Towers of cash

SPECIAL REPORT

Bharti Airtel and Reliance Communications will be the biggest beneficiaries as global investors vie for a pie of the telecom infrastructure space.

The sale of 5 per cent in Reliance Telecom Infrastructure (RTIL) for Rs 1,400 crore to strategic investors has highlighted the value unlocking potential of the telecom infrastructure of Bharti Airtel and Reliance Communications (RCOM).

The two companies with a combined market share of over 40 per cent and running nearly 50 per cent of India's 1.1 lakh telecom towers are looking at options of sharing their infrastructure with other operators or selling a stake to strategic investors or independent tower companies.

Bharti Airtel has an MoU in place with Vodafone to share infrastructure with an eye on improving efficiencies and over 20 per cent of India's existing towers are shared by all the telcos. But is sharing of towers the norm or is India charting its own path? 

THE TALLEST TOWERS
	CMP	Towers	Value (Rs crore)	Shares (cr)	Value per share (Rs)	% of CMP	Total
RTIL	550	13800	27540	204	135	25	685
Bharti Infratel	882	35000	41310	190	218	25	1100
Idea	125	5000	5000	264	19	15	144

Tower power
When the operators rolled out their infrastructure so far in the past, owning telecom towers which help catch and boost signals was seen as a source of competitive advantage. So operators aggressively rolled them out especially in the urban centres snapping up vantage points.

This is also the reason why the proportion of rooftop-based towers is high as compared to ground-based towers. The expansion of the towers is now more evenly spread and areas targeted are along the highways and semi-urban and rural centres.

However, major expansion plans of operators both in terms of infrastructure and rolling out new technology platforms means continuing investments. So, how have operators around the world handled this? In Europe, Vodafone and Hutch share their infrastructure largely because of the small size and density of population covered.

This is the case in Asia as well (China is an exception). Experts opine that India too could go the China way due to the geographical spread and population density. In America, independent tower companies have become what they are by acquiring towers of operators gradually.

The area and the population covered make it unviable for a operator to run a tower company with itself as a sole tenant. Sharing thus becomes a natural outcome of the need to cover the Indian landscape at a cost that doesn't cost the earth.

High on capex
The cost of setting up towers in large numbers can be enormous even for companies with deep pockets. A ground-based tower costs Rs 30 lakh while its roof-top-based sibling can set the company back by half that amount. For tower portfolios of the size of a Bharti and Reliance, this can be quite a burden.

Consider Bharti's plans for tower expansion. The company plans to add 30,000 towers this fiscal. Considering that a significant part would be ground based, the company would be spending close to Rs 9,000 crore. That kind of money is no small change even for a company the size of Bharti.

Shared benefits
The cost benefit of sharing is obvious. Says Prakash Ranjalkar, COO, GTL Infrastructure, an independent tower company, "A telecom operator makes a cost saving of 30 per cent on the capital as well as operating expenditure."

While it is imperative for companies with weak balance sheets such as Spice Communications and Tata Teleservices to share or lease towers, market leaders Bharti and Reliance Communications also need the cash to roll out the next generation of telecom services.

With average ARPUs which have nearly halved over the last four years from Rs 537 to Rs 270, spectrum scarcity forcing denser coverage, imminent rollout of Wimax and 3G services requiring a capex of Rs 40,000 crore and increasing capacity needs due to high minutes of usage, operators are left with no other option but to share infrastructure. But telecom operators are not complaining. The reason? The high cash flow nature of the business means operating margins (in the case of global tower leaders such as American Tower) in excess of 60 per cent. This is why RTIL offered a 5 per cent stake to strategic investors.

The deal...
The sale by RCOM gives RTIL an equity valuation of just over Rs 27,000 crore and translates to approximately Rs 135 per equity share of RCOM. This is nearly 25 per cent of the company's current market price of Rs 550 per share. The company is pitching the deal as a win-win for both companies.

While RCOM would net a capital gain of Rs 1,200 crore, the sale clears the way for an IPO or strategic sale, which will help RTIL raise resources to fund its expansion plans. If this valuation is seen as an incremental gain (Rs 135) to the current market price of Rs 550, it should fetch Rs 685 per share for RCOM shareholders.

And it does not include the gains that might come from the other triggers (some of which might be factored into the price) of setting up an SEZ at its headquarters in Navi Mumbai, BPO business and IPO or the private placement of its international carrier, Flag Telecom. What will gladden the hearts of other telecom operators is that the 5 per cent offering which garnered Rs 1,400 crore was oversubscribed six times.

...is pushing up valuations
Going by the same yardstick for tower infrastructure, the valuation of Bharti Infratel (Bharti Airtel's tower arm) stands at Rs 41,000 crore which translates into a per share value of nearly Rs 218. When factored into the current price of Rs 882, the share should trade at around Rs 1,100.

Both Bharti and RCOM will command a significant premium to other operators and tower companies as there are entry barriers in the form of clearances required from 40 agencies to build a tower and sheer size of their portfolios. RTIL has 14,000 towers while Bharti Infratel 35,000.

While it is difficult to value Idea's 5,000-odd tower portfolio, going by valuation for Reliance and giving it a discount of 50 per cent, the total comes to nearly Rs 5,000 crore. On a per share basis this translates to Rs 19 which when added to the current price of Rs 125 takes it to Rs 143, a 15 per cent increase.