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ICRA Rating Feature March 2009
TELECOM INFRASTRUCTURE INDUSTRY IN INDIA
Anjan Ghosh firstname.lastname@example.org +91-22-30470006 Vikas Aggarwal email@example.com +91-124-4545300 Nidhi Marwaha firstname.lastname@example.org +91-124-4545337
1.0 India is among the fastest growing mobile markets in the world: India, the second largest mobile market in the world, is also among the fastest growing mobile markets globally. The total number of mobile subscribers in India (i.e., the subscriber base) Chart 1: Growth in Indian Mobile Subscriber Base has increased from 6.4 million in 400 346.9 March 2002 to 350 around 350 million 300 261.1 in December 2008, 250 at a compounded 200 annual growth rate 166.1 (CAGR) of 81%, 150 90.1 aided by a 100 52.2 significant increase 33.7 13.0 50 3.6 6.4 0.9 1.2 1.9 in network 0 coverage and a continual decline in tariffs and handset prices.
Subscriber Base (in million)
Source: Telecom Regulatory Authority of India (TRAI) Database
Table 1: Mobile Subscribers as Percentage of Total Telephone Subscribers
Africa Americas Asia Europe Oceania India
Growth in Mobile Base CAGR (2002-07) 48.9% 20.7% 27.1% 16.8% 11.7% 78.2%
Mobile Subscribers as % of Total Telephone Subscribers (December 2007) 89.3% 69.7% 70.0% 72.9% 69.2% 85.6%
Source: International Telecommunication Union (ITU) Database
India, a relatively late entrant into mobile services, has benefited from a significant decline in mobile network costs during the last three to four years. As compared with a capital cost of US$50-90/subscriber to provide mobile service, it costs as much as US$200-350/subscriber to provide fixed-line services. This and the added benefit of mobility have led to stagnation in the total fixed line subscriber base, which along with the significant growth in the mobile base has translated into India having one of the highest ratios globally of mobile subscribers to total telecom subscribers.
Thus future growth is likely to come largely from Class B and C circles and rural areas. which is relatively lower as compared to other countries as depicted in Chart 2.icra. larger players like Bharti Airtel Limited. with coverage reaching around 90% and 35%. India had a mobile penetration of around 27%. mobile growth in India is expected to continue in the short to medium term albeit at a lower level because of the larger base effect. coverage in the Class B and Class C cities is still low at 15-25%. ICRA’s estimates ICRA Rating Services www.0 Despite the growth. Chart 2: Mobile Penetration Levels: India vis-à-vis World Spain Malaysia 109. within these circles growth has largely been concentrated in the urban areas while penetration in the rural areas remains lower.90% 91.in Page 2 . TRAI Database.0 Growth expected to be led by B and C Class circles: The growth in the domestic telecom industry has largely been concentrated in the Metros and Class A circles in the past decade. ICRA’s estimates Note: Mobile penetration does not account for one person having more than one connection Source: Ministry of Statistics & Programme Implementation Database. Reliance Communications Limited. Moreover. However. Mobile Subscriber Base (Dec’08) 99% 95% 97% 70% Circle (Category) 36% 33% 37% 37% 28% 44% 16% 48% 35% 30% 20% 20% 39% 19% 22% 14% 16% 37% 20% 30% 40% 50% 60% 70% 80% 90% 100% Low penetration areas offer higher growth potential Mobile Subscriber Base (Dec’08) Mobile Penetration Source: TRAI Database.90% 93. respectively.30% 85.32% 0% 20% 40% 60% 80% 100% 120% France Japan US Pakistan India Mobile Penetration Source: Market Sources Note: Mobile penetration data for US pertains to June 2008 3. and Bharat Sanchar Nigam Limited (BSNL) are largely focusing on increasing their geographical coverage in Class B and C circles.60% 84% 55. Given the moderate penetration levels at present. mobile penetration remains moderate: As on end September 2008. Keeping this in view.90% 27. Chart 3: Circle-wise Mobile Penetration (Dec’08) Delhi (Metro) Mumbai (Metro) Chennai (Metro) Kolkata (Metro) Karnataka (A) Andhra Pradesh (A) Tamil Nadu (A) Gujarat (A) Maharashtra (A) Kerala (B) West Bengal (B) Punjab (B) Haryana (B) Rajastan (B) Madhya Pradesh (B) Uttar Pradesh (B) Himachal Pradesh (C) Orissa (C) Jammu & Kashmir (C) Bihar (C) Assam (C) North-East (C) 0% 10% Chart 4: Circle-wise Population vs.Telecom Infrastructure Industry in India March 2009 2.
This is also partly on account of the fact that these four operators have Vodaone. 17. featuring 10 mobile Chart 8: Market-share Distribution–Mobile Subscribers (Dec’08) operators. competition is expected to intensify further.0 Conservation of capital .in Page 3 . Bharti Airtel. ICRA Rating Services Tata Teleservices.6% their presence in a larger number of circles as compared with other players.5% Source: TRAI Database www.7% BSNL/ MTNL. namely Bharti Airtel Limited. Assuming Capital Expenditure of USD 70 per subscriber and 1 USD=Rs. taxes. 4. together Idea + Spice. the margins and 15% return indicators may come under pressure as 10% ARPUs continue to fall. 200 175 150 125 100 Sep-08 75 -15% ARPUs (Rs.2% Reliance Communication s. Chart 7: Impact of Declining ARPUs on IRRs at Different EBITDA Margin Levels most telecom operators were able to improve their earnings before interest. average revenues per user (ARPUs) have moved south over the years.6% Vodafone Essar Limited and BSNL. 5% 0% -5% -10% The chart alongside broadly illustrates the impact of declining ARPUs on the internal rate of return (IRR) at different EBITDA margins. with costs being amortised over a larger base and steps being taken to rationalise costs.icra. Aircel. 9.6% 0. in 20% the current market conditions. 11. per month) 550 500 450 400 350 300 Mar-07 Mar-08 Mar-06 400 350 300 250 200 150 400 350 300 250 200 150 100 Jun-06 Jun-08 Jun-07 100 Jun-07 Jun-06 Jun-08 Dec-06 Dec-07 Dec-05 Dec-07 Dec-05 Dec-06 Sep-07 Sep-07 Sep-06 Sep-08 Sep-06 ARPU MoU ARPU MoU Source: TRAI Database Source: TRAI Database Internal Rate of Return 5.the need of the industry: In the past. Chart 5: All-India ARPU & MoU Trend–GSM MoU (per Subscriber per month) Chart 6: All-India ARPU & MoU Trend–CDMA MoU (per Subscriber per month) 450 ARPU (Rs. 17. operations can be unviable at the current level of incremental ARPUs. for new operators especially whose margins are low because of the high set-up costs. With licences being granted to some of the existing operators for new circles and also to new entrants.1% 0. 14.7% mobile market share.1% BPL/ Loop.0% account for almost three-fourths of the entire 24. Reliance Communications Limited. of which four. 0. However. depreciation 25% & amortisation (EBITDA) margins. The movements in the ARPUs and minutes of usage (MoUs) for global system for mobile communications (GSM) and code division multiple access (CDMA) operators are presented in Charts 5 and 6. Per month) IRR at 30% margin IRR at 40% margin IRR at 25% margin Source: ICRA’s estimates.50 6.0 Competition set to intensify further with market liberalisation: The Indian mobile sector is an intensely competitive industry.0 Addition of low usage subscribers and competitive pressures lead to fall in ARPUs: With growth coming from the lower economic strata and on account of strong competition in the mobile industry. The competitive matrix is illustrated in Chart 9.Telecom Infrastructure Industry in India March 2009 4. Thus. HFCL. Sistema Shyam. per month) 550 500 450 400 350 300 Mar-06 Mar-07 Mar-08 450 ARPU (Rs.
icra.0% 18.7% 15.7% 34.1% 31.0% 21.0% 25.6% 23.7% 20.8% 25.6% 15.2% 17.6% 16.9% 3.9% 11.6% 5.8% 24.2% 23.6% Reliance Communications 15.Dec'08 GSM 85.4 0.7% 13.7% 27.4% 16.0% 9.0% 12.9% 12.7% 30.7% 19.4 31.8% 10.5% 30.1 0.9% 4.1% 29.2% 19.5% 18.1% 31.0% 31.4% 8.4% 1.7 Reliance Communications GSM & CDMA BSNL/ Sistema Swan MTNL Tata Tele Vodaone Idea/ Spice Aircel HFCL Shyam BPL/ Loop Unitech Telecom Stel Datacom GSM & CDMA CDMA GSM GSM GSM CDMA CDMA GSM GSM GSM GSM GSM 61.7% 14.3% 1.4% 14.7% 25.5% 18.2% 2.8% NL NL NL NL NL NL NL NL Stel NL NL NL NL NL NL NL NL NL NL NL NL NL NL NL NL NL Datacom NL Source: TRAI Database.2% 30.2% 3.4 1.1% 0.7% 17.5% 37.9% 31.7% 6.3% 8.6% 34.1% 14.0 16.3% 1.4% 5.0% 6.0% 23.4% 1.5% 23.0% Idea/ Spice 11.0% 0.4% 19.2% 23.8% 13.1% 1.9% 13.0% 2.1% 19.2% 12.8% 11.5% 22.6% 17.0% BSNL/ MTNL 9.2% 12.9% 6.0% 30.4% Unitech NL 1.2% Vodaone 19.9% NL NL NL NL NL NL NL NL NL NL NL NL BPL/ Loop 11.9 38.0% 28.3% 11.1% 11.2% 24.4% 14.3% 0.8 60.9% Aircel 26.9% 0.3% 26.1% 16.2% 14.2% 24.0% 23.3% 14.8% 23.5% HFCL NL NL NL NL NL NL NL NL NL NL 2.0% 14.9% 22.9 Licensed Circles (Dec'07 vis-à-vis Sep'08) 25 Competitive Positioning .9% 16.2% 17.5% 12.4% 4.1% 23.5% 7.4% 23.9% 9.1% 11.9% 14.0% 12.6% 17.0% 5.6% 0.0% 13.2% 6.6% 22.9% 7.3% 48.1% 19.1% 10.New Entrants 25 23 23 23 23 21 22 17 Number of Circles Number of Circles 20 15 10 5 0 20 15 13 14 13 10 5 0 Sistema Shya m BPL/ Loop Unitech Da ta com Swa n Telecom 6 6 Stel # of circles licensed (Dec'07) New circles licensed between Jan'08-Sep'08 Licensed circles Sta rt-up spectrum a va ila ble LEGEND: Licensed No Licence Category Circles Delhi Mumbai Metros Chennai Kolkata Maharashtra Gujarat Class 'A' Circles Andhra Pradesh Karnataka Tamil Nadu Kerala Punjab Haryana Uttar Pradesh (W) (including Uttaranchal) Class 'B' Circles Uttar Pradesh (E) Rajasthan Madhya Pradesh (including Chhattisgarh) West Bengal (including Andaman & Nicobar) Himachal Pradesh Bihar (including Jharkhand) Orissa Class 'C' Circles Assam North East Jammu & Kashmir Circle-wise Market Share of Existing Wireless Operators (December 2008) NL Bharti Airtel 22.1% 24.9% 29.5% 0.1% 12.9 0 0 0 0 Total 346.9% 25. ICRA’s estimates ICRA Rating Services www.7% 17.in Page 4 .0% 13.6% 14.6% 30.1% 18.5% 15.3 50.2% 22.5% 17.4% 7.4% 17.7% 16.6% Sistema Shyam Swan Telecom Circle-wise expected number of operators 12 12 12 11 12 12 12 12 12 12 12 12 12 12 12 11 11 12 12 12 12 12 12 Tata Tele 21.2% 43.Telecom Infrastructure Industry in India March 2009 Chart 9: Competitive Matrix Pan-India Operators ---------------------------------------------------------------------------------Regional Operators ---------------------------------------------------------------------------------New Entrants Bharti Airtel Existing base of operations Subscriber Base (million) .7% 15.8% 13.6% 4.5% 16.1% 14.9% 4.7% 0.
etc. is beneficial for all parties involved as it brings along significant operational as well financial savings. ICRA Rating Services www. with increasing competition posing an urgent need for telecom companies to expand their coverage and sharpen their focus on core operations so that they can sustain and improve their market position. Key components include: Spectrum (radio frequency) Base tower station Microwave radio equipment Switches Antennas Transceivers for signal processing and transmission. thus enabling the companies to minimise duplication of efforts and costs and improve profitability. sharing of infrastructure. Overall. According to ICRA’s estimates. passive infrastructure accounts for 60-70% of the total cost of setting up a wireless network.in Page 5 . etc. the same has been a critical area of operations for telecom companies in the past.0 Passive infrastructure sharing (tower-sharing) gaining signficance: Passive infrastructure being one of the most important components of a mobile network.icra. passive as well as active. However.Telecom Infrastructure Industry in India March 2009 7. Chart 10: Constituents of a Mobile Network Mobile Networks Passive Infrastructure or Non-Electronic Infrastructure Backhaul Active Infrastructure or Electronic Infrastructure The backhaul part of the network consists of the intermediate links between the core of the network and the various sub-networks Key components include: Steel tower/antenna mounting structures Base tower station shelter Power supply Battery bank Invertors Diesel generator (DG) set for power backup Air conditioner Fire extinguisher Security cabin. passive infrastructure has assumed the status of an independent industry during the past few years.
8 million. where there is paucity of real-estate space.). ground-based towers (GBTs) are taller (typically 200 to 400 feet) and are mostly used in rural and semi-urban areas because of the easy availability of realestate space there.1 Functioning of a Tower Infrastructure Company: A tower infrastructure company provides passive infrastructure on a sharing basis to telecom operators. Provision of turnkey solutions to telecom companies such as sourcing of equipment. keeping in view the network rollout plans of prospective customers. which are generally placed on the roofs of highrise buildings. typically. while GBTs can accommodate up to six tenants. RTTs can accommodate two to three tenants.1. and other binding terms and conditions between the two parties.icra. ICRA Rating Services www. (i) Ground-Based Tower: Erected on the ground. 1. Shelter Room - DG Set - 7. etc. apart from factors such as location and geographical conditions (wind speeds. which in turn determines the capacity of the towers.2 Master Service Agreements A tower infrastructure company normally enters into separate Master Service Agreements (MSAs) with its occupants/tenants. Provision of support services such as backup power. testing and maintenance. depending on the height of the tower.1. The role of a tower infrastructure company may be summarised as follows: Site planning. type of terrain. 7. Typically. are shorter (than GBTs) and more common in urban and highly populated areas. including entering into long-term agreements with land owners. Hence. Site acquisition. GBTs involve a capital expenditure in the range of Rs. 2. and clearly spell out the overall tower requirements of the tenants. Roof-Top Tower (RTT): Roof-top towers (RTTs). (ii) It is the height of a telecom tower that determines the number of antennas that can be accommodated. of necessary regulatory Figure 1: Telecom Tower Structure with Key Components Antennas Microwave Feeders - - Steel Tower - Erection and commissioning of tower and allied equipment. MSAs are signed between tower infrastructure companies and telecom operators (tenants).1 Types of Towers Telecom towers are broadly classified on the basis of their placement as Ground-based and Roof-top. air-conditioning and security. Obtaining approvals. these involve a capital expenditure of Rs.in Page 6 .4 to 2.5 to 2 million.Telecom Infrastructure Industry in India March 2009 7. the pricing terms.
tower infrastructure companies may charge a premium over the standard rentals. discounts range from 10 to 20% for twin sharing and from 20 to 30% for triple sharing.icra. 8. etc.). Bharti Airtel Limited. with provisions of periodic revision (mostly annual). and Tata Teleservices Limited have hived off their tower assets into separate tower infrastructure subsidiaries. the rentals may also be computed as a percentage of the capital invested. For instance. ICRA Rating Services www. a larger number of sites may mean higher discounts for the telecom operator. uptime for regular and strategic sites. The rentals stated in the MSAs are generally applicable over the tenure of the contract. Location: In the case of strategically located sites (congested areas. an MSA specifies the following terms and conditions: Table 2: Key Terms under MSAs between Tower Infrastructure Companies and Telecom Operators Rentals are specified. and Independent tower infrastructure companies (ITICs) 8. which has an estimated portfolio of around 85.0 Industry Structure: At present. Reliance Communications Limited. Variable Costs like Fuel and Energy Such costs are charged from tenants on the basis of their Charges actual consumption. So. any approvals pertaining to active components are largely obtained by the telecom operators. Wi-max. Tenure The tenures of MSAs generally range between 10 and 25 years. Reliance Infratel Limited. if a player has entered into an agreement with a tower company for its GSM services and thereafter wants to install additional equipment for alternative services (Third Generation (3G). city centre. namely Bharti Infratel Limited. At present. and also the penalties on tower infrastructure companies in the case of failure to achieve the same. CDMA. Moreover. In some cases. all the approvals pertaining to passive infrastructure are obtained by the tower infrastructure company.in Page 7 . there are broadly two kinds of operators in the domestic tower infrastructure industry: Tower infrastructure subsidiaries. each active electronic module is considered a separate tenant.1 Tower Infrastructure Subsidiaries: In India. Operating Expenses Fixed Charges Expenses such as security and maintenance are usually borne by the tower infrastructure companies.000 towers. Approvals Generally. Space/Ground Rental Space/ground rentals are usually borne by the tower infrastructure company. Lock-in-Period Most MSAs specify a lock-in period. depending on factors such as: Rental Type of tower (GBT or RTT): Tower rentals are normally higher for GBTs as compared with RTTs. Statutory Clearances/ MSAs clearly specify the list of approvals and clearances to be taken by the tower companies. highways) and in hilly terrains. the same would be treated as additional tenant(s) for the purpose of the agreement. which are the spun-off tower divisions of the telecom-operator companies. tower infrastructure companies usually pass on a percentage of the cost saving to their tenants. Number of sites: Tower infrastructure companies may also offer discounts on standard rentals. and Wireless TT Infoservices Limited. there is generally a provision of penalty on the tenant. depending on the number of sites to be rolled out in accordance with the MSA. However. Tenancy Generally. and other operations and maintenance parameters. Tenure: Tower infrastructure companies usually offer more attractive terms for longer tenure MSAs as they lower occupancy risks for them.Telecom Infrastructure Industry in India March 2009 Broadly. which may range from 2 to 5%. Also Bharti Infratel Limited together with Vodafone Essar Limited and Idea Cellular Limited in a joint-venture agreement has created India’s largest tower infrastructure company – Indus Towers Limited. Increase in Variable Costs Most MSAs also provide for pass-on of any escalations in variable costs to the tenants. respectively. Any excess over a pre-specified level is generally shared with the tenants. Penalty Clauses Rollout: Usually MSAs provide for penalties for delay in the deployment of towers beyond the date specified in the agreed rollout plan. Service Level: Most MSAs specify the services levels with respect to power availability. in the case of termination of contract by the telecom operator during the lock-in period. Level of sharing on towers: As sharing increases.
which in turn may serve to attract other tenants. lower operating costs. Xcel Telecom Private Limited. in certain cases. Vodafone Essar Limited. 8. Moreover. Under the anticipatory approach however. and Idea Cellular Limited Tata Teleservices Limited’s subsidiary WTTIL merged with Quippo Telecom Infrastructure BSNL. 1 Now merged with WTTIL. are usually at a disadvantage as compared with tower subsidiaries as ITICs do not have assured occupancy on their tower portfolios. a number of ITICs have ventured into the domestic telecom tower industry. ICRA’s estimates Existing Tower Portfolio ~9. among others.000 ~ 70. Tower Portfolio ~ 44. and the terms of the contract are specified beforehand in the MSAs signed by the two parties.icra. and a favourable capital structure.000 towers ~2000 These companies have their business model based largely on the following two approaches: Contract Approach Anticipatory Approach Under the contract approach. 8. ICRA’s estimates Hiving off of tower divisions into separate companies is strategically beneficial for telecom operators as it leads to significant unlocking of value while simultaneously improving operational and capital efficiencies. The latter model involves higher business risks as the tower company may not be able to achieve reasonable tenancy for its tower infrastructure and at profitable terms.500 towers ~1.in Page 8 .000 towers ~1. Table 4: Illustrative List of Some Third Party Tower Companies in India Company Name GTL Infrastructure Xcel Telecom Essar Telecom Infrastructure Aster Infrastructure Others Source: Market sources.3 ITICs versus Tower Companies: ITICs. as most large telecom companies in the country have their own tower subsidiaries. Moreover. Aster Infrastructure Private Limited and TVS Interconnect Systems Limited. Nevertheless.2 Independent Tower Infrastructure Companies: Over the past few years. in whose case credit quality can also be a concern. GTL Infrastructure Limited.000 Source: Market sources. Essar Telecom Infrastructure Limited.000 ~18. ITICs differentiate themselves by offering flexible payment terms to mobile operators (for instance. tower subsidiary of Tata Teleservices Limited ICRA Rating Services www. while the tower infrastructure subsidiaries gain an advantage in terms of an assured occupancy from their parent. tower companies set up tower sites going by the requirements of the telecom operators. especially those following the anticipatory approach.Telecom Infrastructure Industry in India March 2009 Table 3: Tower Portfolios of Operator-Promoted Tower Infrastructure Companies/ Telecom Operators Company Name Reliance Infratel Limited Bharti Infratel Limited Indus Towers Limited Wireless TT Info Services Limited (WTTIL) + Quippo Others Background Reliance Communications Limited’s subsidiary Bharti Airtel Limited’s subsidiary Joint venture of Bharti Infratel Limited. tower companies set up tower infrastructure at sites with reasonable demand potential and subsequently invite telecom operators to set up their network on these towers. Mahanagar Telephone Nigam limited (MTNL). backended payment structure). which enables the mobile operators to reduce their costs in the initial years. Tower Vision India Private Limited.000 ~ 85. These include. Quippo Telecom Infrastructure Limited 1. the market for ITICs consists largely of regional operators and new entrants. The parent telecom company benefits from reduced incremental capital requirements.000 ~ 27. ITICs are in a better position to address the needs of growing telecom operators who have recently received licences and spectrum to launch operations in new circles because of flexible rollout plans that are more suited to new entrants. Sistema Shyam TeleServices.500 towers ~4. Aircel etc.
750 46% 48.6% 14. Stable and predictable cash flow business: Once a tower asset is rented out.450 20.000 (B) Operating Expenses * 18. tower companies are generally highly leveraged.444 67.333 1.5 to 2 million.000 27.08% 15. operations and maintenance (tower) etc.000 34.444 30. security expenses.583 -7.8% 14.333 1. particularly the ones borne by the tower company such as security and maintenance and ground rent.573 40.4 to 2.42% Source: ICRA’s estimates *Includes site rentals.550 71% 69.333 1.817 62. Some of these expenses can vary significantly with location ** Assuming capital expenditure to be funded at a debt: equity ratio of 2:1 ICRA Rating Services www.000 17.Telecom Infrastructure Industry in India March 2009 9.444 51.444 (F) Profit before tax (PBT) PBT as % of Gross Revenues -17.000 17.000 68. a ground-based tower requires a capital expenditure of Rs. the larger companies with a bigger and geographically spread out portfolio of networks may be able to get rentals for the towers in advance and also obtain better credit terms from their suppliers.000 34. Low working capital requirement: The tower business is also characterised by low working capital requirements.600.650 21.in Page 9 .333 (E) Profit before depreciation & tax (PBDT) PBDT as % of Gross Revenues Depreciation (assuming an asset life of 15 years) -2.000 30.600.773 23. while a roof-top tower involves a capital expenditure of Rs.19% 36.600.000 17. Given the high capital investments required in the business.150 80% (D) Other Fixed Expenses Interest** @12% 1.027 -50.8 million.000 3 2. Table 5: Illustration . are largely fixed in nature.Improvement in a Tower Company’s Profitability with Increase in Tower-Sharing Ratio - - - Particulars Sharing Capital Expenditure Rental per Tenant (A) Sharing Adjusted Revenue 1 2. High initial capital investments: On an average.64% 53.000 17. 2. thus further improving their working capital cycle.350 77% 86.000 108. it usually generates a stable and predictable cash flow in the form of tower rentals from occupants over the term of the MSA between the two parties.600. Moreover.0 Economics of the Model—Tower Infrastructure Companies The key points relating to the working of tower infrastructure companies are discussed in following bullet list.000 34.000 Ground-Based Tower 2 2. 1.icra.373 49. High incremental profitability: The costs of operating a tower. Thus each increment in tenancy is accompanied by a minimal increase in costs.7% 14. This leads to a more than proportionate increase in profits for every increase in occupancy.017 56.000 90.4% 14.000 4 2. as most of the operating expenses (such as electricity and fuel and other variable operating expenses) are reimbursable by the tenants on actual basis.250 19.217 44.850 (C) Contribution Contribution as % of Gross Revenues 15.
Internal Rate of Return ICRA Rating Services www.2 1.4 1.in Page 10 . which increases the number of base tower stations (BTS) required to handle the same subscriber base.3% Internal Rate of Return (IRR) 0. Analysis suggests that there would be net annual cost savings for mobile operators if they opt to lease towers from a tower company rather than own them. QoS will become more important as customers will then have a broader range of options available with limited switching costs. which 20% increases the tower requirements 10% to cover the same number of subscribers (vis-à-vis urban 0% areas). However.2% 9.3% 1 1. which means a larger number of cell sites would be required for the same area. 30% given that the population in rural areas is widely dispersed. Besides. with the likely introduction of mobile number portability. going forward. as discussed in the following bullet list. quality of service (QoS) would become the prime distinguishing factor among the competing companies. which increases the requirement of towers to maintain a reasonable level of service quality. there are several other factors too that drive increase in tower sharing. Chart 11: Impact of Increasing Occupancy on IRRs 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 18. Viability of business at low ARPUs: At present. Given this fact. the scope for further tariff reduction is low. incremental growth in the subscriber base is coming mainly from rural/semi-urban Chart 12: Impact of Declining ARPUs on IRRs at Different EBITDA Margin areas (also in these areas. business ARPUs (Rs. operators will require additional infrastructure in their existing areas of operation to be able to offer better QoS. Per month) viability can increase IRR at 25% margin IRR at 30% margin IRR at 40% margin significantly on the strength of infrastructure sharing (please Source: ICRA’s estimates refer Chart 7 also).100 subscribers. the telecom infrastructure business generates strong financial metrics once the average occupancy ratio (indicating average number of tenants per tower) crosses 1. Moreover.7 times. as mobile tariffs in India are currently one of the lowest in the world.6% 5. 2. domestic telecom operators competed largely on the pricing plank.Telecom Infrastructure Industry in India March 2009 According to ICRA’s estimates.6 million and a life of 15 years.7% 15. the overall impact on Profit and Loss is also positive. But as Chart 12 shows.icra. Thus while on an average. Quality of service: In the past. the manner in which the IRR moves at various occupancy levels is depicted in Chart 11. network design and planning in rural areas is 40% different from that in urban areas.8 2 Tenancy/ Occupancy Ratio Source: ICRA’s estimates 9. a rapidly increasing subscriber base and spectrum crunch would further add to the problem of telecom operators having to maintain the minimum level of QoS. a GSM BTS can handle around 1.5% 12. the Levels in an Infrastructure Sharing Scenario incremental ARPUs are relatively 50% lower). 200 175 150 125 100 75 -10% even at low ARPUs. Enhancement of profitability: Tower sharing helps operators lower their operating costs and capital expenditure and thereby earn better margins and higher Return on Capital Employed (RoCE). Moreover.1 Factors driving growth for passive infrastructure sharing: Apart from favourable industry prospects. the country has the problem of spectrum scarcity.6 1. Assuming an initial capital expenditure of Rs. Further. in the case of high usage areas the figure can be as low as 600-700 subscribers. Thus to retain existing subscribers by preventing subscriber churn. High usage and limited spectrum availability: India has one of the highest MoUs in the world.
9% providers are likely to get most of their Source: Industry sources.5% Infrastructure Chart 13. Indus Towers . competition has intensified significantly in the domestic Chart 13: Market Share Distribution–Tower Infrastructure Industry tower infrastructure industry.000 308.000 408. ICRA’s estimates business from smaller players and new entrants. Idea Cellular Limited. Swan Telecom.000 Leased 312.333 312.4% With leading GSM players forming a consortium (Indus Towers) and other larger players such as Tata Teleservices and Xcel Telecom Reliance Communications entering into long0. with several players spinning off their tower portfolios and independent operators expanding their operations.4% Incumbent Operators Bharti Airtel Reliance Communications Vodafone Essar BSNL ICRA Rating Services Subscriber Base (million) Dec'08 85. and S Tel Limited. Operating Expenses Tower Rentals Depreciation Cost of Capital Overall Saving Owned 543.in Page 11 .333 Source: ICRA’s estimates Note: Calculations assume a tower cost of Rs.93 46. New technologies to further stimulate demand: 3G services are expected to be launched in the country in 2009-10. Also. in order to augment their services. Shorter rollout time.000 0 173.for 7 circles.35 60.000 0 0 Difference 231. given that the incumbents already have the competitive advantages of widespread distribution networks. The market Reliance Infratel Others shares of the various players are depicted in Aster 16. Moreover. 2.65 61. thereby significantly shortening the rollout time. Tower companies allow players to start operations in a particular region just by installing their electronics on the readyto-use towers. established brand names and strong subscriber base.Telecom Infrastructure Industry in India March 2009 Table 6: Incremental Costs in Owning vs. shorter network-rollout time would be a critical success factor for the new entrants. Leasing a Tower Amounts in Rs. a longer rollout time could mean loss of substantial market share to other operators. demand for towers is expected to report a sharp increase.for 16 circles Reliance Infratel . WTTIL + 3.icra. own tower portfolio and other tower companies www. Moreover.000 -408. Given the significant expansion plans of new entrants over the medium term and the need for them to optimise investments in order to maintain returns.000 173.6 million. This would further increase the demand for sharing of passive infrastructure.0 Industry on the path of consolidation: Within the span of the last one to two years. 0. Aircel Cellular Limited and Shyam Telelink Limited (now Sistema Shyam Teleservices Limited) have received licences as well spectrum in new circles. various operators plan to launch WiMax services as soon as they receive additional spectrum from Government. Entry of new players and expansion plans of existing operators: Recently.for all circles Indus Towers MTNL. 10. new licences have been issued to players such as Unitech. Table 7: Telecom operators and their potential passive infrastructure suppliers Essar Telecom Infrastructure 1. as the following table shows.6% the new and smaller third-party infrastructure Quippo 6.5% Bharti Infratel 10. several regional operators such as Vodafone Essar Limited.8% 27.333 312.3% Indus Towers 32.6% term agreements for passive infrastructure GTL Infrastructure sharing mostly with their tower subsidiaries. which would enable them to become pan-India operators in the next one-two years.23 Main Suppliers of Incremental Passive Infrastructure Bharti Infratel . doing business may not be easy for the new entrants. life of asset of 15 years and 12% cost of capital. The operating expenses are indicative. a key necessity: As the domestic telecom industry is highly competitive.
Telecom Infrastructure Industry in India March 2009 Incumbent Operators Idea Cellular/ Spice Tata Teleservices Aircel Cellular MTNL BPL Mobile Communications HFCL Infotel Sistema Shyam TeleServices Subscriber Base (million) Dec'08 38.37 Main Suppliers of Incremental Passive Infrastructure Indus Towers WTTIL Own and other tower companies BSNL. own tower portfolio and other tower companies Own and other tower companies Own and other tower companies Own and other tower companies Overall.01 31.95 0.38 0.in Page 12 . the domestic telecom infrastructure industry is expected to see consolidation in the near future given the rapidly increasing number of independent tower infrastructure companies and following the entry of several large telecom companies in the infrastructure business. ICRA Rating Services www. in ICRA’s view.76 16.19 1. and that this increased demand would be accompanied by greater sharing of infrastructure by the existing as well as new telecom players. at least over the medium term.icra. The need for such sharing.08 4. Summary: ICRA is of the view that demand for passive telecom infrastructure in India would continue to grow at a healthy rate. would be dictated by the imperative of remaining profitable in an increasingly competitive market.
and ICRA in particular. Fax + (91 79) 2658 4924 Hyderabad: Tel +(91 40) 2373 5061/7251.in Page 13 .com.Telecom Infrastructure Industry in India March 2009 ICRA Limited An Associate of Moody’s Investors Service CORPORATE OFFICE Building No. Phase II. 8. makes no representation or warranty. express or implied. New Delhi 110001 Tel: +91 11 23357940-50 Fax: +91 11 23357014 Branches: Mumbai: Tel. DLF Cyber City. Fax + (91 20) 553 9231 © Copyright. such information is provided ‘as is’ without any warranty of any kind. Fax + (91 33) 2287 0728 Bangalore: Tel + (91 80) 2559 7401/4049 Fax + (91 80) 559 4065 Ahmedabad: Tel + (91 79) 2658 4924/5049/2008. 2nd Floor. 2009.icra. Fax + (91 40) 2373 5152 Pune: Tel + (91 20) 2552 0194/95/96. All information contained herein must be construed solely as statements of opinion and ICRA shall not be liable for any losses incurred by users from any use of this publication or its contents. All information contained herein has been obtained by ICRA from sources believed by it to be accurate and reliable. Tower A. Contents may be used freely with due acknowledgement to ICRA. Although reasonable care has been taken to ensure that the information herein is true. 26 Kasturba Gandhi Marg. Website:www. timeliness or completeness of any such information. Fax: + (91 22) 2433 1390 Chennai: Tel + (91 44) 2434 0043/9659/8080. All Rights Reserved. ICRA Rating Services www.: + (91 22) 24331046/53/62/74/86/87. Fax + (91 44) 2434 3663 Kolkata: Tel + (91 33) 2287 8839 /2287 6617/ 2283 1411/ 2280 0008. Kailash Building. 11th Floor. Gurgaon 122 002 Tel: +91 124 4545300 Fax: +91 124 4545350 Email: info@icraindia. 2433 0724/ 3293/3294. ICRA Limited.in REGISTERED OFFICE 1105. as to the accuracy.icra.
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