Consolidation in the telecom services industry has been accompanied by consolidation in the passive infrastructure segment. There are, in effect, just two players in the telecom tower segment – Indus Towers and Brookfield, which has bought out both Reliance Jio’s tower and fibre assets and ATC’s tower assets in India.
Both tower companies rely on the same three clients – Reliance Jio, Bharti Airtel and Vodafone Idea Limited (VIL) – for tenancy. Airtel has a substantial stake in Indus Towers, amounting to around 48.95 per cent, and reportedly has ambitions to push its stake beyond 50 per cent to take majority control. Vodafone UK used to own around 28 per cent of Indus but is said to have sold most of it in a sequence of deals.
Indus Towers has fewer assets than ATC, with around 220,000 towers, while Brookfield controls around 253,000 towers after it bought out ATC’s network of roughly 78,000 towers, in a $2.5 billion deal that followed up on Brookfield’s buyout of Jio’s assets.
Indus has better tenancy ratios at around 1.7x per tower versus Brookfield’s 1.5x, but Jio also has a 30-year deal that ensures it is Brookfield’s anchor tenant. Both Airtel and Jio continue their 5G network expansion, while VIL is yet to begin its 5G roll-out and has significant gaps in its 4G network as well.
One key factor that precipitated the ATC-Brookfield deal was the difficult financial situation of VIL. The cash-strapped telco was not able to pay its dues. This led to cash flow difficulties for ATC. VIL’s financial issues have also been a significant problem for Indus Towers, which has had to provision continuously for the receivables, with around Rs 3 billion in provisions for bad debt as of March 2023. However, after VIL managed to raise a substantial sum, Indus Towers has received some of its dues and the cash flow situation looks better.
Indus’ collections improved significantly through the second half of fiscal year 2023-24 as VIL’s cash flow constraints eased. VIL has since cleared past dues of Rs 3 billion. As a result, its balance sheet now looks better.
Apart from VIL, which is looking to start its 5G roll-out, Jio and Airtel are expanding their rural operations to cover underserved remote areas. The roll-out of 5G for Jio and Airtel is also still in progress. Assuming telcos want to improve speeds and connectivity, they require more tower density even in urban areas where heavy traffic is generated. So, there is a high likelihood of a three-player telecom services market for the medium term. This means better business and more tenancy for tower companies, in contrast to the situation some time back when it looked like telecom services would become a full-fledged duopoly.
However, revenues per tower have reduced over the past three years, and that trend continues with the revenue per tower being at around Rs 70,000 per month (March 2024) versus Rs 73,000 (June 2023). Indus Towers added roughly 7,900 tenancies between January and March 2024, and analysts believe it added around the same number or a little less in April-June 2024. Management guidance is for tenancy additions of around 7,000 per quarter for the near term. Assuming flat rental revenues per tower and 7,000-plus rental additions, this would work out to around 5 per cent growth in total revenues every quarter. Operating profits (earnings before interest, taxes, depreciation and amortisation) would grow by around 2 per cent per quarter. Lower energy costs, would push up margins overall, if tower companies can reduce their power costs per tower, as they are attempting.
Indus’ collections improved significantly through the second half of fiscal year 2023-24 as VIL’s cash flow constraints eased. VIL has since cleared past dues of Rs 3 billion. As a result, the balance sheet now looks better, with net debt reducing and profit after tax almost tripling to Rs 60.3 billion (March 2024) versus Rs 20.4 billion (March 2023). The provision of Rs 3 billion for bad debt was written back, fattening the profit.
However, receivables are still fairly high at around Rs 64.5 billion (March 2024), up from Rs 48.7 billion in March 2023, indicating that tardy payments remain an issue. Although there is optimism about VIL’s future, the telco remains in a difficult situation financially and needs to raise more funds. This is reflected in Indus Towers’ financials. Moreover, Indus has to continue incurring capital expenditure as it is adding steadily to its tower count.
The competitive dynamics of the tower duopoly are hard to decipher, but there is room for both. One element that is critical to both tower operators is VIL’s financial health. If VIL can shore up its financials, roll out its 5G network, strengthen its 4G network and pay for rentals promptly, both towercos could benefit. Otherwise, Indus has a relationship with Airtel, while Jio has a 30-year agreement with Brookfield. Both telcos will continue to spend on rentals and increase tower tenancies, and they will continue to use both towercos as convenient.
The trends in terms of revenues indicate that revenues per tower are likely to rise only if VIL increases its footprint substantially even while the other two telecom service providers continue their respective network expansions. This would lead to an increase in tenancies/towers and the buildout of new towers.
The rentals per tenant per tower – the amount a service provider pays for every tower where it has tenancy – show a declining trend, and that is unlikely to change. Tower operators do not appear to have the pricing power to hike rentals even with a duopoly.
According to the Jio management, its capex cycle has peaked, which means that network expansion will reduce in momentum. Airtel is still pushing to increase its rural presence, which is where the growth prospects have arisen for Indus in the recent past. But Airtel’s capex intensity is also likely to decline through the current and next fiscal year. VIL’s network roll-out would be the chief driver of growth. If this growth does not take place, there could be a classic scenario for the utilities in the tower industry. Once the capex cycle completes for Jio and Airtel, the tower companies will continue to generate stable income but will not see much revenue growth. They may, however, be able to improve margins on the basis of scale, more efficient operations and cheaper energy management options.
The share price of Indus has risen by 128 per cent in the past 12 months on the basis of the improvement in VIL’s prospects and also on the assumption that the Bharti Group will continue to increase its stake via acquisitions from the market.
The company saw an extraordinary expansion of profits as VIL cleared its past dues, and it will see some growth for sure as Jio and Airtel continue their network expansions. But once the capex cycle is complete for Airtel and Jio, any serious growth upside in the medium-to-long term depends on VIL making a sustainable turnaround. Whether VIL can achieve that is still an open question.
Devangshu Datta
