A Winning Strategy

Today, infrastructure sharing is hogging the limelight, thanks
to Reliance Telecom Infrastructure (RTIL), a subsidiary of Reliance
Communications. The company recently placed a 5% equity stake with a group of
leading institutional investors across the US, Europe, and Asia for $337.5 mn,
helping RTIL, which is valued at $6.75 bn. It is a big achievement considering
the fact that RTIL's valuation is around 22.5% of Reliance Communications'
valuation, ie, Rs 120,000 crore in July 2007. And, the company is eyeing a
valuation of $9 bn for RTIL by March 2008.

With this announcement things have started moving on the
infrastructure-sharing plank.

Idea has recently announced that its Board of Directors has
decided to de-merge the passive infrastructure of the company into a wholly
owned subsidiary, subject to all regulatory approvals. And, it is expected that
within six months we might see the Idea subsidiary getting a complete go ahead
for a separate subsidiary.

Bharti Infratel is one step ahead of Idea Cellular in this
respect. Recently, a court-convened meeting of all the shareholders took place.
"Things are on track and the whole de-merger process will be legally
completed within two months," says Akhil Gupta, group managing director,
Bharti Enterprises.

Tata Teleservices has floated a tender for commissioning of
3,000 new towers under infrastructure sharing in existing and new circles
through shared platform, and is in the process of finalizing partners for the
purpose. The company has already shortlisted partners and will soon take a call
in this regard. Spice has already given orders to TowerVision India and Quipo
Telecom Infrastructure (QTIL). Even BSNL has plans to share towers through the
USO project for which work has already started. However, there are some
operators who are still undecided, but are expected to take a final call this
fiscal.

The huge numbers on the tower front is throwing up new
opportunities for IP-1 (infrastructure provider-1) players. And, less the tower
subsidiaries, the better it is for IP-1 players, as they can get more towers
under their belt. It is good to know that lowering of Capex as well as Opex will
help operators to focus more on marketing and customer services, which need a
lot of attention from senior management. And, these services will get
complicated once operator crosses 100 mn mobile connections by 2010.

On the IP-1 front, there is a long list of companies of which
majority are Indian. There is also a mix of players focusing on pan-India
operations and players with limited coverage. There are some who are early
starters, and some others who are still studying the Indian market and chalking
out strategies for the future. The IP-1 players focusing on India include GTL
Infrastructure (GIL), Essar Telecom Infrastructure, QTIL, TowerVision, American
Tower, XCEL Telecom, TVSICS, Aster Infrastructure, Independent Mobile
Infrastructure (IMIL), and others. Of this majority have telecom turnkey or
investor background, whereas only Aster Infrastructure comes from a
manufacturing background.

The IP-1 Players

American Tower is one of the very late entrants in the country, though they
have been a leader in owning and operating wireless and broadcast communication
sites in North America. Recently, the company has set up a subsidiary in India.
Worldwide, the company has a portfolio of over 22,000 communications sites of
which 20,000 towers are in the US, and over 2,800 in Mexico and Brazil. In
addition to these the company also offers access to over 10,000 rooftop and
tower sites in the US that they manage for third parties.

Talking about India strategy, Amit Sharma, executive vice
president, president-Asia, American Tower, says, "The focus is to acquire a
small portfolio of towers for service providers, and to build nationwide
marketing of towers whereby existing towers are managed by others. The company
is focusing on countries where there is tremendous growth and multiple
operators. Currently the focus is on SAARC, Vietnam, Malaysia, Indonesia, and
the Philippines."

According to Prakash Ranjalkar, COO, GIL (operational in
fourteen circles), the company is planning to close the fiscal with 6,700 sites,
and plans are to add around 7,000 sites every year for the next two years. The
company's strategy is to focus on geographies where no operator has any
towers.

And, this gives them an edge over other IP-1 players. Apart from
this, the company is also focusing on having 30% towers on a proactive basis, so
that they can do their own radio planning and then approach operators for
infrastructure sharing for that location, thereby providing increased coverage
and quality to operators in those geographies.

Already operational in Punjab, Haryana, UP(E), UP(W), Karnataka,
Madhya Pradesh, and Gujarat, QTIL has set up close to 1,500 towers and is now
expanding services in Rajasthan, Andhra Pradesh, Bihar, West Bengal, Orissa, and
Jharkhand. On the other hand, TVSICS is focusing on circles like Andhra Pradesh,
Kerala, Gujarat, and Madhya Pradesh, and plans are for expanding to new circles
like Rajasthan, Delhi, UP (E), and UP (W).

TVSICS is focusing on four circles of Andhra Pradesh, Kerala,
Gujarat, Madhya Pradesh and planning to start services in another four circles
soon. The company has already commissioned 100 sites and plans are to close the
fiscal with 1,500 sites of which 300 will be proactive sites (sites where they
will set up towers on their own and then populate it with operators).

With a pan-India play, Essar Telecom Infrastructure has
completed around 2,000 sites and plans are to complete 6,000 by FY '08.
"The company is focusing on circles like Maharashtra, Mumbai, Gujarat,
Tamil Nadu, Kerala, Andhra Pradesh, Madhya Pradesh, UP (E), UP (W), Bihar,
Orissa, and Rajasthan," says Ajay Madan, CEO, Essar Telecom Infrastructure.

IMIL is a part of Independent Mobile Infrastructure, Mauritius.
The company has a two-fold strategy for the Indian market. The first strategy is
to own, operate, and lease passive infrastructure, and the second, to acquire
passive infrastructure and lease it back.

IMIL is actively supported by investment bankers, private equity
players, and high networth individuals. It is actively looking at a pan-India
play, but is not willing to share its plan and strategy.

There is a second category of IP-1 players whose focus is on
limited circles, as they are not looking at pan-India operations initially. The
companies include TowerVision, Aster Infrastructure, and XCEL Telecom.
TowerVision is focusing only on three circles-Karnataka, Haryana, and Punjab.
"The company has built up around 800 sites and plans are on to build around
1,200 by December 2007," says Amit Ganani, CEO, TowerVision. Aster
Infrastructure is also focusing on three circles-Karnataka, Punjab, and Andhra
Pradesh. As per industry information, New Silk Route Private Equity (NSR),
Mauritius has bought 72.5% stake in Aster Infrastructure for Rs 232.58 crore.
NSR is picking up stake in three tranches. In the first tranche, the company has
bought 32% and the other two tranches will be 17% and 23.5% respectively. It is
also one of the seven buyers that bought 5% stake in RTIL for $337.5 mn.

XCEL Telecom is presently operational in two circles and the
third circle is expected to be operational in a month's time. Sandip Basu,
managing director and CEO, XCEL Telecom, says that to start with, the company is
planning to have a run rate of 50 towers per circles a month, and plans are to
scale it to 100 towers per circle a month in the next three months.

The Success Mantra

The Indian market is big. But, is it big enough to accommodate more than a
dozen players? If one looks at the market, there are three tower subsidiaries of
which two are already formed, whereas the third is in its formation stage. There
will be some more additions on the tower subsidiary front.

To be successful in the Indian market, both tower subsidiaries
and IP-1 players have to focus on significant reduction of Capex and Opex for
the given set of towers vis-à-vis operators' Capex and Opex on a standalone
basis. Not only this, operators have to share towers with as many operators as
possible to keep rentals significantly lower vis-à-vis standalone players.

It is good to know that Reliance Telecom Infrastructure and
Bharti Infratel have been formed for creating value. Both these companies will
start with a large number of towers under their belt. For instance, on day one,
RTIL had 14,000 towers, whereas Bharti Infratel will have around 50,000 towers
when the company comes into existence. And, by the end of this fiscal, RTIL will
have around 40,000 towers whereas Bharti Infratel will have around 65,000
towers. The numbers are impressive and will take Bharti Infratel and RTIL to be
the number one and number two players worldwide, since the number one player,
American Tower, has only 22,000 plus towers. In order to be at par with American
Tower on the tenancy front, both companies have to focus a lot on increasing the
tenancy ratio, and this would not be easy considering the fact that they come
from the operator background, where neutrality is a big question mark. It would
be interesting to see how the two will ensure independent operations without
divesting majority shareholding in the beginning. Divestment is the only path
both companies can follow, since more independence means more prosperity for
tower subsidiary. And, the earlier they do, the better it is in terms of tenancy
ratio and better valuation for tower subsidiary. Since the barometer of success
of any player working in the infrastructure sharing space is its tenancy ratio,
the greater the tenancy ratio, higher the valuation.

"To provide independence to Bharti Infratel, we will have a
minority position by diluting our equity and induction of private
investors," says Akhil Gupta. "Within 2-3 years, we would like to list
the company," he adds.

Speaking on neutrality, Ramesh Venkat, group president, Finance
and Treasury, Reliance ADA Group says, "We will keep an arm's length, and
the contract between RTIL and Reliance Communications would be the same
vis-à-vis other operators and RTIL." The company says that it is neutral
and independent, and will increase the tenancy ratio.

Knowing this limitation, Bharti and Vodafone wanted to play
smart by signing an MoU. According to Akhil Gupta, the MoU had two parts: First,
sharing of infrastructure without any equity linkages, and second a deliberate
attempt should be made to merge both companies under one roof. But, some sources
say the talks have failed, since the two companies have not been able to decide
who will be the majority stakeholder in the JV company, and the economic benefit
each party will get out of the final deal. And, it is not easy to understand the
complications. But, if they patch up, it will be a big disadvantage to IP-1
players.

Tower subsidiaries do have problems. Other operators will not be
comfortable sharing their business plan, as there is fear of passing competitive
information to the parent company. Understanding this limitation, tower
subsidiaries will initially focus more on setting up a large number of towers to
gain competitive advantage in FY '09, and later they will focus on increasing
tenants.

Speaking about the RTIL strategy, Ramesh Venkat says, "This
year, there are not too many outside tenants. But in FY '09 they will
increase, depending upon the rollout plans of other operators."

Being a tower subsidiary, the parent company will take an anchor
tenant position in a majority of the towers, thereby taking prime slot. This is
not beneficial for the number two and three tenants. The other question is how
many existing towers can be shared since majority of the towers are deployed in
urban areas, and majority are on rooftops where a maximum of two can share. Yet
another question is: will existing ground-based towers support multiple tenants
or do they need to be conditioned for multiple operators? And, the cost incurred
and timeframe in conditioning these towers will not make them ready for day one
with majority of towers.

On the other hand, IP-1 players have lot of advantage vis-à-vis
operator subsidiaries. The IP-1 players have neither the network nor the tower
to start with. But, they have an advantage vis-à-vis operator subsidiaries, as
they are neutral and independent in nature. Apart from this, IP-1 players should
constantly focus on quality of service and cost reduction, which can be further
passed on to operators. Plus they have to focus on fast rollout of services.
Even pan-India presence will provide a lot of cost advantages vis-à-vis
localized presence. So, a majority is looking at a pan-India presence.

According to Ajay Madan of Essar Infrastructure, the IP-1
players have an advantage as they will take care of timely delivery and also
provide good uptime. Whereas Arun Kapur, group president and CEO, QTIL says,
"With the focus on newer technologies, the quality of IP-1 towers is
significantly higher (as they do not have any legacy network)." ST Rizvi,
head, Business Development, TVSICS says, "We have to build in one year what
service providers have built in 8-10 years." So, there is a huge
opportunity for IP-1 players.

Apart from organic growth, IP-1 players are also looking at
inorganic growth. And, as and when these opportunities do come up for
evaluation, IP-1 players would take up these opportunities to increase their
dominance in their category, thereby helping them to grow at a fast pace in this
fast growing Indian communications market.

The Innovation Mantra

In order to reduce Capex and Opex, tower subsidiaries and IP-1 players are
focusing on a lot of innovation activities including site design, shelter
design, power management, use of non-conventional energy, and others. Not only
this, the players also have to grapple with a lot of engineering, business and
technology complexities as and when they talk about coexistence of 2G, 3G, and
WiMax under the same roof. The players also should do a lot of balancing to
provide error-free service in both urban and rural areas. In urban areas, the
focus would be more on providing interference-free service irrespective of
technologies. Whereas in rural areas, the focus would be more on providing
increased coverage. So the players will focus on design, power management, and
shelters, and this will decide who will top the table.

For cost reduction, Amit Sharma, executive vice president, Asia,
American Tower, says, "We will focus on optimum design for multiple users,
since we have the expertise."

For others, it is reduction on the power front. Since tower
companies are focusing on passive infrastructure, the players can help operators
in reducing power expenditure. For example, QTIL is focusing on windmill DG,
inverter-based solution, and hybrid DG, while GIL is focusing on hydro cells and
green shelter. The company has also formed an energy management cell for
strategic tie-ups and is also looking at non-conventional energy from a
long-term perspective.

Apart from innovation, the government also has to take decisions
at a fast pace. The DoT is yet to give a final go ahead on backhaul sharing,
which is long pending. And, this will also have an impact on USO projects, as
IP-players are totally dependent on operators for backhaul sharing as well as
spot frequency. For faster rollout of service, DoT has to give permission at the
earliest to share backhaul.

The infrastructure-sharing project also requires huge investment
and long gestation periods. And, finally, players with deep pockets and faster
implementation will be successful in the long run.

Pravin Prashant


pravinp@cybermedia.co.in