The headwinds faced by the telecom tower industry have largely subsided and the industry is now treading towards a regime of steady addition in tenancy levels and a stabilisation of the working capital cycle. As per an ICRA note, telecom service providers (telcos) are end users of telecom towers and while they have witnessed severe pressures in the past, green shoots of recovery are visible in the form of improvement in their operating metrics.
According to Sabyasachi Majumdar, Senior Vice President and Group Head, Corporate Ratings, ICRA Ltd: “There has been a stabilisation in the telecom services industry, which has brought stability to the tower industry by, arresting the tenancy exits. Further, demand for telecom services, especially data, has witnessed a very strong growth, translating into consistent network expansion and upgradation by the telcos. This is expected to keep the demand for tower companies buoyant. Given the consolidation in the telecom services industry in the past, tenancy ratios for tower companies declined to 1.3-1.5 times from historical highs of more than 1.8 times. These tenancy ratios are expected to become the new normal for the industry, given that it’s a ‘3+1’ structure for the telecom services industry. While the receivable cycle witnessed elongation to more than 60 days in FY2021, against less than 30 days in FY2017, the liquidity position of tower companies remains strong. The capital structure also remains healthy with limited external net debt, which coupled with healthy profitability translate into strong debt protection metrics, with interest coverage of around 5x and net debt (including leases)/OPBDITA of around 1.5x for FY2021.”
ICRA had earlier revised the outlook on the telecom tower industry to Negative, following the levy of AGR penalty on the telecom service providers, as it exacerbated their already stretched balance sheets leading to weakening of their credit profile and thus exerting pressure on the receivable cycle of the tower companies. Further, there were concerns on the continuity of operations of one of the service providers, which may have led to tenancy losses for the tower operators. With alleviation of these issues to some extent, ICRA has now revised the outlook to Stable from Negative. Moreover, implementation of revival package of the state-owned telco and planned/completed fund raising by some of the privately owned telcos have aided the improvement in their liquidity position; and thus, payments to the tower operators, which remain essential to the telecom service providers.
The telecom services industry has been witnessing steady improvement in its performance, driven by continued healthy demand for data services and consistent upgradation of subscribers to 4G from 2G, which has resulted in sequential improvement in the ARPU levels. ARPU, although witnessed a decline in Q4FY2021, due to abolition of interconnect usage charges, the normalised trajectory is expected to remain upwards. However, the balance sheets of the telcos remain precarious, given the elevated debt levels and consequently weak coverage indicators. ICRA expects the improvement in the operating metrics to sustain enabling it to restore the stable outlook on sector, with strengthening of the credit profile of telcos, as marked by scaling up of revenue and margin expansion. This will be supported by increase in ARPU levels and contribution from non-telco businesses, strengthening of balance sheet and liquidity position.
Majumdar concludes: “While the network expansion and technology upgrades point towards steady growth in the IP business, the tower industry is set for a journey towards exploring new revenues sources and opportunities of growth. Some of these can come from active infrastructure sharing, apart from partial monetisation of existing tower spaces as well as small cells, data centers, smart cities, etc. The business plans and extent of revenue and return generation from these would remain a key monitorable.” CT Bureau