Tower firms' top line woes to continue despite 4G switch: CRISIL report

Telcos’ focus on densification of 4G network is unlikely to result in better top line for tower companies, a recent CRISIL report has suggested. 

As telcos stress on densification of 4G, the replacement of 2G and 3G base transceiver station (BTS) or signal transmitters with 4G will slow down the net BTS additions to about 155,000 in fiscal 2020 from 275,000 in fiscal 2019. 

The number of BTSs per tower is, however, expected to increase marginally to 3.85 this fiscal compared with 3.67 in fiscal 2019 on increased loading by telcos to increase their capacity per site. This will support existing coverage during high traffic and congestion, CRISIL said in a note shared with Business Standard. 

Hetal Gandhi, research director, CRISIL, said this loading results in a discount to telcos (which need to pay just 10-15 per cent of rent). This reduces the potential for higher top line of tower firms. 

Telecom operators are pushing consumers to shift to 4G network as it allows them to offer more data services which convert to higher revenue.  

Going forward, loaded sites are expected to account for a higher proportion of incremental tenancies. In addition, rentals may come under pressure during contract renewals as telcos have higher bargaining power, Gandhi felt. 

This is because telcos’ return on capital employed (RoCE) is less than around 2 per cent, compared with tower companies’ RoCE, which is as high as 19-20 per cent. After a decline of about 7 per cent in fiscal 2019, CRISIL Research expects the rent revenue per tower to remain under pressure and decline by another 2-3 per cent in fiscal 2020. 

Tower companies are already hit by tenancy losses. Consolidation in the telecom industry has changed the dynamics of tower firms. The latter reported massive tenancy losses over the past one and half years. 

For instance, the recent merger of Vodafone and Idea resulted in over 57,000 tenancy losses. Moreover, reduction of around 21,000 tenancies is expected in the first half of fiscal 2020. While exit penalties are expected to partially offset the revenue loss, the impact of tenancy losses is expected to spill over to fiscal 2020 as well. 

“The telecom sector is moving towards an oligopolistic structure, with three players accounting for more than 90 per cent market share. This will pose challenges for tower firms and put pressure on rent revenue per tower as the number of tenants per tower would go down. Also, the stressed financial condition of debt-ridden telecom incumbents will restrain any material hike in rentals, at least over the medium term. 

In addition, though the towers added by Bharat Sanchar Nigam and Reliance Jio account for a considerable share of captive towers, the revenue from this does not flow to the industry,” Gandhi added. 

A look at tower rentals in the past 12 quarters indicate a stabilising trend till the first half of fiscal 2018 and then a drop for the first time in five years in the second half of fiscal 2018, owing to tenancy losses. 

The Indus Towers-Bharti Infratel merger, expected to be completed by late 2019, is set to create the world’s second-largest mobile tower operator, with over 163,000 towers and 36 per cent tower market share in India. Post-merger, the industry will have three large players controlling over 70 per cent of the tower market.

Meanwhile, with telecom operators divesting tower assets, the industry is expected to the shift to pure-play independent tower firms from the operator-led model. 

Telecom sector debt remains elevated due to high network investments and spectrum price. CRISIL Research estimates the total debt to be Rs 4.3 trillion as of March 2019. Thus, telcos are resorting to measures such as selling standalone towers or reducing stake in existing tower subsidiaries, to pare debt. For instance, Vodafone and Idea, last year, sold 20,000 standalone towers to American Tower Company (ATC) for around Rs 7,800 crore. Also, Bharti Airtel had raised over Rs 12,000 crore through multiple rounds of stake sale in Bharti Infratel.