Tower erection plans could dip 40%, valuations to take a hit

Written by Rachana Khanzode | Mumbai | Updated: Mar 10 2009, 05:38am hrs
Valuations of tower companies are expected to take a hit, with almost a 40% cut in the projected tower erection plans of telecom companies. As many as 2,00,000 towers of the total 4,96,000 planned by 2011 are expected to be dropped, according to industry analysts. The projections for towers include those by independent tower operators, operators with tower companies and telecom operators.

We estimate 3,00,000 to 3,30,000 towers by FY2011 rather than the estimated 4,96,000 by the companies, says Neeraj Jain, director, strategic & commercial intelligence, transaction services, KPMG. Valuations of tower companies are driven by the revenues of these companies, which are directly related to the number of towers X tenancy ratios X average lease rentals.

During the economically-stable days, valuations of tower companies like Reliance Infratel were pegged at as high as Rs 27,000 crore in July 2007 with towers that cost just Rs 20-40 lakh each to set up, priced close to Rs 2 crore. This sparked off a wave of M&A deals in the tower industry. Post this, in June 2008, Indus Towers was formed, a joint venture between Bharti Infratel, Vodafone and Idea with 70,000 towers each valued at Rs 1 crore per tower. In another example, Quippo acquired stake a 49% stake in Wireless Tata Telecom Infrastructure Ltd for Rs 2,400 crore.

At the same time, if the tower companies execute their plans as announced, the tenancy ratios (number of base transreceiver stations - BTS - per tower) will drop drastically to 1.1, making it difficult for them to survive. A Citigroup report (February 2007) projects 4,63,590 BTS required by FY2011. Currently, the tenancy ratio in the industry range from 1.2 to 1.7 and companies need to have a tenancy ratio of 2.0 to be profitable. Presently, Bharti Infratel has a tenancy ratio of 1.3, Reliance Infratel has 1.7 and GTL has a tenancy ratio 0.9. Reliance Infratel is still profitable because it charges higher than market rental rates and its tenancy ratio is driven by Reliance Communications GSM launch. But in a bid to attract external tenancy, we expect it to cut rates, says GV Giri, an analyst with India Infoline Capital.

Also, with 3G expected sometime next year, tower companies are already implementing base stations that complement the rollout of 3G, from last 6-8 months. These would just require software adjustments to rollout the 3G services. Analysts point out that 3G-rollout is expected to be restricted to the larger cities and into certain pockets that are high revenue generators, 3G rollout can be dependent on the forthcoming new towers and the existing towers. This is because the BTS required for the 3G rollout are micro BTS and can be even nailed in a wall, adds Jain.