The telecom infrastructure industry has played a vital role in the fast-paced growth of wireless telephony. Infrastructure sharing has, in particular, helped in increasing telecom coverage in remote rural areas. There is a strong correlation between telecom infrastructure and telecom services, which is reflected in the increase in the number of towers and mobile subscribers over the past five years. In March 2006, 85,000 telecom towers served 98.78 million mobile subscribers, which increased to 370,000 towers serving 811.59 million users in March 2011.

Aware of the importance of infrastructure, which serves as the backbone of the telecom industry, the government is paying special attention to this segment. The draft National Telecom Policy [NTP], 2011 also recognised the need for the creation of large-scale and quality telecom infrastructure as a key to rapid economic and social development of the country.

Over time, with adequate policy and regulatory support, both public and private telecom operators have created an extensive telecom network with more than 400,000 tower sites by December 2011. The year 2011 witnessed some key developments in the tower infrastructure arena. These included a shift in focus from greenfield tower rollouts to increasing tenancies, a move towards consolidation, increasing uptake of renewable energy solutions, and the upgradation of a large part of tower infrastructure to 3G technology. In what will be one of the most significant regulatory developments with respect to tower companies, the telecom infrastructure industry is likely to receive the status of essential infrastructure soon.

A look at the key developments in the tower space over the past one year...

Size and growth

Between 2006 and 2011, the tower industry grew almost four times in size with the number of towers increasing from 85,000 to over 370,000 as of March 2011. Between March 2006 and March 2011, the industry witnessed a compound annual growth rate of 44.44 per cent.

As of December 2011, the telecom industry had a tower base of over 380,000, an average tenancy ratio of 1.75x, around 612,000 base transceiver stations (BTSs), and over 1,000,000 route km of optic fibre cable (OFC) network across the country. In 2010-11, the tower industry registered total revenues of Rs 190 billion, a 40.74 per cent growth over the Rs 135 billion registered in 2009-10. The growth of the tower industry has been in line with the growth of the overall mobile subscriber base.

At present, there are nine telecom tower companies in the country, apart from the tower portfolios still held by the operators themselves. Indus Towers, which was formed as a three-way venture between Bharti Airtel, Idea Cellular and Vodafone Essar in 2007, is the largest tower company globally. As of September 2011, Indus had a strong portfolio comprising more than 110,000 towers spread across 16 telecom circles.

It is followed by Reliance Infratel, whose tower portfolio comprises a total of 50,000 towers as of December 2011. Of these, around 33 per cent are linked with its OFC network. Viom Networks and GTL Infrastructure, with a portfolio of over 38,000 towers and 32,500 towers, hold 10.55 per cent and 8.83 per cent of the country’s total tower base respectively. Viom Networks also has 95,000 tenancies across 22 telecom circles. While Indus is an operator-backed entity, both Viom and GTL Infrastructure are independent pure-play tower operators. The state-owned Bhart Sanchar Nigam Limited (BSNL) also holds a substantial share of over 60,000 towers. However, unlike the tower companies, BSNL has not yet leased out its towers to other players.

Key trends and developments

While the overall tower base has gone up significantly, its year-on-year growth has been on a decline. This is primarily because the industry shifted its focus from increasing the number of towers to increasing tenancies on the existing towers. Tower companies scaled down their rollout plans in order to avert an oversupply situation and are not eager to roll out greenfield towers. In the near future, the demand created by new technologies like 3G and BWA would be the primary reason for the development of new towers. However, the pace of new tower rollouts will be slower.

Consequently, the past year witnessed an increase in tenancy ratios of the companies. The key players in the industry saw a significant increase in tenancies and, by end-2011, most of them stood at upwards of 1.6x levels. The industry is also moving towards an enhanced use of high capacity multi-tenant towers. In order to reduce costs, it is looking at streamlining tower design, and making them lightweight and tubular. Tower companies are aiming at downsizing older uneconomical towers, which cater to only one or two tenants.

As telecom operators have been facing high margin pressures, tower rentals have been declining and have reduced by 20 per cent over the last one year. In fact, over the past few years, the rentals declined from Rs 55,000 per month to Rs 27,000-Rs 32,000 per month for ground-based towers and to Rs 19,000-Rs 21,000 for rooftop towers.

With the slowdown in rollouts, tenancy levels below the optimal 2.5x levels and a situation of overcapacity in urban areas, tower companies had a tough year. GTL Infrastructure, for instance, faced some trouble in the second half of 2011, with a total debt of Rs 100 billion on its books. The company was busy with debt restructuring exercises in the last two-three months of the year.

With a tenancy level of 2.4x, the highest in the industry, Viom Networks has ventured into the international market. The move came as the company’s promoter groups, the Tata Group and Srei Infrastructure Limited, decided to look at new revenue streams from global services as tower companies in India continued to be burdened with huge debt and falling revenues. In this regard, Viom is reportedly in advanced talks with leading telecom operators in Africa, and West and East Asia. Also, it is likely to close a $300 million deal with Norway’s Telenor Group to manage around 8,000 towers for its mobile arm in Bangladesh, Grameenphone.

Tower companies are also looking at merger and acquisition (M&A) options. While the tower industry has already undergone significant consolidation in the past years, 2011 saw companies evaluating options for complete sell-outs or stake sales. For instance, Reliance Infratel has been looking for an acquirer since its deal with GTL fell apart. Reliance Communications has hired the investment banking arm of UBS to sell its 95 per cent stake in Reliance Infratel for $5 billion.

A relatively small player, Tower Vision is looking to exit the sector and has sought a valuation of more than $125,000 per completed tower. Bharti Infratel, ATC and private equity firm Carlyle have submitted first-round bids for acquiring stakes in the company. The bids, though preliminary, are reported to be valuing the company at $700 million.

Meanwhile, the three leading operators, Bharti Airtel, Idea Cellular and Vodafone, are reportedly working on creating a holding company structure to manage the entire infrastructure owned by them. The proposed holding company is likely to have four subsidiaries – Bharti Infratel, Indus Towers, and the tower assets of Vodafone and Idea Cellular outside the Indus Towers joint venture. A single entity housing the tower assets of all the three operators would result in the creation of the biggest tower company in the country, with around 170,000 towers.

Also, the year 2011 saw infrastructure providers shifting their focus to the problem of high energy costs. Energy expenses have been rising steadily for tower companies in the country, outstripping the growth in revenues. Power and fuel constitute a significant portion of the network operating costs – about 25-30 per cent. This is primarily because of low grid power availability and high dependence on diesel generators for energy needs.

In this scenario, infrastructure providers are of the view that there is a need for a paradigm shift in the business model, with the emergence of energy companies as a new link in the telecom value chain. Tower operators are of the view that a new business model, rescos (renewable energy management companies) or escos (energy management companies), should be set up with government support. Infrastructure providers, and the Tower and Infrastructure Provider Association  have suggested the promotion of such a model to the Department of Telecommunications.

The way forward

The year 2012 is likely to witness further consolidation in the tower industry. Also, infrastructure providers are likely to explore international markets for future growth. On the domestic front, around 150,000 new towers would be rolled out by 2014-15.

The commercial implementation of 3G and wireless broadband based on next-generation networks is likely to usher in further growth for the industry. Next-generation technology will primarily bring about an increase in tenancy on the existing tower base. The growing demand for data services is expected to augment the number of base stations per tower. The increased focus on rural penetration will also play a pivotal role in increasing the tower base. The focus in rural areas will be on erecting new towers in the short run.

The government has also chalked out extensive plans to promote the sector. In 2011, the Telecom Regulatory Authority of India (TRAI) came out with a consultation paper for the formulation of a telecom infrastructure policy. TRAI’s recommendations for the policy include extending essential infrastructure status to the telecom infrastructure segment, providing tax holidays to telecom infrastructure providers, elimination of multiple clearances and levies for tower installation, and promotion of in-building solutions. Also, the NTP 2011 is likely to allow active infrastructure sharing. These steps, if implemented, will give a major boost to the industry.