Tele tower cos give weak margin signal

The ripples of a consolidation in the telecom sector has spilled over to the tower industry as well which is feeling the heat with declining margins and profitability.

In the last one year, consolidation in the tower industry paved way for players, including Bharti Indus (after merger of Bharti Infratel and Indus Towers), American Tower Corporation (ATC) which acquired Viom Networks and independent tower business of Vodafone and Idea separately, and Reliance Jio (after acquiring assets of Reliance Communications). State-run player BSNL is the other major player with substantial number of towers and is looking to divest its tower assets.

In the mobile market, the industry is left with three players – Bharti Airtel, Vodafone-Idea combine and Reliance Jio, besides the telecom PSU combination of BSNL/MTNL.

The wave of disruption in the telecom space started with the entry of Reliance Jio, as low data tariffs with free voice calls delighted the mobile users but impacted financials of the incumbents, and then the allied tower industry.

Experts say a lean structure has been created across the telecom and tower industry. Going forward, expansion of 4G services and new technology 5G will be key to growth as data is the future.

The tower industry in India requires a massive investment of Rs 20,000 crore in the next few years to keep pace with the burgeoning growth in data on mobile and advent of new technologies. The industry needs at least 100,000 towers in the near future as it makes a stride towards new technologies including 5G, artificial intelligence, internet of things. Not to forget, the need for constant expansion in 4G mobile services.

According to TAIPA director general TR Dua, the country's telecom industry boasts of the world's lowest tariffs and low handset prices, where the number of towers have quadrupled since 2006 from 100,000 to nearly 4,40,000 towers in 2016 and 4,71,000 towers as on April 2018.

Crisil Research analysts say the tower industry margin will attain fiscal 2013 levels in the current fiscal.

In the report, Crisil said in fiscal 2019, it expects operating margins to contract 450 bps because of co-location exits and decline in rentals per tower.

After the merger of Vodafone India and Idea Cellular, Vodafone Idea is in the process of exiting about 27,500 co-locations and is expected to announce more in the near term. Along with this, there will be a loss in tenancies of smaller players such as Aircel and Telenor which exited the space.

Also, industry's rental per tower is expected to decline by 7-9% on-year owing to co-location exits and lower tenancies. However, the increase in number of towers and exit penalties will limit the decline in rent revenues of the industry.

In the first half of fiscal 2019, Bharti Infratel has already seen a 350 bps on-year slide in operating margins... the trend would continue in the second half of the year as well. And in fiscal 2020, operating margins are expected to drop another 300 bps primarily due to a dip in rentals and further loss in tenancies of Vodafone-Idea and Bharti-Tata, post-merger, Crisil said.

Currently, the industry has 471,000 towers across the country with 18.5 lakh base transceiver stations (BTSs) installed over these towers while the total subscriber base stands at around 1.1 billion.

Dua said, "The country is set to witness a multi-fold growth of data which will necessitate the installing of around 100,000 mobile towers across the country in the near future."

Despite the consolidation, the growth in data traffic and volume is manifold. According to a recent report by Ericsson, smartphone subscriptions in India is likely to grow from 560 million in 2018 to 1 billion in 2024, and data traffic per smartphone per month is expected to grow at a compound annual growth rate of 14% from 6.8 GB in 2018 to 15 GB in 2024.

Way ahead

Going forward, fiberisation of mobile towers will be the need of the hour. US, China and Japan have more than 80% of mobile towers fiberised while in India the percentage is close to just 20%.

However, the tower industry has many challenges in setting up of towers which include issues with the right of way (RoW), difficulty in new site acquisitions, lack of single window clearance and others. Since the issue of call drops, the telecom department has been working on with many other departments to ease setting up of telecom infrastructure by operators. The department of telecommunications has been proactive in resolving issues on RoW with various state departments.

India has over 1 billion mobile users, but 50-60 % of users are still on the 2G network, i.e. not on the internet. The battle for next round will be fought for these 2G users where every telecom player will compete to get a maximum pie of this number.

Rs 20,000 cr – investment required by telecom tower industry  in the next few years