ICRA Rating Feature

ICRA Rating Feature March 2009


Anjan Ghosh aghosh@icraindia.com +91-22-30470006 Vikas Aggarwal vikas@icraindia.com +91-124-4545300 Nidhi Marwaha nidhim@icraindia.com +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)

March 2009

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

Website: www.icra.in

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.

with coverage reaching around 90% and 35%. Moreover. Thus future growth is likely to come largely from Class B and C circles and rural areas. Keeping this in view.Telecom Infrastructure Industry in India March 2009 2. Chart 2: Mobile Penetration Levels: India vis-à-vis World Spain Malaysia 109.0 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. 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. mobile penetration remains moderate: As on end September 2008.90% 93. India had a mobile penetration of around 27%. respectively.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. However.60% 84% 55. 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. Given the moderate penetration levels at present. and Bharat Sanchar Nigam Limited (BSNL) are largely focusing on increasing their geographical coverage in Class B and C circles. ICRA’s estimates ICRA Rating Services www. ICRA’s estimates Note: Mobile penetration does not account for one person having more than one connection Source: Ministry of Statistics & Programme Implementation Database. which is relatively lower as compared to other countries as depicted in Chart 2. 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. Reliance Communications Limited.icra. larger players like Bharti Airtel Limited. within these circles growth has largely been concentrated in the urban areas while penetration in the rural areas remains lower.90% 27.in Page 2 . TRAI Database.90% 91.0 Despite the growth.30% 85. coverage in the Class B and Class C cities is still low at 15-25%.

ICRA Rating Services Tata Teleservices. 200 175 150 125 100 Sep-08 75 -15% ARPUs (Rs.5% Source: TRAI Database www.1% 0. 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. for new operators especially whose margins are low because of the high set-up costs.in Page 3 .6% their presence in a larger number of circles as compared with other players.6% Vodafone Essar Limited and BSNL. Sistema Shyam. depreciation 25% & amortisation (EBITDA) margins. 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. 14. 4.7% mobile market share. With licences being granted to some of the existing operators for new circles and also to new entrants.7% BSNL/ MTNL. Bharti Airtel. 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. together Idea + Spice. the margins and 15% return indicators may come under pressure as 10% ARPUs continue to fall.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. competition is expected to intensify further. Thus.0 Competition set to intensify further with market liberalisation: The Indian mobile sector is an intensely competitive industry.the need of the industry: In the past. 0.0 Conservation of capital . per month) 550 500 450 400 350 300 Mar-06 Mar-07 Mar-08 450 ARPU (Rs. featuring 10 mobile Chart 8: Market-share Distribution–Mobile Subscribers (Dec’08) operators. taxes.icra. HFCL. The competitive matrix is illustrated in Chart 9. Chart 7: Impact of Declining ARPUs on IRRs at Different EBITDA Margin Levels most telecom operators were able to improve their earnings before interest. Per month) IRR at 30% margin IRR at 40% margin IRR at 25% margin Source: ICRA’s estimates. of which four. namely Bharti Airtel Limited. 17.Telecom Infrastructure Industry in India March 2009 4. This is also partly on account of the fact that these four operators have Vodaone. 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.0% account for almost three-fourths of the entire 24. 9. with costs being amortised over a larger base and steps being taken to rationalise costs.1% BPL/ Loop. Reliance Communications Limited. average revenues per user (ARPUs) have moved south over the years.50 6. 17. in 20% the current market conditions. operations can be unviable at the current level of incremental ARPUs. Aircel.2% Reliance Communication s.6% 0. 11. However. Assuming Capital Expenditure of USD 70 per subscriber and 1 USD=Rs.

0% 12.3% 8.4% 14.2% 6.9% 14.1% 31.7% 15.7% 30.0% 5.5% 18.7% 16.0% 18.1% 19.0% 23.3% 48.3% 1.3% 11.2% 23.7% 17.9% 9.4% 17.2% 23.9% 11.1% 14.9% 12.7% 13.3% 0.2% 30.5% 7.6% 30.2% 2.1% 24.1% 31.6% 17.9% 29.6% 4.4 31.0% 9.9% 3.4% 4.7 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.Dec'08 GSM 85.0% 21.6% 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.icra.2% 24.9 38.2% 3.0% 6.4% 5.9% Aircel 26.0% 0.9% 4.6% 17.2% Vodaone 19.8% 13.8% 23.1% 16.9% 31.7% 20.9% 7.6% 14.9 Licensed Circles (Dec'07 vis-à-vis Sep'08) 25 Competitive Positioning .9% 25.6% 0.8% 13.9% 16.0% 2.6% 23.6% 16.6% 34.7% 27.8% 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.1% 23.9% NL NL NL NL NL NL NL NL NL NL NL NL BPL/ Loop 11.5% 0.1% 29.7% 19.1% 11.1% 19.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) .6% Reliance Communications 15.9% 6.3 50.2% 24.7% 34.0% Idea/ Spice 11.0% 30.1% 14.5% 17.4 0.1 0.5% 30.2% 17.0% BSNL/ MTNL 9.1% 0.9% 0.8% 24.2% 12.7% 14.4% 1.2% 22.in Page 4 .6% 22.2% 43.9 0 0 0 0 Total 346.8% 11.0% 13.4% Unitech NL 1.3% 26.4 1.4% 8.1% 10.5% 37.8% 10.0% 14.1% 1.0% 25.5% 18.5% 23.7% 0.3% 14.0 16.1% 11.6% 15.1% 12. ICRA’s estimates ICRA Rating Services www.5% 22.4% 7.8 60.0% 13.1% 18.5% 12.2% 19.5% 15.0% 23.0% 31.0% 12.4% 14.6% 5.4% 16.7% 25.3% 1.4% 23.2% 17.8% 25.7% 6.4% 1.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 22.5% HFCL NL NL NL NL NL NL NL NL NL NL 2.4% 19.2% 12.9% 13.9% 4.7% 15.9% 22.2% 14.7% 17.0% 28.5% 16.

the same has been a critical area of operations for telecom companies in the past. According to ICRA’s estimates. Overall. 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. sharing of infrastructure. etc. passive infrastructure accounts for 60-70% of the total cost of setting up a wireless network. passive as well as active. However. passive infrastructure has assumed the status of an independent industry during the past few years.Telecom Infrastructure Industry in India March 2009 7.in Page 5 . etc. 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. Key components include: Spectrum (radio frequency) Base tower station Microwave radio equipment Switches Antennas Transceivers for signal processing and transmission.0 Passive infrastructure sharing (tower-sharing) gaining signficance: Passive infrastructure being one of the most important components of a mobile network. ICRA Rating Services www. is beneficial for all parties involved as it brings along significant operational as well financial savings.icra. thus enabling the companies to minimise duplication of efforts and costs and improve profitability.

1.in Page 6 . 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. the pricing terms. ICRA Rating Services www. testing and maintenance. air-conditioning and security. The role of a tower infrastructure company may be summarised as follows: Site planning. 7.Telecom Infrastructure Industry in India March 2009 7. and clearly spell out the overall tower requirements of the tenants. including entering into long-term agreements with land owners. (ii) It is the height of a telecom tower that determines the number of antennas that can be accommodated. typically. apart from factors such as location and geographical conditions (wind speeds. 1. which in turn determines the capacity of the towers. etc. depending on the height of the tower.1 Types of Towers Telecom towers are broadly classified on the basis of their placement as Ground-based and Roof-top. and other binding terms and conditions between the two parties. Obtaining approvals. Hence. these involve a capital expenditure of Rs. RTTs can accommodate two to three tenants.2 Master Service Agreements A tower infrastructure company normally enters into separate Master Service Agreements (MSAs) with its occupants/tenants. (i) Ground-Based Tower: Erected on the ground. Typically. 2.). Provision of turnkey solutions to telecom companies such as sourcing of equipment. Site acquisition. keeping in view the network rollout plans of prospective customers. type of terrain.8 million. GBTs involve a capital expenditure in the range of Rs. Shelter Room - DG Set - 7.1 Functioning of a Tower Infrastructure Company: A tower infrastructure company provides passive infrastructure on a sharing basis to telecom operators. where there is paucity of real-estate space.5 to 2 million. MSAs are signed between tower infrastructure companies and telecom operators (tenants). are shorter (than GBTs) and more common in urban and highly populated areas. Provision of support services such as backup power.icra.4 to 2. Roof-Top Tower (RTT): Roof-top towers (RTTs). of necessary regulatory Figure 1: Telecom Tower Structure with Key Components Antennas Microwave Feeders - - Steel Tower - Erection and commissioning of tower and allied equipment. which are generally placed on the roofs of highrise buildings. while GBTs can accommodate up to six tenants.1.

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. CDMA. Tenancy Generally. ICRA Rating Services www. the same would be treated as additional tenant(s) for the purpose of the agreement. So. there is generally a provision of penalty on the tenant. Lock-in-Period Most MSAs specify a lock-in period. Wi-max. in the case of termination of contract by the telecom operator during the lock-in period. and  Independent tower infrastructure companies (ITICs) 8. uptime for regular and strategic sites. Space/Ground Rental Space/ground rentals are usually borne by the tower infrastructure company. Variable Costs like Fuel and Energy Such costs are charged from tenants on the basis of their Charges actual consumption. namely Bharti Infratel Limited. city centre. At present. Service Level: Most MSAs specify the services levels with respect to power availability. which has an estimated portfolio of around 85.icra. and also the penalties on tower infrastructure companies in the case of failure to achieve the same. Level of sharing on towers: As sharing increases. with provisions of periodic revision (mostly annual). Operating Expenses Fixed Charges Expenses such as security and maintenance are usually borne by the tower infrastructure companies. any approvals pertaining to active components are largely obtained by the telecom operators. Approvals Generally. Reliance Infratel Limited. Number of sites: Tower infrastructure companies may also offer discounts on standard rentals. 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. Reliance Communications Limited. there are broadly two kinds of operators in the domestic tower infrastructure industry:  Tower infrastructure subsidiaries. Location: In the case of strategically located sites (congested areas. respectively. each active electronic module is considered a separate tenant. Any excess over a pre-specified level is generally shared with the tenants. Tenure: Tower infrastructure companies usually offer more attractive terms for longer tenure MSAs as they lower occupancy risks for them.1 Tower Infrastructure Subsidiaries: In India.000 towers. Increase in Variable Costs Most MSAs also provide for pass-on of any escalations in variable costs to 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. which are the spun-off tower divisions of the telecom-operator companies. the rentals may also be computed as a percentage of the capital invested. For instance. Statutory Clearances/ MSAs clearly specify the list of approvals and clearances to be taken by the tower companies. and Wireless TT Infoservices Limited.Telecom Infrastructure Industry in India March 2009 Broadly. depending on the number of sites to be rolled out in accordance with the MSA. tower infrastructure companies usually pass on a percentage of the cost saving to their tenants. all the approvals pertaining to passive infrastructure are obtained by the tower infrastructure company. etc. In some cases. However. highways) and in hilly terrains. and other operations and maintenance parameters. The rentals stated in the MSAs are generally applicable over the tenure of the contract. Bharti Airtel Limited. a larger number of sites may mean higher discounts for the telecom operator. Tenure The tenures of MSAs generally range between 10 and 25 years. 8. depending on factors such as: Rental Type of tower (GBT or RTT): Tower rentals are normally higher for GBTs as compared with RTTs.in Page 7 . which may range from 2 to 5%. Moreover.). 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 Tata Teleservices Limited have hived off their tower assets into separate tower infrastructure subsidiaries.0 Industry Structure: At present. 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).

Moreover.000 ~ 27. 8. Moreover. Under the anticipatory approach however. tower companies set up tower sites going by the requirements of the telecom operators. 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. lower operating costs. Sistema Shyam TeleServices. are usually at a disadvantage as compared with tower subsidiaries as ITICs do not have assured occupancy on their tower portfolios. Essar Telecom Infrastructure Limited. Aster Infrastructure Private Limited and TVS Interconnect Systems Limited. in certain cases.in Page 8 . 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. backended payment structure).500 towers ~1. especially those following the anticipatory approach. in whose case credit quality can also be a concern. Mahanagar Telephone Nigam limited (MTNL). and Idea Cellular Limited Tata Teleservices Limited’s subsidiary WTTIL merged with Quippo Telecom Infrastructure BSNL.000 ~ 85. Aircel etc. ICRA’s estimates Existing Tower Portfolio ~9. 8. ITICs differentiate themselves by offering flexible payment terms to mobile operators (for instance. Vodafone Essar Limited. These include.000 ~ 70. Nevertheless. among others.2 Independent Tower Infrastructure Companies: Over the past few years. 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. 1 Now merged with WTTIL.3 ITICs versus Tower Companies: ITICs. which in turn may serve to attract other tenants. while the tower infrastructure subsidiaries gain an advantage in terms of an assured occupancy from their parent.000 towers ~2000 These companies have their business model based largely on the following two approaches:  Contract Approach  Anticipatory Approach Under the contract approach.000 ~18. Quippo Telecom Infrastructure Limited 1. Xcel Telecom Private Limited.000 towers ~1. and a favourable capital structure. as most large telecom companies in the country have their own tower subsidiaries.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. The parent telecom company benefits from reduced incremental capital requirements.000 Source: Market sources.500 towers ~4. tower subsidiary of Tata Teleservices Limited ICRA Rating Services www.icra. Tower Vision India Private Limited. which enables the mobile operators to reduce their costs in the initial years. and the terms of the contract are specified beforehand in the MSAs signed by the two parties. GTL Infrastructure Limited. 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. Tower Portfolio ~ 44. the market for ITICs consists largely of regional operators and new entrants. a number of ITICs have ventured into the domestic telecom tower industry. 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.

icra.333 1. a ground-based tower requires a capital expenditure of Rs.19% 36.017 56. security expenses.000 17.444 30.000 (B) Operating Expenses * 18.000 34.600.444 67.000 17.4 to 2.600.373 49. while a roof-top tower involves a capital expenditure of Rs. 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. Stable and predictable cash flow business: Once a tower asset is rented out.000 34.600.000 30.773 23. High incremental profitability: The costs of operating a tower. 2.217 44. Moreover.817 62.in Page 9 .450 20.000 90.000 3 2.750 46% 48. 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.444 (F) Profit before tax (PBT) PBT as % of Gross Revenues -17. This leads to a more than proportionate increase in profits for every increase in occupancy.8 million.42% Source: ICRA’s estimates *Includes site rentals.150 80% (D) Other Fixed Expenses Interest** @12% 1.000 68.0 Economics of the Model—Tower Infrastructure Companies The key points relating to the working of tower infrastructure companies are discussed in following bullet list. tower companies are generally highly leveraged.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. operations and maintenance (tower) etc.550 71% 69.000 108.8% 14.333 (E) Profit before depreciation & tax (PBDT) PBDT as % of Gross Revenues Depreciation (assuming an asset life of 15 years) -2.027 -50.000 34.4% 14. particularly the ones borne by the tower company such as security and maintenance and ground rent.333 1. 1. thus further improving their working capital cycle.600.573 40.850 (C) Contribution Contribution as % of Gross Revenues 15.Telecom Infrastructure Industry in India March 2009 9.000 27.583 -7.000 Ground-Based Tower 2 2. are largely fixed in nature. 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.5 to 2 million. Table 5: Illustration . Thus each increment in tenancy is accompanied by a minimal increase in costs.64% 53.333 1.6% 14.444 51. as most of the operating expenses (such as electricity and fuel and other variable operating expenses) are reimbursable by the tenants on actual basis.000 4 2. Given the high capital investments required in the business.7% 14.350 77% 86.650 21.250 19.08% 15.000 17.000 17. High initial capital investments: On an average. Low working capital requirement: The tower business is also characterised by low working capital requirements.

the scope for further tariff reduction is low. domestic telecom operators competed largely on the pricing plank. as discussed in the following bullet list. Quality of service: In the past.7 times.2 1. which 20% increases the tower requirements 10% to cover the same number of subscribers (vis-à-vis urban 0% areas).5% 12. 30% given that the population in rural areas is widely dispersed. the Levels in an Infrastructure Sharing Scenario incremental ARPUs are relatively 50% lower). there are several other factors too that drive increase in tower sharing. network design and planning in rural areas is 40% different from that in urban areas. the country has the problem of spectrum scarcity. in the case of high usage areas the figure can be as low as 600-700 subscribers. 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. as mobile tariffs in India are currently one of the lowest in the world. 200 175 150 125 100 75 -10% even at low ARPUs. a GSM BTS can handle around 1. Chart 11: Impact of Increasing Occupancy on IRRs 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 18. business ARPUs (Rs. quality of service (QoS) would become the prime distinguishing factor among the competing companies.Telecom Infrastructure Industry in India March 2009 According to ICRA’s estimates. 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.8 2 Tenancy/ Occupancy Ratio Source: ICRA’s estimates 9. Further. 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). 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. which means a larger number of cell sites would be required for the same area.100 subscribers.7% 15. which increases the number of base tower stations (BTS) required to handle the same subscriber base. 2. with the likely introduction of mobile number portability. Assuming an initial capital expenditure of Rs.6 1. going forward.6 million and a life of 15 years. Thus while on an average.4 1. Internal Rate of Return    ICRA Rating Services www. which increases the requirement of towers to maintain a reasonable level of service quality.6% 5. But as Chart 12 shows. Given this fact.  Viability of business at low ARPUs: At present.icra. However. QoS will become more important as customers will then have a broader range of options available with limited switching costs.in Page 10 .3% Internal Rate of Return (IRR) 0. Thus to retain existing subscribers by preventing subscriber churn. Besides. the manner in which the IRR moves at various occupancy levels is depicted in Chart 11. 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).3% 1 1.2% 9. operators will require additional infrastructure in their existing areas of operation to be able to offer better QoS. the overall impact on Profit and Loss is also positive. the telecom infrastructure business generates strong financial metrics once the average occupancy ratio (indicating average number of tenants per tower) crosses 1. Moreover.1 Factors driving growth for passive infrastructure sharing: Apart from favourable industry prospects. Moreover. High usage and limited spectrum availability: India has one of the highest MoUs in the world.

000 -408.for all circles Indus Towers MTNL.3% Indus Towers 32. competition has intensified significantly in the domestic Chart 13: Market Share Distribution–Tower Infrastructure Industry tower infrastructure industry. several regional operators such as Vodafone Essar Limited. Aircel Cellular Limited and Shyam Telelink Limited (now Sistema Shyam Teleservices Limited) have received licences as well spectrum in new circles. new licences have been issued to players such as Unitech. shorter network-rollout time would be a critical success factor for the new entrants. a key necessity: As the domestic telecom industry is highly competitive. 0. various operators plan to launch WiMax services as soon as they receive additional spectrum from Government. 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.333 Source: ICRA’s estimates Note: Calculations assume a tower cost of Rs.333 312. Leasing a Tower Amounts in Rs. doing business may not be easy for the new entrants.for 16 circles Reliance Infratel . The market Reliance Infratel Others shares of the various players are depicted in Aster 16. Tower companies allow players to start operations in a particular region just by installing their electronics on the readyto-use towers. and S Tel Limited.0 Industry on the path of consolidation: Within the span of the last one to two years.000 Leased 312. own tower portfolio and other tower companies www.in Page 11 .8% 27. Swan Telecom. Moreover.23 Main Suppliers of Incremental Passive Infrastructure Bharti Infratel .000 308. This would further increase the demand for sharing of passive infrastructure.000 0 173. a longer rollout time could mean loss of substantial market share to other operators. WTTIL + 3. Also. Shorter rollout time.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. ICRA’s estimates business from smaller players and new entrants. life of asset of 15 years and 12% cost of capital. given that the incumbents already have the competitive advantages of widespread distribution networks.  Entry of new players and expansion plans of existing operators: Recently.000 408. demand for towers is expected to report a sharp increase.35 60.4% Incumbent Operators Bharti Airtel Reliance Communications Vodafone Essar BSNL ICRA Rating Services Subscriber Base (million) Dec'08 85.5% Bharti Infratel 10. Table 7: Telecom operators and their potential passive infrastructure suppliers Essar Telecom Infrastructure 1. The operating expenses are indicative. Moreover.333 312. Indus Towers .for 7 circles.9% providers are likely to get most of their Source: Industry sources. established brand names and strong subscriber base.6% term agreements for passive infrastructure GTL Infrastructure sharing mostly with their tower subsidiaries. as the following table shows.5% Infrastructure Chart 13.6% the new and smaller third-party infrastructure Quippo 6.Telecom Infrastructure Industry in India March 2009 Table 6: Incremental Costs in Owning vs. Operating Expenses Tower Rentals Depreciation Cost of Capital Overall Saving Owned 543.000 173. Idea Cellular Limited. in order to augment their services. thereby significantly shortening the rollout time.6 million.icra.   10. 2. New technologies to further stimulate demand: 3G services are expected to be launched in the country in 2009-10.000 0 0 Difference 231. with several players spinning off their tower portfolios and independent operators expanding their operations.93 46. which would enable them to become pan-India operators in the next one-two years.65 61.

in Page 12 .01 31.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. 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.76 16.95 0.37 Main Suppliers of Incremental Passive Infrastructure Indus Towers WTTIL Own and other tower companies BSNL.08 4.icra. and that this increased demand would be accompanied by greater sharing of infrastructure by the existing as well as new telecom players. would be dictated by the imperative of remaining profitable in an increasingly competitive market. Summary: ICRA is of the view that demand for passive telecom infrastructure in India would continue to grow at a healthy rate. at least over the medium term. The need for such sharing.38 0. own tower portfolio and other tower companies Own and other tower companies Own and other tower companies Own and other tower companies Overall. in ICRA’s view.19 1. ICRA Rating Services www.

Fax + (91 20) 553 9231 © Copyright.: + (91 22) 24331046/53/62/74/86/87. 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.in Page 13 . such information is provided ‘as is’ without any warranty of any kind.icra.com. Although reasonable care has been taken to ensure that the information herein is true. makes no representation or warranty. Contents may be used freely with due acknowledgement to ICRA. and ICRA in particular. Fax + (91 40) 2373 5152  Pune: Tel + (91 20) 2552 0194/95/96. as to the accuracy. All Rights Reserved. ICRA Limited. Kailash Building. 2433 0724/ 3293/3294. ICRA Rating Services www. DLF Cyber City. 11th Floor. express or implied. Gurgaon 122 002 Tel: +91 124 4545300 Fax: +91 124 4545350 Email: info@icraindia. Tower A. 26 Kasturba Gandhi Marg.icra. 8.in REGISTERED OFFICE 1105. Fax: + (91 22) 2433 1390  Chennai: Tel + (91 44) 2434 0043/9659/8080. Fax + (91 79) 2658 4924  Hyderabad: Tel +(91 40) 2373 5061/7251. Website:www. Phase II. 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. timeliness or completeness of any such information. 2nd Floor. All information contained herein has been obtained by ICRA from sources believed by it to be accurate and reliable. Fax + (91 44) 2434 3663  Kolkata: Tel + (91 33) 2287 8839 /2287 6617/ 2283 1411/ 2280 0008. New Delhi 110001 Tel: +91 11 23357940-50 Fax: +91 11 23357014 Branches: Mumbai: Tel.Telecom Infrastructure Industry in India March 2009 ICRA Limited An Associate of Moody’s Investors Service CORPORATE OFFICE Building No. 2009.