During the past decade, there has been significant development of telecom infrastructure in the country. According to industry estimates, telecom towers have grown by more than 30 per cent since 2006, resulting in a telecom tower base of over 450,000. In the past year, however, the growth in this segment has been slower. In 2012, the industry added less than 10,000 towers as compared to about 12,000 towers added in 2010, as per market estimates.
The slow growth was largely on account of the oversupply of towers in urban areas and viability and cost related issues in rural India. Further, having made huge investments in acquiring 3G spectrum and subsequently rolling out 3G services, operators curtailed their 2G network enhancement plans. Besides, the cancellation of 2G licences resulted in an uncertain policy and regulatory environment with many companies deferring their 2G and 3G roll-out plans, thereby impacting the telecom tower business. This development led to the tower industry focusing more on improving and increasing tenancies.
The challenges notwithstanding, analysts expect the number of towers to go up by 60,000 by September 2014 and the industry to grow by 25 per cent during the next five years.
Key players
Currently, there are nine telecom tower companies in the country, apart from the operators’ own tower assets. These companies have an estimated tenancy ratio of about 2, as per industry analysts.
Indus Towers – a 42:42:16 joint venture of Bharti Airtel, Vodafone and Idea Cellular – currently owns approximately 110,559 towers in 15 telecom circles (as per the company’s website). For the next two years, the company is aiming to operate 20 per cent of its sites on renewable energy, which, according to its officials, will mean that around 20,000 sites will be diesel free by end-2013.
GTL Infrastructure has a portfolio of over 30,000 towers across the country. Over the next two years, it will focus on signing fixed energy contracts to ensure that its cash flows are maintained and improved.
Viom Networks currently has over 40,000 towers across all 22 telecom circles in the country. It is the strongest player in neutral host-shared in-building solutions (IBSs).
Reliance Infratel’s tower portfolio comprises about 50,000 towers, of which around 33 per cent are linked with its optic fibre network. Its coverage spans 22 circles, covering more than 25,000 towns and 600,000 villages. However, it has been looking for a buyer as its parent company, Reliance Communications (RCOM), aims to offload the majority stake in it. Last year, two private equity funds, Blackstone and the Carlyle Group, had expressed interest in jointly acquiring the majority stake in Reliance Infratel. However, there has been no progress on this front since mid-2012.
Founded in 2007, Bharti Infratel has over 34,000 towers across 18 states and 11 circles. It also has a 42 per cent stake in Indus Towers. The company launched its initial public offering in December 2012 and reportedly raised more than
Rs 41 billion. It plans to utilise the proceeds to build new towers and upgrade its existing infrastructure.
Both MTNL and BSNL are looking to capitalise on their infrastructure to create additional revenue streams. MTNL has been sharing its passive and active infrastructure such as towers and core capacity with various operators. The company has about 1,400 towers and plans to add 700 towers in the coming year.
BSNL has rented out its tower slots to most leading private operators, including Tata Teleservices Limited (TTSL), Bharti Airtel and Aircel. Also, it intends to outsource the management of its tower and optic fibre cable network across the country to private telecom infrastructure companies.
Regulatory developments
Despite the initiatives taken by the Telecom Regulatory Authority of India (TRAI) to remove hurdles in the telecom infrastructure segment, companies in this space continue to face regulatory and policy obstacles. For instance, they are subjected to multiple clearances and levies by local civic authorities and state governments. Moreover, there are several instances of unnecessary delays on the part of local authorities to grant permission for erecting towers. All these have impacted the growth and deployment of towers.
Further, policy guidelines vary across the country, with each state having its own set of regulations. This has led to inconsistency in procedures and imposition of various levies for the installation of towers.
To address these issues, TRAI has, in the past two years, released two sets of recommendations: the Telecom Infrastructure Policy and the Approach Towards Green Telecom. According to TRAI’s recommendations on telecom infrastructure, all Category 1 infrastructure provider (IP-1) companies will be brought under a single unified licence regime. Thereafter, these companies will be allowed to install and share their active networks.
The recommendations include granting infrastructure status to the telecom tower segment, offering tax benefits for IP-1 companies under Section 80 IA of the Income Act, 1961, strengthening the scope of mobile virtual network operators, and reducing the charges imposed by local authorities for tower installation.
In 2012, the long-awaited move to grant infrastructure status to the tower sector came into effect. The segment is capital intensive and most tower companies face challenges in raising funds due to high borrowing costs and volatility in the equity market. Infrastructure status will entitle these companies to tax incentives.
Currently, the government provides tax holidays and other provisions under Section 80 IA of the Income Tax Act, 1961 to infrastructure companies in sectors like power, natural gas and ports.
While telecom is an essential infrastructure, companies in this space were deprived of such tax benefits. Granting infrastructure status, therefore, addresses the ambiguities in the tax issues related to the sector, wherein, in some cases, towers are taxed as an infrastructure property and in others as buildings. Infrastructure status will also promote investments in rural areas and incentivise private sector companies to participate in telecom infrastructure projects.
In a significant move, to encourage green telecom, TRAI made recommendations to promote the deployment of energy efficient technologies in order to reduce carbon emissions by the sector. As per the new rules approved by the Department of Telecommunications (DoT), it is mandatory for telecom companies to use renewable sources of energy for powering their towers. Telecom operators are also required to ensure that at least 50 per cent of all telecom towers in rural areas and 20 per cent in urban areas run on hybrid power (a combination of renewable energy and grid power) by 2015. The move aims to reduce the carbon emissions resulting from increased dependence on diesel.
Currently, over 65 per cent of a tower’s electricity requirement is met by diesel generator (DG) sets. Further, the mandate requires that by 2020, 75 per cent of rural towers and 33 per cent of urban towers should utilise hybrid power.
Key challenges
A major challenge faced by the tower industry is the lack of adequate and dedicated grid power. This results in towers being run on diesel, which is not only expensive but also unviable in the long run. Also, with the government enforcing strict guidelines pertaining to diesel usage, it is essential that the industry takes steps for the use of green energy to power its sites. In addition, 3G and LTE network roll-outs will not increase tenancies as these networks would cater largely to urban areas, which are already adequately covered. Towers are available in a city for even 2300 MHz frequency, which allows limited propagation. These next-generation services are, therefore, expected to give rise to a loading phenomenon on existing sites.
Another key challenge for the infrastructure sector is increasing energy costs. The industry is working on developing contracts that can reduce energy usage and, therefore, expenditure on energy.
Emerging tower trends
Some of the key emerging trends in the telecom infrastructure segment, according to Shubham Majumder, executive director, Kotak Mahindra Capital Company, are increasing deployment of alternative energy solutions (solar-DG hybrids), especially in rural areas; capex optimisation through modular tower build-outs and rapid deployment solutions; opex optimisation through renegotiation of operation and maintenance rates, reduction of site rentals, etc.; and deployment of IBSs.
As per Majumder, there is a major opportunity for tower operators in the active infrastructure space as telecom operators are cash strapped after paying steep 3G licence fees and are unlikely to be inclined to bear significant capex for rolling out new services.
Going forward, he says that the industry should look to decrease its debt levels. Also, excessive reliance on Korean, Chinese and Taiwanese financial institutions, which have been instrumental in providing vendors’ credit of late, is not desirable. “In order to ensure a healthy debt-equity ratio, the industry will need incremental equity investment. Moreover, several banks have set a criterion that incremental loans will be provided only to companies that are able to bring in incremental equity,” he says.
Future revenue drivers
According to Pankaj Agrawal, co-head, Analysys Mason, India, the future revenue drivers for the telecom infrastructure are as follows:
•Increasing coverage in select areas as none of the operators has covered all 450,000 villages.
•Currently, managed service agreements are structured in a way that 3G coverage does not require tenancy additions. Operators have to pay only around Rs 4,000 per existing tower to offer these services along with 2G services.
•The all-in, all-up model for active/passive sharing is likely to gain adoption. Under this model, an operator pays a fixed amount for energy usage, passive infrastructure, etc. Operators and original equipment manufacturers implemented this model in the past, but it was not successful due to a lack of coordination.
•Fibre backhaul network expansion has been considered by several operators, but microwave capacity and FTTx offload need to be considered for fibre demand projections. Using LTE technology under the National Broadband Plan will allow high speed data access in rural areas and be a key driver for fibre sharing.
Conclusion
The tower space is expected to stabilise in the coming years with a renewed focus on growth. Progress in this segment is likely to be driven by sharing and consolidation of infrastructure. A clear shift is on the cards – from a focus on new roll-outs to increasing tenancies. Also, the industry expects a large portion of the business to move from urban to rural markets as the teledensity in the latter areas is much lower.