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Put to the Test: Challenges in the telecom infrastructure space

March 13, 2014

Indian consumers’ demand for communication services coupled with the telecom industry’s willingness to roll out infrastructure to match this demand have played a key role in driving telecom service growth in the country. However, there have been several challenges in achieving this growth. One of these is the high capex associated with telecom infrastructure development. A telecom tower site requires an investment of Rs 2 million to Rs 2.5 million and the break even for such investments is achieved over a long period of time. Even in the case of fibre roll-outs, high right-of-way (RoW) charges make it a very expensive business proposition for operators. These RoW charges vary across circles and generally range from Rs 100,000 per km in low-growth/revenue circles to Rs 1 million per km in metro circles such as Mumbai. Such exorbitant RoW fees have discouraged operators from undertaking extensive fibre roll-out in the country. Rural and remote regions, despite offering huge untapped potential, have witnessed limited tower roll-out by operators and tower companies largely on account of very high capital requirements and deferred returns.

Further, deployment issues such as delayed processes, the lack of a single-window clearance mechanism and issues in securing RoW have impacted infrastructure development. Tower companies are required to seek approvals from several regulatory authorities for tower installation. Each of these bodies has its own set of rules and regulations, which results in delayed roll-out as well as cost escalations. Another key issue faced by tower companies is the management of energy requirement at tower sites. Poor grid power availability has made most of the tower sites highly diesel dependent. However, the surging cost of fuel and growing instances of diesel pilferage have made a dent in the pockets of tower companies. The use of alternative sources of energy such as wind, solar, biogas and fuel cell to power tower sites has been limited to a very small base. Moreover, these technologies have their own constraints. Besides being highly capex intensive, solar energy requires large tracts of south-facing and shadow-free land for panel installation, while wind energy can be used only in regions with high wind density. Meanwhile, biomass-based power plants face issues in procuring fuel while fuel cells (hydrogen based) have serious logistics-related limitations. Though the industry is optimistic about the renewable energy service company model, the concept is new for the Indian telecom infrastructure space and may take several years before being implemented in a big way.

While the aforementioned challenges have persisted for several years now, their impact has become more pronounced in recent times as overall sector growth has slowed down. The lack of regulatory clarity, policy paralysis and poor operator finances have impacted the business operations and growth prospects of several infrastructure providers. Following the developments related to the 2G controversy, some operators have exited the Indian telecom sector while several others have downsized their operations significantly. The incumbents are struggling to retire the huge debt on their books. Further, substantial payments in the form of the one-time spectrum fee and for spectrum acquisition will add to their financial issues. In this scenario, operators have resorted to massive cuts in their capex, which resulted in a sharp decline in new tower roll-outs as well as tenancies, and consequently, tower companies’ annual revenues from rentals have been impacted.  Moreover, the response to 3G services has been below expectations, which impacts the return on investments in network roll-out. The stringent norms related to electromagnetic field radiations emanating from towers also require tower companies to roll out new and improved towers, which will further impact the cash-crunched companies.

As it is, tower operators are facing issues in raising funds for new roll-outs. Most of the incremental financing in the past three years for the industry has come through the debt route. There has been very limited equity financing through foreign direct investment from global strategic players or through equity placements to minority shareholders. Bharti Infratel’s initial public offering in December 2012 was the only successful deal in the past three years. On the other hand, Reliance Communications’ efforts to sell a majority stake in its tower subsidiary and Viom Network’s plans to get listed on national and international bourses have failed. One of the key factors that discourages investors is the tower companies’ high leverage coupled with their inability to service this leverage at the current level of earnings before interest, taxes, depreciation and amortisation. Several companies have already opted for debt restructuring, seeking an extension of the principal and interest payment period or a decline in coupon rates, etc.

Net, net, the past few years have put the telecom infrastructure segment to test on account of low investments and low tenancy. Limited tower roll-outs and tenancies are likely to continue in the short run. However, investments in the segment would increase in the medium to long term on the back of 3G network expansion, 4G service roll-out and greater policy and regulatory clarity.

 

 
 

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