The ratings agency said that the ongoing consolidation in the Indian telecom sector could turn out to be credit neutral for tower companies as reduction in redundant tenancies and higher bargaining power of telcos will be offset by the requirement for additional data sites and upgradation of the existing 2G/3G sites to 4G sites on account of rising data demand.
“Counterparty risk remains critical for telecom tower companies. The average rental per tower could remain under pressure in FY18 due to deteriorating financial health of the telecom companies, despite contractual escalators embedded in master service agreements. However, site upgradation and data driven site growth will support the revenue growth. Base Transceiver Station additions are likely to be strong, particularly with operators launching and/or expanding their 3G and 4G service offerings,” the agency said.
There are about 420,000 telecom towers in India with an average tenancy ratio of 2x-2.2x which could increase by 15%-20% over FY18-FY19 with 4G emerging as a predominant data technology. Operators will also continue to offload more data to Wifi networks and small cell networks.
The agency said that tower companies’ revenues will be protected in the short to medium term with tenancy additions from 4G expansions likely to offset tenancy losses emanating from the merger of Vodafone and Idea, Reliance Communications Limited with Aircel Limited and Telenor India’s acquisition by Bharti Airtel
Reliance Jio has a target to set up 200,000 cell sites by mid-2018 from current 120,000 cell sites at present.
Ind-Ra said that the likely proliferation of the low cost 4G feature phones is also likely to drive the data demand.
The agency further added that the cash flows of telecom tower companies are also likely to be protected from the exit penalties upon consolidation due to cancellation of duplicate agreements.
“The tower business is characterised by high front‐ended capex, high operating leverage and financial profile improvement directly linked to growth in tenancy ratio. As most of the tower operators work on a build‐to‐suit model having at least one anchor tenant with long term lock‐in periods, tower companies have a strong and steady stream of predictable annuity cash flows but low working capital requirements,” Ind-Ra said.
“Tower companies have high operating leverage due to relatively low variable operational expenses which leads to improved margins upon increase in asset sweating.”