The imminent duopoly in the telecom industry will massively shrink profits for tower companies such as Indus Towers and American Tower Company. These tower companies, which are already in a bind as a result of non-payment of dues by Vodafone Idea, are likely to encounter further troubles in case the telecom player becomes insolvent since they will lose out on multiple shared tenancy contracts.

Top tower company executives, who spoke to businessline on conditions of anonymity, said tower sharing deals will be harder to come by if there are only two operators in the market. While tower companies play an instrumental role in deploying telecommunications networks for operators, they are also an industry in their own right. In FY22, the industry generated ₹46,000 crore of annual revenue, according to a top analyst. Tower companies allow operators to deploy vast tracts of telecommunications networks with minimum capital investments, leasing towers from tower firms.

Leasing towers from tower firms also allow telecom carriers to launch services quickly. Tower companies encourage infrastructure sharing, where operators, instead of deploying their own towers for networks, can use towers set up by tower companies, which are shared between multiple operators to make capital expenditure far more efficient. Top executives in tower companies note that tenancy sharing agreements for telecom towers will go down drastically in a likely scenario where Vodafone Idea exits the market. 

“A tenancy sharing agreement ensures that costs for deploying towers is offset efficiently. If two operators share a telecom tower, they have to pay lower rents and tower companies recover higher margins on those towers. In a duopoly, especially given that Reliance Jio’s network is on single tenancy towers, tower companies will be facing a massive hit on the margins. This will also reduce future investments into digital infrastructure by tower companies,” said a former executive with an ATC on conditions of anonymity. 

Preliminary evidence for slower deployment of telecom towers can be seen in Indus Tower’s quarterly updates. The tower company will likely end tower deployments in FY23 at a three-year low, even as telcos have started deploying the 5G network. In FY21, Indus added over 10,000 telecom towers and approximately 6,000 telecom towers in FY22; it is unlikely to cross this number in FY23 as it has only added 4,000 towers by Q3 FY23. The upcoming uncertainty in the market is also reflected in Indus’ stock prices, which are currently being traded at a five-year low at approximately ₹140 per share. Of the top three tower companies, Indus, ATC and Brookfield, Indus is the only publicly listed company.

Profit to take a hit

Another analyst added that EBITDA for tower companies is likely to halve if Vodafone Idea becomes insolvent or struggles on without making further capex from 70 per cent to 35 per cent.  ATC is likely to be the most affected by Vi’s insolvency, with over 25,000 tower sites that have Voda Idea as the single tenant. 

Another tower company executive added that if Vodafone Idea becomes insolvent or is unable to pay dues to tower companies, Vi’s rural sites will be the first to shut down affecting over 65 million 2G subscribers in rural India.