The future deployment of towers is expected to be demand driven but not based on proactive deployment, and it is likely to be at a much slower pace as compared to the past few years.

With declining prices of 3G services in India, its adoption and traffic has increased across circles and it is expected to grow with increasing service and device affordability and coverage expansion. The number of 3G subscribers is expected to grow to around 412 million by 2017. 3G and 4G services are expected to add substantially to data traffic in India, thus necessitating more base stations due to additional capacity requirements. This, in turn, is expected to increase the demand for towers. Further, as 3G spectrum operates on a higher frequency band, its reach is limited. Operators will have to set up additional towers to ensure seamless service.

The future deployment of towers is expected to be demand driven and not based on proactive deployment, and it is likely to be at a much slower pace as compared to the past few years. The tenancies are expected to be driven by 3G capacity and 4G coverage (with capacity in later years), and some 2G coverage in select areas. It is expected that catch-up coverage and additional capacity in urban areas will result in an incremental deployment of 44,000 towers between March 2012 and March 2017.

Wireless telecommunications service providers have made considerable investment in building network infrastructure to address the high subscriber growth and consequent increase in traffic. Typically, for a GSM operator providing 2G services, the number of subscribers that are served by a base transceiver station (BTS) is 850-1200. It is estimated that 2G base stations are currently installed on 376,000 towers. The current coverage of 3G remains focused on select cities, but operators are expected to roll out 3G networks in tier-II and tier-III cities in the next two years, and it is expected that 3G coverage will reach villages with a population of more than 5000 in a few years, amounting to about 19,000 villages in total.

Industry tenancy has grown from 1.05 in 2007-08 to 1.7 in 2011-12. Tower tenancy currently stands at 1.7 times for 2G towers, of which tenancies for telco-owned tower companies are estimated at around 1.94 times and tenancies for independent telcos are valued at around 1.46 times. Industry tenancy is expected to increase from 1.7 in March 2012 to 2.46 in March 2017, primarily because of a rise in the sharing of infrastructure. An increase in effective 3G tenancies is expected, especially from co-located sites. Consolidation among tower companies is expected to further increase the tenancy ratio and is poised to lower the proportion of operator-owned tower assets.

Industry revenue is projected to grow from Rs. 1361 billion in March 2012 to Rs. 1609 billion in March 2017. An increase in the number of towers and tenancies is expected to be the primary drivers.

Green Initiatives Take Center Stage

Telecom tower providers are looking to reduce operational costs by inviting proposals for setting up independent renewable energy companies that will generate and supply green power to run towers.

The Tower and Infrastructure Providers' Association (TAIPA) has floated a Request for Proposal inviting NGOs and private green power companies to generate and supply off-grid power to telecom towers in the country. This comes in the wake of TRAI's regulation directing all telecom service providers to ensure that part of the power that is used for the towers comes from renewable sources. Under the new rules, at least 50 percent of towers and 20 percent of the urban towers are to be powered by hybrid energy sources (renewable and grid) by 2015. The move is aimed at reducing carbon emission due to increased dependence on diesel.

TAIPA has selected Mahindra & Mahindra and Creative Mark Engineering Solutions to work as renewable energy service companies (RESCOS) and set up renewable energy-based power plants, adjacent to telecom tower sites and sell them power on a pay-per-use model. Under this project, RESCOS will sell power to the telecom company at a pre-determined cost on a pay-per-use model. Power generated by RESCOS will be off-grid. But additional power generated by them can also be sold to commercial users living in areas where the power plants are located.

A Healthier Industry

The tower vendors are aggressively trying to reduce debts and raise fresh capital for new deployments.

Reliance Communications in an effort to decrease its debt is continuing to look to sell stakes in its Infratel unit. The company expects clarity on infrastructure needs of mobile operators to emerge by January 2013, after the 2G auction is completed. The company is expecting to conclude a value-unlocking strategy for Reliance Infratel by 2013.

Bharti Infratel has filed its draft red herring prospectus for its public issue that would see part exits by financial investors encompassing Singapore's sovereign wealth fund Temasek, Goldman Sachs, and Japanese financial services group Nomura. The IPO would involve a fresh issue of 146.2 million shares besides an offer for the sale of 42.6 million shares by four investors. As per the draft red herring prospectus (DRHP), the company is looking to raise over Rs. 2940 crore through a fresh issue of shares, which would be used for upgradation and replacement of existing towers, installation of 4813 new towers, besides green initiatives at tower sites. Given this, the company is looking at an issue price of at least Rs. 200 per share.

The total issue is expected to be around Rs. 5000 crore (USD 900 million). Bharti Airtel, which holds 86 percent of the tower arm, would own around 79.4 percent stake of the company post issue. The company would need to bring down its holding to sub 75 percent level by June 2013 as per listing norms and that may mean a post issue stake sale or further issue by Airtel to dilute its holding.

Reliance Infotel is planning to build its network with a mix of rented mobile towers and its own BTSs (base tower stations or mobile towers). Besides an estimated 100,000 towers of its own, RIL Group would also consider leasing out the base stations from third parties. Infotel is focusing on a low-cost model so that it can keep the rates of 4G telecom services lower than that of other players. The company is working on ultra-low-cost base stations, used to transmit signals for telecom services, costing Rs.100,000 each. At this price point, the cost of the proposed towers would be as low as 1/40th of the base stations deployed by some leading mobile phone service providers. These low-cost towers are part of the strategy of RIL as it gears up for its foray into telecom space through Infotel Broadband.

GTL Infra Ltd. intends to improve returns on its tower portfolio by entering into arrangement with other players in the industry bilateral basis for single tenant towers. The company is in the process of rationalizing its tower portfolio to reduce its operating cost. GTL expects to reduce the overlap between its tower portfolio and Chennai Network Infrastructure Limited (CNIL) tower portfolio. The company expects that these efforts will result into rationalizing its tower portfolio by 10-15 percent.

Infrastructure Status

The tower provider industry has been granted an infrastructure status, with which come multiple benefits, which would encourage more investments to come into the sector. The Cabinet Committee on Infrastructure has included telecom towers along with fixed line in the harmonized list of sub-sectors and an implementation committee consisting of representatives of various departments from RBI, SEBI, IRDA, and the Planning Commission has been formed. The tower and infrastructure provider's association (TAIPA) will work with the implementation committee to work on bringing commonality of interest to ensure rapid progression.

The telecom tower infrastructure is a highly capital-intensive sector and the benefits of accelerated depreciation would encourage further investments in expanding the telecom infrastructure to rural areas. The harmonized infrastructure status offers new gateways of growth for the sector and provides a platform for public-private partnership in the industry.

Accelerated Depreciation and Tax Holiday under Section 80I-A

As many towers have already been depreciated considerably, this is expected to have a limited impact with less CapEx expected by the existing players. Tower companies can also avail tax holiday under section 80I-A. Many players in the tower space, being loss making, are hardly paying any taxes, the real benefits will come when they turn profit making. Infrastructure status will help tower companies get a benefit of two to three percent on the domestic loans, on a case-to-case basis, whereas external commercial borrowings will be at a much softer rate as against current domestic borrowing rate of 12-13 percent. There will also be increase in the tenure of the loan from seven to eight years currently to 10-12 years, again on case-to-case basis. This will allow the tower companies to spread the loan tenure over almost the entire useful life of the asset, which is around 15 years. It will allow lower import duties and exemptions on excise duty on telecom infrastructure equipment.

Tower companies will be eligible for viability gap funding (VGF) reducing the CapEx for new tower projects. This facility is meant to reduce the capital cost of the projects by credit enhancement, and to make them viable and attractive for private investments through supplementary grant funding. VGF can take various forms such as capital grant, subordinated loans, operation and maintenance (O&M) support grants, and interest subsidy.

After witnessing a phenomenal growth during 2006-10, the tower industry started seeing stagnation FY 2011 onward, as it added less than 10,000 towers in a year due to oversupply of towers in urban areas and viability issues in rural areas. This was primarily on account of large capacity addition in the previous three to four years in expectation of increased demand from 3G services and aggressive expansion plans of new telecom operator leading to oversupply situation in most of the urban areas; decline in profitability of telecom service providers as their balance sheets were burdened with debts related to 3G-BWA auction and network expansion; and increased focus on enhancing tenancies rather than adding more towers.

The number of towers is expected to reach 443,000 in the next couple of years, as compared to the present 400,000 towers, most of the growth predominantly coming from Category B and C circles. This slower growth of around five percent annually in the new capacity addition implies only marginal benefits for the telecom tower industry from the infrastructure status.

Payback Period to Improve for New Towers

It is challenging for a single tenant tower to breakeven whereas a tenancy of around 1.7x will allow the tower company payback the debt within a stipulated tenure of seven to eight years and will breakeven in around 11 years. A longer tenure loan with soft interest rates, with the grant of infrastructure status to tower industry, will strongly improve the payback period and the break-even will even be possible at lower tenancies, making some of the new towers viable, especially in the rural and remote areas.

Much Needed Capital for Green Initiatives

As 60 percent of the total power supplied to telecom towers is off-grid in India, telecom service providers and the tower companies (though partially) are incurring huge energy-related costs. Most of the renewable sources like solar panel, wind energy, and biomass require considerable CapEx in the beginning (e.g., approximately an investment of Rs. 0.3-0.5 crore required for a solar-wind hybrid system to cater to 6 kW of power requirement). In the existing set-up, the renewable power systems have a payback period of six to eight years. As the energy costs for telecom towers are pass-through, serious initiatives were lacking from the tower companies to go green. Easy capital is expected to allow the tower companies to speed up efforts in this direction, which will reduce the energy-related costs of the telecom sector as a whole. It is also predicted to prompt the telecom service provider to go for expansion in semi-urban and rural areas, where the energy-related costs are substantially higher and stand as a deterrent for expansion.

Expansion in Rural Areas

Indian villages account for more than 2/3rd of the total population but still contribute around 1/3rd of the total wireless subscribers. Teledensity in rural areas is abysmally low at 39 percent against 156 percent in urban areas as on August 2012. Sparsely populated villages, lower tenancy ratios, and higher operating expenses due to unavailability of consistent grid power and security related costs make rural expansion a difficult proposition for the tower companies. Universal Service Obligation Fund (USOF) has so far financed around 7300 towers in rural areas, which is less than two percent of the total tower capacity in the country and is certainly not enough to serve the vast rural hinterlands. The infrastructure status with its slew of benefits especially viability gap funding will encourage tower companies to venture into the unviable rural areas. This will be dependent on the tenancy assurance from the telecom service providers.

3G and 4G Expansion

In the 3G space, most of the players have already deployed their network, as 3G services have reached more than 1000 towns and cities in India and are waiting for 3G subscriber growth to pick up. As 3G operators are already providing 2G services in the respective circles, most of them do not require additional towers for the expansion of 3G services as the 3G BTS can be co-mounted in the same shelter. Many of the 4G licensees including RIL and Tikona, who do not provide 2G services, will require fresh tenancies for their expansion either on the existing towers or new towers. Reliance Infotel is expected to build its own tower network of around 100,000 towers to support its 4G expansion partly on its own, and the company will be the largest beneficiary of infrastructure status in the tower space.

Import of Equipment/Parts of Telecom Towers

As new tower construction requires a CapEx of Rs. 0.25-0.3 crore for ground-based tower and Rs. 0.14-0.18 crore for a roof-top tower, some of the tower companies might tap Chinese vendors, which claim to supply tower equipment at almost one-third to one-fourth of the cost required in India. Infrastructure status to tower industry will reduce the import duties on such towers lowering the overall CapEx for the tower firms. Also, the excise duty benefits will bring down the CapEx for domestically built towers, according to CARE Ratings Research.

Charting a Road Map

Growth of tower industry is highly linked to the expansion of telecom service providers. Huge cash outgoes are expected out of major events like spectrum auction, one time fees for excess spectrum and spectrum renewal along with refarming, leaving little room for the telecom service providers for expansion. To some extent, it will help both telecom service providers and tower companies tapping newer avenues of growth like rural areas. This will also help the government achieving its goals of better rural connectivity.

Concerns like inclusion of tower business in the Unified Licensing Regime and subsequent imposition of license fees as a percentage of revenue is probably the biggest regulatory overhang for the sector. Other regulatory issues like streamlining of regulatory approvals from various state and local agencies are extremely important for the faster execution of new projects.

India is the second-largest and fastest growing telecommunications market in the world, projected to reach a wireless subscriber base of 1 billion by 2014. It is expected that catch-up coverage and additional capacity in urban areas will result in incremental tower deployment of 44,000 towers by March 2017. Within this overall growth opportunity, there are compelling reasons for wireless telecommunications service providers to increasingly seek to share tower infrastructure.

The wireless telecommunications service providers are under pressure to reduce their operating expenses and capital expenditure. Consequently, leasing space on towers owned and operated by third parties makes more economic sense to operators than building and operating their own telecommunications towers. Other factors that promote tower sharing include government incentive schemes and policies that promote such sharing, such as the Universal Service Obligation Fund initiated by the DoT, the expansion of wireless networks to India's less densely populated and more remote areas, and the increasing penetration of new technologies such as 3G and 4G services.

The cost of establishing a tower is generally a one-time expenditure and the incremental capital expenditure and operating costs required to provide for loading of equipment by additional sharing operators at a tower are relatively low. In light of this, each additional sharing operator at a tower generally has a positive effect on margins. The tower vendors are focusing on attracting multiple additional wireless telecommunications service providers to their existing towers. In addition, there exists the possibility of offering transmission backhaul through optical fibre connectivity and microwave connectivity at towers in the future, subject to favorable regulatory changes, as well as providing first level maintenance services in relation to customers' active infrastructure installed at towers. Further new revenue streams that can be pursued at existing towers include renting out space for the placement of advertising and the installation of automated teller machines. The tower industry is exploring each of these potential revenue streams, like in-building solutions and distributed antenna systems, subject to considerations such as incremental investment, expected revenues, and potential return on capital.