Telecom tower industry is expected to undergo structural changes in the medium term: ICRA

As per ICRA estimates, debt to the tune of Rs. 80,000-90,000 crores can be pruned from the telecom industry if the stake sale transactions of tower assets currently under discussions materialize.

By Priyanka

    According to the new report by research firm ICRA, the telecom tower industry is expected to undergo structural changes in the medium term.

    Telecom tower industry is expected to undergo structural changes

     

    Currently, the industry, with around four lakhs towers and about eight lakh tenancies, is a sizeable one in the world. It has ten organized players (apart from many small tower owners) wherein 74 percent of the portfolio is held either by tower companies promoted by telecom operators, or by telecom operators themselves. Over the next 1-2 years, there is likely to be a material change in the industry structure with a number of players expected to reduce to 4-5.

    The report said that the industry is also likely to witness strong growth in the coming years driven largely by the network expansions by telecom operators, and upside in rentals due to improved negotiation power which would follow from consolidation as well as from greater independent ownership.

    At the same time, the consolidation transactions could entail migration of some debt to the tower industry from the telecom industry, where elevated debt levels remain an area of concern.

    Harsh Jagnani, Sector Head & Vice President - Corporate Ratings, ICRA elaborates: "The industry generates steady cash flows given its indispensability to the telecom services and benefits from the inherent strengths of the lease agreements or Master Service Agreements (MSA) which include: long tenure (the MSAs range from 10-15 years), penalties on exit before a fixed lock-in period, per annum escalations in rentals, and incentivising addition of new tenants."

    "This, along with moderate capex over the last few years has enabled many tower companies to achieve strong financial profile with the steady reduction of debt. The industry is now on a solid footing to expand as the telecom sector looks for greater and deeper network expansions to meet the growing need for data," Jagnani added.

     

    As per ICRA estimates, debt to the tune of Rs. 80,000-90,000 crores can be pruned from the telecom industry if the stake sale transactions of tower assets currently under discussions materialize. A significant portion of this could be funded by debt in the tower industry, to be supported by its relatively stronger capital structure and greater predictability of cash flows.

    Tower companies may also look beyond traditional business and explore opportunities in areas such as in-building solutions, WiFi hotspots, fiberization, etc., although the business models around these remain to be developed. In addition, possible upsides to the cash flows for the tower companies are growing in rentals due to improvement in the negotiation power of tower companies; and reduction of power expenses, primarily diesel consumption, aiding the growth in profitability. Tower industry can also explore the REIT/InvIT (Real Estate Investment Trust or Investment Trust) structure to access a greater pool of investors.

    Read More About: telecom news jio telecom operators
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