of services to rural folk, especially financial schemes such as the National Rural Employment Guarantee Act (NREGA). Tower sites can be used as the point of presence in villages for implementing such projects.

Hemant Joshi of Deloitte maintains that most of the operators have hived off their tower assets into separate companies. The idea being to raise cash (some companies scuttled IPO plans in 2011) and make tower assets into a separate business to improve tenancies.

“We are of the firm belief that consolidation is the way forward for the tower industry and only three to four large players will be there in the industry, as it happens in mature markets,” GTL’s Milind Bengali said.

Indus’ Shantharaju too believes that consolidation is evident but on the operators’ companies (Opco) side. Indus, however, will continue to focus on organic growth.

“Consolidation is evident on the Opco side. Six to seven players will emerge giving stability to the industry. Practically, consolidation has already happened at the market place. More than 90% of revenue market share is enjoyed by 4 or 5 players in each circle,” he maintains.

Tower companies are looking at new revenue opportun-ities to make up for the losses.

(This article was published in the Business Line print edition dated July 6, 2012)
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