“Around 40-50% of the lost tenancies can be regained gradually”

By Ankit Jain

With a strong wave of consolidation in the telecom industry, and its many ripples on the tower infrastructure space, how soon can these towers think of getting back into a pole position with happier tenancy ratios, government relief, and sustainable growth? ICRA Limited Assistant Vice President & Sector Head - Corporate Ratings Ankit Jain, in an interview with Pratima Harigunani, shares his views on some latest developments. Excerpts:

What is the state of tower infrastructure and growth in the telecom space in India? Has expansion and capex picked up this year? What effects have transpired after a major industry consolidation?

The telecom services industry in the past had more than 10 operators, resulting in healthy tenancy ratios for the tower companies. Post the consolidation in the services industry, tower companies witnessed sizable tenancy losses resulting in a decline in tenancy ratios. However, with the healthy increase in data usage in the recent past, there has been an increase in the tower rollouts and tenancy numbers. It is expected that if the telecom services industry structure remains intact, there will be a steady demand for towers, and the tenancy numbers are expected to increase steadily.

What is the state of tenancy ratios right now? If a Telco suffers survival due to profitability pressures and poor ARPUs, what domino effects can tower companies face, especially when VIL occupies a 35% tenancy share?

As stated above, the tenancy ratio for the tower industry has witnessed a decline to around 1.3-1.4 times with the consolidation in the telecom services industry. In case of further consolidation, it is expected that the tenancy ratio will decline further. For ICRA sample of tower companies – namely Indus Towers Limited, ATC Telecom Infrastructure Private Limited, Ascend Telecom Infrastructure Private Limited, and Tower Vision India Private Limited – VIL occupies around 35% share in the tenancies. In case of severe financial stress on this telco, we expect that these tenancies will face an exit. However, in such a scenario, with an increase in traffic on the remaining telcos, they will have to expand their network and take up additional tenancies. ICRA expects that around 40-50% of the lost tenancies can be regained gradually and the balance will be lost due to network alignment and redundancies.

The tenancy ratio for the tower industry has witnessed a decline to around 1.3-1.4 times with the consolidation in the telecom services industry.

You suggest that relief measures on license and spectrum levies can help ease out financial distress in the industry – would this trickle towards the tower industry too? How soon, if so?

The relief measures that we talked about will aid the telecom service providers and ease the financial stress in the services industry. With the improving the health of the telecom industry, the rollouts are bound to increase which will provide a fillip to the demand for towers and thus will increase the business potential for the tower industry.

What is the relative dominance of telcos, captive companies, independent tower companies in the telecom infrastructure space?

To start with, the telecom service providers owned the towers. They themselves incurred capex to expand the network. However, steadily, sharing of infrastructure started, telcos hived off their tower business to separate entities and towers became a separate industry. Further, telcos monetized their stakes in these tower companies, which led to the evolution of independent tower companies. As we stand today, a sizable share of the pie belongs to independent tower companies, while there would be some captive tower units as well (mainly with BSNL).

With improving health of the telecom industry, the rollouts are bound to increase which drive demand for towers and increase the business potential for the tower industry.

How can tower companies get greener when most power and fuel costs still work as pass-through costs towards operators?

The energy models have undergone a lot of change, starting with pass-through to a Fixed Energy Model (FEM) and then to a mix of both. FEM allowed tower companies to innovate on the energy front and earn margins on energy. This coupled with increasing ESG considerations turned the focus of tower companies towards green energy. Moreover, tower companies are again focusing on shifting the energy model back to FEM.

Jain is Assistant Vice President & Sector Head - Corporate Ratings, ICRA Limited

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