An introduction to the Indian tower market

The Indian tower market has been growing and evolving steadily since its creation in 2007. With operators keen to cooperate to achieve rapid growth and with its unique reliance on local raw materials, the Indian tower market continues to support the telecoms industry with operational excellence at a competitive price as they make the most of new spectrum. It’s also helping operators to meet environmental targets set by the government as India continues the push towards 4G and connected cities.

With an estimated 400,000 towers, the Indian telecom industry is the world’s second largest and continues to grow rapidly; to date, India has more telecom towers than the USA (~300,000), is second only to China (~1mn towers) and has 800 million mobile connections. Over the past seven years, operators and independent tower companies have built an average of 50,000 new towers per year and coverage now extends to 90% of the Indian territory. The Indian tower industry has been supporting this growth since its creation in 2007 with the founding of Quippo SREI (now know as Viom Networks). It was the same year that an operator first spun off its towers into a fully-owned subsidiary when Bharti Airtel created Bharti Infratel. The Indian tower industry was created to make the most of telecom infrastructure, 70% of which has been built or is now operated by the towercos, and helps them to keep up with growing demand for mobile voice and increasingly data connectivity.

The Indian tower ecosystem has several unique characteristics that differentiate it from that of other markets. India’s telecoms market is very much towerco-driven thanks to the unbeatable opex and capex savings they are able to provide. Strong relationships with local suppliers of steel and other raw materials and services mean that new tower sites can cost as little as US$25,000, much lower than the global average which is around US$100,000. This means that the Indian market is also quite price sensitive and lease rates and service price points are lower than other markets, averaging ~US$500 per month. Lease rates are however somewhat determined by what the MNO tenant can afford to pay, and diesel costs are passed through at the majority of sites (although around 10,000 sites in India are operated by powercos on fixed cost contracts). In addition to this, when a new tenant is added both they and the existing tenants receive a 10% discount on rent. This hasn’t been widely practiced in other markets, but has been a key incentive in the Indian market since the early days of the tower industry, and Airtel are believed to have sought a similar discount structure in their African tower sale. The tenancy ratios of India’s five largest towercos are at or approaching 2.0, and average ~1.5 across the country, reflecting the maturity of the market.

 

Indian telecoms regulators have been forward-thinking and flexible as the Indian tower industry has evolved over the years. In 2012 the Indian government restructured the telecoms industry and revisited a large number of licenses that had been previously awarded, resulting in the cancellation of 122 licenses. The number of licensed mobile network operators in each Circle dropped from an average of eleven to the five that currently hold 85% of the market share. The fallout for the tower industry was instant and brutal. In the short term the number of tower tenants dropped by a double digit percentage leading to a sharp decrease in revenues. In the longer term, the restructuring has made the market more transparent and less risky; the restructuring may have resulted in fewer operators, but they make for much better tenants. In addition, towercos were forced to focus on cashflow, and on reducing opex through increased efficency and new, lighter tower designs. Even single tenant cell sites had to be profitable in India, aiming for 56-58% EBITDA per site excluding pass through.

India’s finance ministry recently announced an increased GDP growth rate between 8.1% - 8.5% for the fiscal year starting in April 2015 and this is expected to contribute to increased growth in the telecoms sector. India is already one of the world’s fastest growing mobile markets with 941 million connections in Q4 2014, representing SIM penetration of 74% (source: GSMA Intelligence), and 8.87 million subscribers. Both mobile voice and data services are still growing; with data penetration estimated at 25% and much of this 2G - 2.5G, the operators still have a long way to go. With mobile broadband penetration at 11% a large part of the network investment is expected to focus on 1800, 2100 and 2300 MHz rather than the 900Mhz spectrum. Some estimate that the Indian telecom industry will need to build as many as 400,000 more towers over the next five years to support this, while others predict that the same results can be achieved with increased operational efficiency, tower tenancy and a smaller rollout of new towers supplemented by small cells. The government in India has also created programmes to promote connectivity in the country and increase the energy efficiency of all industries, which are sure to have an impact on the tower industry. Currently urban mobile penetration is estimated at 125%, while it is at 42% in rural areas; the Digital India initiative aims to close this gap and is calling on mobile network operators to play a key role which will drive a significant amount of new growth.

 

While 4G penetration in the Indian market is currently miniscule, there is every indication that it will increase quickly. Huge investments have been made on spectrum with Indian operators spending close to US$50bn on auctions over the past 4-5 years; these auctions are ongoing and expected to continue until 2018-2019. The race to bring data connectivity and ultimately 4G to the Indian market has attracted new competitors to the market including R-Jio, a subsidiary of Reliance Industries Limited. R-Jio’s recent press releases indicate a great deal of focus on the burgeoning mobile data segment. R-Jio’s licenses for 1800Mhz and 2300 MHz spectrum will require more BTS, and they are expected to lease towers rather than build to enter the market faster. Towercos will be watching closely to see exactly what R-Jio’s strategy is, which circles they will target, and what the opportunities are.

Technology, innovation and operational excellence are the keys for the independent towerco value proposition, and Indian towercos are shifting their focus to streamlining their operations and reducing costs.

Originally in the tower industry the cost of diesel consumption was passed on to the tenant, demotivating investment in energy efficiency. As the focus on providing a complete managed service increases the fixed-cost energy model is becoming more popular, which also incentivises towercos or partner ESCOs to invest in energy efficiency. The migration to green energy has been resisted due to the initial capex cost, as well as O&M and management challenges in rural areas. Currently only ~1% of India’s towers are powered by renewable energy; there are approximately 4000 solar powered sites in the country, but 60,000 run diesel free with widespread use of CDC battery hybrids. Batteries are widely used, including VRLA (lead-acid) and lithium-ion. Battery banks are now the primary power source on many unreliable grid sites, with the diesel genset being used only as a backup.

The powerco / ESCO model is becoming more prevalent and there is increasing investment from end to end; legacy assets are maintained and managed, and then replaced as required. Its estimated that in total powercos manage around 10,000 towers in the Indian market, and they are seen as a small segment with a big role to play in the future considering projected growth and government targets. In its January 2012 “Approach Towards Green Telecommunications”, the government originally set a target for 50% of rural and 20% of urban sites to be powered by renewable energy by 2015.  These targets have since been revised, with a focus being put on improving the carbon footprint through reduction in the use of diesel.

 

The big question is “when will the next major tower deal in the Indian market take place?”. The 2012 restructuring resulted in a halt to the M&A activity that took place between 2007 and 2012. It seems that this is slowly starting to pick up again and there have been rumours of one or two possible transactions involving Indian and international towercos. In addition to this it is also speculated that BSNL is in the process of a carve out of its ~45,000 towers into a new towerco subsidiary with some industry figures claiming that this is a matter of time.

In the meantime some Indian towercos are already in the process of evolving from a basic infrastructure sharing model to a full multi-service model providing end-to-end support of both passive and active network elements. Towercos are looking for new ways to help operators minimise opex and capex and become their key partners for managed services including customised site planning, energy efficiency, access to fibre networks and white label WiFi services for end users. The Indian tower market continues to be vital and innovative, and a source of inspiration for the industry as a whole.