Telecom companies tower business will put their companies in astounding growth territory by 2010. As we have saw that on July 19, 2007 Reliance Communication offloaded 5% stake in RTIL (Tower business) translating to Rs 135 per share from their total equity value at USD 6.75 billion (about INR 27000 crore).
Bharti Airtel has seen nearly 90% growth in their subscribers from 19.57 million in FY06 to 37.14 million in FY07. During the same period Reliance Communication has seen growth of 39% from 20.21 million to 28.01 million subscribers. In FY07, Bharti Airtel has total tower site of 39281 and Rel Comm held 13000 towers.
India currently has total tower sites of 120,000, housing 136,000 BTS (Base Transmitting Station) of various operators. As per analyst estimates, Bharti Airtel will alone have 114,000 towers by March 2010 and Reliance Communication is likely to have 63,000 towers.
If these companies are able to deliver the target taking their current pace by 2010 then where will they stand?
At this pace their equity value in tower business will have significant upside by March 2010.
Even with the largest tower portfolio in the country, Bharti has the highest occupancy ratio on its towers with 1.26 occupants per tower. However, all other operators' towers have lower occupancy ratios resulting in average occupancy of the industry being low at 1.13.
Macquarie Research estimate huge demand for wireless towers as coverage in rural areas of India increases and Indian wireless companies cover more people. We estimate that the industry would need 450,000 BTS by March 2010 to support a forecast wireless subscriber base of 425 million. Research firm expect Bharti Airtel to capture dominant market share in this space. Bharti Airtel to have a portfolio of 114,000 towers by March 2010, translating into all-India towers market share of 33%. Reliance Communication is likely to have the second largest portfolio, with 63,000 towers, implying a market share of 18.3%.
Other third-party, independent tower companies are also likely to succeed. However, competing with bigger players with assured captive occupancy will remain the key challenge for these companies. Third-party tower companies are likely to have lower occupancies since they start from scratch, while operator-owned tower companies already have occupancy ratios of 1x or more.
Tower sharing help to moderate the tower requirements for all operators. Tower sharing will likely lead to easier, faster and cost effective entry of hitherto small or regional operators into new circles turning them into pan–India operators. Players like Bharti and RCOM who are at the forefront of the tower initiative potentially run the risk of significant enhancement in competition from these new entrants.
Macquarie Research expect the tower businesses to add significant upside to Bharti and RCOM's valuations. DCF analysis of Bharti Infratel suggests a valuation of USD 8.5 billion for the tower company, Bharti Infratel. In addition, Bharti Airtel is likely to gain from lower capex at the parent company level due to outsourcing of their tower requirements. The savings to Bharti Airtel at USD 3.16 billion. In total, the upside to Bharti Airtel from the tower subsidiary at USD 11.6 billion or Rs 250 per share. This translates to additional upside of 30% over and above the upside of 24% from the base business.
Reliance Telecom Infrastructure suggests a valuation of USD 4.45 billion for the tower company. Like Bharti, RCOM will also gain from lower capex at the parent company level. The savings to RCOM at USD 3 billion from reduced capex requirements. In total, we value the upside for RCOM at USD 7.5 billion or Rs 135 per share translating to additional upside of 27% further to the base business upside of 29%.
According to Merrill Lynch Report, " We are raising our PO on Reliance Communication (RCom) to Rs 690 per share (20% potential upside). This is driven by 1) Rs 70 per share value ascribed to external tenants on their tower subsidiary, 2) Rs 15 per share towards the land for which RCom recently received SEZ approval; and 3) Rs 605per for RCom's core telecom biz, implying an EV/EBITDA of 13x FY09E, broadly on par with our target valuation for Bharti at Rs 1000 per share. In addition to Bharti's core valuation, our quick estimates indicate that external tenancy on Bharti's tower biz could be worth Rs 125 share using broadly similar assumptions as for RCom. "
"RCom announced the sale of a 5% minority stake in its towers-subsidiary to a clutch of financial investors. The stake sale places RTIL's total equity value at USD 6.75 billion. Based on discussions with the Co, we think it is early to fully factor the capex recovery & external occupancy assumptions that have likely driven the deal value. Our SoP above assumes 15-25% discount to implied deal valuations. We assume 30% external occupancy for RTIL vs Co's expectation of 40% external occupancy. We work with an 11% capex recovery factor vs the Co's indicative range of 11-13%. On tower rollout, however, we think RCom's indication of 50K towers by FY10 is conservative; we factor 70K towers by FY10. " says Merrill Lynch.
In the analyst meet held post-deal, Mr Anil Ambani, Chairman ADAG said that the Co is on track to unlock value, in FY08, on four fronts: 1) tower biz; 2) FLAG undersea cable biz; 3) development of SEZ land; & 4) development of a BPO biz around existing contact center facilities. The Co may look for another tranche of value-unlocking in towers/RTIL & reiterated plans for overseas listing of FLAG. The Co will IPO its tower biz but said there is no pre-committed timeline for this.
According to Citigroup Report, "RCOM's tower plans scaled up RCOM also disclosed plans to set up 23,000 towers during FY08 (capex of US$1.5bn); which could go up if GSM becomes reality leading to higher no. of towers and US$2bn capex. On the supply side, 80% of the towers will have tenant capacity of 4+. On the demand side, management is also factoring tenancy from WiMax and 3G apart from 2G Voice."
"RCOM's towerco valuations at EV/invested Capital of ~3.0x is in-line with global peers but does not adjust for lower expected tenancy (see table overleaf). This will rub off positively on Bharti's towerco valuations – our estimate of Rs160/share (US$7.3bn) is at EV/tower of US$131,000 and EV/IC of 1.9x. "
Key Risks
- Unexpected failure to execute in the tower-sharing business
- A change in regulation or restrictions on pricing may have an adverse impact on the business.
- A slowdown in business due to higher competition or otherwise will lead to significant decrease in already poor interest coverage ratio. This could further increase the financial risk for the company and may potentially lead to higher than forecast dilution of equity.
- This is a highly capex intensive business and most tower companies plan to increase their leverage significantly to support their aggressive capex plans. A huge increase in capex could have a very negative impact on the balance sheets of the companies exposing them to significant financial risk.
- Unforeseen financial burden from likely 3G auctions
- Unexpected pressure on RoE (return on equities) due to overseas expansion plans
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