After experiencing a slowdown for two years, the telecom infrastructure industry seems to be on a revival path with an increase in demand for new towers, higher tenancies, market consolidation and improved segment outlook. The recovery in the growth of the telecom industry in 2014 has been the biggest driving force behind the positive outlook for the telecom infrastructure segment. Telecom operators, which had been suffering the effects of regulatory overhang, declining voice revenues and highly leveraged balance sheets, are now exhibiting better financial performance as a result of the surge in the adoption of data services. Therefore, service providers are now increasingly focused on upgrading and ramping up their existing network, while simultaneously demanding the roll-out of new towers to deploy additional base transceiver stations (BTSs). This augurs well for the telecom infrastructure industry as the expansion of the 3G network and roll-out of the 4G network will drive demand for new tower sites and tenancies, thereby resulting in higher revenues for tower companies.

Despite the significant growth potential, the industry continues to face several regulatory and operational challenges, such as uncertainty regarding tower installation norms, right-of-way issues and finding suitable locations to deploy towers and optic fibre cable (OFC). Further, while the segment has been granted infrastructure industry status, tower companies have not been able to avail of the benefits that are offered under the status. In addition, adhering to the stringent renewable energy mandate and electromagnetic field radiation norms is turning out to be an uphill task for tower companies.

tele.net takes a look at the industry size and performance, key trends, investment plans of companies, and the key challenges in the telecom infrastructure space…

Industry size and company performances

Over the years, the Indian telecom infrastructure industry has seen substantial growth in terms of tower deployments, even though growth in new installations had dipped in 2012-13 and 2013-14. At present, there are over 425,000 telecom towers in the country, the majority of which are located in urban areas. The tower industry is highly fragmented; there are around eight independent tower companies, while service providers such as Vodafone India, Bharat Sanchar Nigam Limited (BSNL) and Idea Cellular have set up their own towers. This is despite the fact that the market has already seen consolidation in the past few years, with the acquisition of several independent tower companies including Xcel Telecom, Independent Mobile Infrastructure, India Telecom Infra and Essar Telecom Infra.

With operators, especially incumbents, continuing with their aggressive expansion strategy, the tenancy ratio of the industry has improved to 1.7. In fact, large independent tower companies like Indus Towers, Bharti Infratel and Viom Networks already boast of a tenancy ratio of over 2. This is likely to further improve in the future, as several companies host a single service provider at many of their tower sites, which offers scope for more tenancies. Moreover, network expansion by incumbents and new entrants, as well as 4G network roll-outs by Reliance Jio Infocomm Limited (RJIL), will result in a significant increase in tenancies in the next few years. RJIL, which is likely to launch a pan-Indian 4G network, has already signed tower infrastructure sharing contracts with several companies, including Indus Towers, Viom Networks, Ascend Tower, Tower Vision, GTL, ATC, Reliance Communications (RCOM), Bharti Infratel and BSNL. Given the scope of 4G network launch by RJIL, all these tower companies will see an improvement in their tenancies.  According to Capitel Partners, greenfield 4G network roll-out is likely to result in 75,000 tenancies over the next three years.

In the fibre cable segment, the majority of the infrastructure is owned by the service providers. BSNL has the widest and largest OFC infrastructure of about 600,000 rkm across the country. Meanwhile, Idea Cellular and Bharti Airtel had laid 193,625 route km (rkm) and 90,200 rkm of fibre cable respectively, as of December 2014. RCOM had 190,000 rkm of OFC across the country as of September 2014.

Despite an increase in the roll-out of fibre cable over the past few years, most tower sites do not have fibre connectivity at present. According to industry estimates, less than 15 per cent of the tower sites across the country are connected through an OFC network, as against a requirement of 90 per cent to ensure a seamless and effective data services experience. Industry experts, however, believe that operators are likely to lay OFC aggressively as data traffic on the networks continues to rise, a phenomenon that has been witnessed in mature markets.

Growth drivers and key trends

Higher data traffic to drive tenancies and demand for tower sites

During 2014, data services witnessed a tremendous growth in adoption on account of significant purchases of smartphones and an increase in the use of over-the-top applications. In fact, the growing data traffic has resulted in an improvement in the top line of operators, which have been struggling to contain the decline in ARPUs on account of cannibalisation of voice services, which still account for over 70 per cent of service revenues. For the quarter ended December 2013, Bharti Airtel and Idea Cellular recorded 83 per cent and 120 per cent year-on-year increases in data usage respectively.

With realisations from data services improving, operators are now inclined to increase network spending to support the growing data traffic. Although most Node B deployments (3G BTSs) so far have taken place through loading and co-locations on existing tower sites, industry experts are of the view that future deployments are likely to take place on new tower sites and lead to an increase in co-locations. Further, many operators that hold spectrum in both the 900 MHz and 1800 MHz bands are likely to migrate their 2G (GSM) networks to the latter band in order to free up the former band for 3G. Given that networks on the 1800 MHz band require almost double the number of tower sites to support the same number of users as on the 900 MHz band, the migration of GSM networks to the 1800 MHz band is expected to result in a rise in tenancies. According to Capitel Partners, such a network migration will lead to about 45,000 tenancies over the next three years.

Government initiatives and rural opportunity

While urban areas have seen a massive expansion in terms of network deployment, several rural regions continue to lack adequate telecom connectivity. Operators have made limited investments in rural areas vis-à-vis urban areas on account of low ARPUs, lack of grid power and higher cost of service delivery. However, this scenario is likely to change as the urban markets have become saturated and rural customers are increasingly demanding mobile services, which has improved the business case for these services.

To this end, the government has been pushing for network roll-out through initiatives such as the National Optical Fibre Network (NOFN) project and tower deployment in Naxal-affected areas, among others. Under the Rs 200 billion NOFN project, the government aims to provide broadband connectivity to 250,000 gram panchayats through the deployment of incremental OFC between the district level and the block level. Upon completion of the project in 2017, service providers will be given unbiased access to the broadband network and will be allowed to offer value-added services, besides broadband services. Meanwhile, the government is facilitating the deployment of 1,836 new BTSs in Naxal-affected areas at a cost of Rs 32.16 billion to enable security agencies to communicate in critical situations. Another project being implemented by the government involves the deployment of 8,000 towers in the north-eastern states at an investment of Rs 50 billion, in order to boost mobile connectivity in the region. All these projects are being funded through the Universal Service Obligation Fund.

Industry heading for consolidation

The first level of market consolidation occurred in 2009-10, when several independent tower companies that had a single tenant were acquired by new entrants to expand their respective footprints. The industry is now gearing up for the second wave of consolidation with several major tower companies considering the inorganic route to increase their footprint, while also striving for organic growth. Bharti Infratel, for instance, is considering acquiring the telecom towers of Vodafone India and Idea Cellular in seven circles where its affiliate Indus Towers does not operate. Similarly, ATC, which went on an aggressive buying spree when it first entered the Indian market, is once again looking at potential acquisition targets. ATC has reportedly emerged as the key contender for the purchase of 51 per cent stake in Viom Networks, which will be followed by a merger and ATC will retain the controlling stake. In end-2013, it also became apparent that the owners of Ascend Tower were looking to exit the market. Although the latest reports of the company’s owners planning to expand its tower portfolio seem to have put an end to the stake sale, the owners may still want to exit the market if they receive a good valuation for the company. Similarly, RCOM is willing to sell around 26 per cent stake in its tower unit, Reliance Infratel, as it continues to sell non-core assets to pare its debt, though only for a correct valuation. Meanwhile, Aircel is planning to buy back the towers it had sold to GTL Infrastructure in 2010. However, any deal will be a lengthy process as the two entities are entangled in a legal battle over the said asset.

Institutional and operational challenges

One of the key issues facing the telecom infrastructure industry is the green energy mandate issued by the government. As per the mandate, by 2015, tower companies are required to power 50 per cent and 20 per cent of their towers in rural and urban areas respectively through hybrid energy solutions. However, currently the industry is far short of the target set by the government. Not even 10 per cent of the total installed towers are currently using hybrid energy solutions. One of the biggest reasons cited by the tower industry for the slow adoption of green energy solutions is their high upfront costs and lack of a viable business model. Despite the tremendous decline in the price of solar modules, setting up a solar photovoltaic system entails significant investments and commitment from the owner to ensure sustainable operations. However, given their lack of expertise in energy management, tower companies have been slow in scaling up green energy solutions across their portfolios. Moreover, as the cost of generation of solar power is higher than conventional power tariffs, tower companies are not interested in using solar energy solutions for powering towers located in urban areas. Wind energy solutions, on the other hand, cannot be implemented at many tower sites due to the requirement of minimum wind speed so as to ensure adequate power generation.

Another issue raised by the tower industry is the proposal of imposing a licence fee on tower companies, as is levied on telecom service providers. Tower companies reckon that this move will be detrimental to the growth of the industry as it will put an extra burden on tower companies and the telecom sector. They are of the view that the imposition of a licence fee will lead to double taxation as service providers already pay a percentage of their revenues as licence fee. Also, tower companies have contended that they have signed master service agreements (MSAs) with telecom service providers for leasing space on towers for setting up BTSs. Given that these MSAs have long tenures, their terms cannot be modified until the contract is renewed. Consequently, tower companies will have to bear the cost of the licence fee.

Infrastructure service providers have also pointed out that securing approval from the regulatory authorities for setting up towers and laying fibre continues to be a lengthy and complex process. Further, although the central government has issued guidelines for setting up towers, there still seems to be a degree of uncertainty regarding state norms, as many state governments are yet to finalise their norms. On the upside, the norms issued by the Kerala government are in line with the centre’s guidelines, which have been welcomed by the telecom industry. Another positive development for the industry was the Bombay High Court issuing an interim order asking regulatory agencies to not take action against companies installing tower sites in schools, hospitals and colleges across Maharashtra.

Future outlook

The telecom infrastructure industry is poised for significant growth as the increasing demand for data services continues to push the industry to make investments in expanding as well as upgrading networks. For instance, Indus Towers has earmarked an investment of Rs 60 billion for the next two to three years and intends to set up 2,000-2,500 towers per annum during that period. Also, the focus would be on converting the existing sites and building new ones based on green energy solutions. Similarly, Viom Networks is planning to invest Rs 1.5 billion in the next one year to set up 1,000-1,500 towers across the country.

The infrastructure industry will gain further momentum if the government provides more clarity on policy and regulatory issues and offers incentives and tax rebates. The decision of the Department of Telecommunications to seek tax incentives for tower companies under Section 35AD of the Income Tax Act is a positive move, especially as these companies have not received the benefits offered through infrastructure industry status. However, the government also needs to ensure uniformity in state government norms for tower installation, which would give tower companies more visibility and reduce litigation.