Indian Telecom Industry: Telecom Infrastructure Exchange
The cancellation of licenses, the implementation of open market policies and other liberal economic policies have helped the Indian telecommunications sector to register remarkable growth over the last 5 years. India’s telecommunications sector is today the second largest and fastest growing telecommunications market in the world, only after China. Competition is intense with 4 of the top 10 telecoms operators representing two-thirds of the entire mobile market.
While all major telcos such as BSNL, Bharti, MTNL, Reliance, and Tata Infocomm have seen a drastic increase in their subscriber base in recent years, average revenue per unit (ARPU) remains a major concern as the Price competition shows no signs of boiling. According to TRAI, in December 2008, the total subscriber base stood at 346.9 million, from 0.9 million as of March 1998. Despite subscriber-based growth, mobile phone penetration remains at a under 27% compared to 94% in the US. Furthermore, growth has been mainly from metropolitan areas and Class A circles.
Due to increasing competition and declining ARPU, large telecom operators including Bharti, BSNL and Reliance are now increasingly targeting Class B and C and rural circles to capture the untapped subscriber base. Given that growth will come from the lower income strata, it can be safely assumed that the APRU will continue to fall further.
ARPU and Memoranda of Understanding (Minutes of Use) are two critical factors for a telecommunications company, since they directly impact its EBITDA margins (earnings before depreciation and amortization of interest tax) and IRR (internal rate performance). In the past, telecommunications companies were able to improve their EBITDA figures by amortizing the cost on a large and growing subscriber base. However, fierce competition and declining ARPU are putting pressure on the EBITDA and IRR of these companies.
Sharing telecommunications infrastructure seemed like the most logical step to improve capital efficiency and reduce the cost of maintaining passive telecommunications infrastructure, as well as allowing them to focus on their core operations. Return on Capital Employed (RoCE) and earnings are also positively affected when telecom operators prefer to lease towers rather than own them.
A tower infrastructure company provides passive telecommunications infrastructure on a shared basis to telecommunications operators by entering into master service agreements (MSAs) with them. While sharing telecommunications infrastructure is now the order of the day around the world, the extent to which they are shared depends on competition and the regulatory climate in each country.
To improve capital and operational efficiency, large telecommunications companies, including Bharti Airtel, Reliance Communications, and Tata Teleservices, parted ways with their tower divisions as independent companies. This benefited them not only in the form of reduced operating costs and capital requirements, but also in unlocking significant value. Tower infrastructure subsidiaries always have the advantage of having a safe occupant. According to ICRA, telecom infrastructure can generate good returns after achieving an average occupancy ratio of 1.7.
In addition to the telecommunications infrastructure subsidiaries, there are several Independent Telecommunications Infrastructure Companies (ITIC) that build passive and active telecommunications infrastructure in advance and rent it out to operators. For example, Essar Telecom Infrastructure Limited, Xcel Telecom Private Limited, GTL Infrastructure Limited, Quippo Telecom Infrastructure Limited, Vision India Private Limited, Aster Infrastructure Private Limited, and TVS Interconnect Systems Limited.
ITICs are at a disadvantage compared to other telecommunications infrastructure subsidiaries, since they do not have insured occupants. In addition, the large telecommunications operators have their own infrastructure subsidiaries. As such, ITICs focus on regional and new operators. Unitech, Swan Telecom and S Tel Limited are some of the new participants that will count on these ITICs to optimize their investment.
Mobile phone rates are currently so low that any further reduction in rates will be impossible. The only distinguishing factor will be the quality of the service provided by the telecommunications operators. Given the limited spectrum coupled with an increasing number of subscribers, providing good quality of service will require additional passive and active telecommunications infrastructure, increasing the demand for ITIC. The introduction of mobile number portability with limited switching costs is seen as another important factor that will drive the ITIC sector.
Driven by intensifying price competition, mobile rates are now the lowest in the world. Consolidation is now expected to be the strategic and most logical step in the future, supported by the growing number of ITICs.
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