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September 02, 2007

The towering opportunity in telecom infrastructure

Businessworld points out how Indian telecos are cashing in by spinning off their tower businesses.
For Indian companies, this serves two purposes. One, it unlocks the value that is stuck in these towers, which can be reinvested in expanding their subscriber handling capacities. This would also help them improve their profit margins, which have been under pressure as the average revenue per user has been falling.

At present, companies allocate about 40 per cent of their capital expenditure on these towers (each tower costs between Rs 12 lakh and Rs 35 lakh). The hiving off of the tower business makes it an independent company, whose assets can be shared by different telecom players. Such sharing reduces capital expenditure and operational costs, including maintenance, for companies. Besides, adding more subscribers will increase the topline.

Sharing towers also facilitates quick rollout of networks in rural India, where the density of cellphone users per square kilometre is much lower. But demand is expected to grow rapidly. The government aims to connect 100 million rural users, and is willing to offer tax breaks to attract companies to build towers.

UPDATE: Business Today has a more detailed feature on this phenomenon with emphasis on the rich valuations of deals in this sector.

The tower companies say there is going to be a huge demand given the growth in subscriber numbers and also the pan-India ambitions of many operators. Yet, the question persists: If all players are expanding their tower base, why would they need to share towers at all?

...the operator-promoter companies clearly have a head start over their third-party competitors, who have to start operations from scratch. But that's not dampening their growth expectations. "Our plan is to grow to 20,000 sites in the next three years," says Ajay Madan, CEO, Essar Telecom Infrastructure Company, which has set aside Rs 1,200 crore for tower expansions. For their part, the new players would appear better positioned to evolve a more integrated business model that can accommodate new wireless technologies. "We are talking to a few internet and broadband players who want to share our towers for deploying Wimax services," reveals Madan.

...Tower companies are valued at a multiple of earnings before interest, depreciation, taxes & amortisation (EBITDA). Companies operating in mature markets such as American Towers are valued at 16-17 times the EBITDA. "There is a case in India of taking a much higher multiple because the market in India is growing much faster than that in the US," says Venkat.

...Despite new revenue streams like Wimax and wireless broadband emerging, the tower industry will have to rely on voice traffic as its bread and butter for the next 3-5 years. And it's this dependence on a single revenue stream that will lead to a shakeout-just as in the us, where a dozen players got reduced to three giants, with the smaller firms going bust in the late '90s because of underpricing in anticipation of big volumes. "They (tower owners) just cannot price arbitrarily or abnormally. Any new operator will outsource a tower only if it makes business sense for him," warns Awasthi.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.