Telecom tower industry heads toward steady tenancy additions: ICRA

The headwinds faced by the telecom tower industry have largely subsided and the industry is now heading towards a regime of steady addition in tenancy levels and stabilization of working capital cycle, ICRA said in a note on Wednesday, adding that recovery is visible in the form of improving operating metrics of telcos, which are the end-users of tower companies.

Stabilization in the telecom services industry has consequently brought stability to the tower industry by arresting tenancy exits. Furthermore, demand for telecom services, especially data has seen significant growth, leading to consistent network expansion and upgradation by the telcos, noted Sabyasachi Majumdar, Senior Vice President and Group Head, Corporate Ratings, ICRA Ltd.

“This is expected to keep the demand for tower companies buoyant. Given the consolidation in the telecom services industry in the past, tenancy ratios for tower companies declined to 1.3-1.5 times from historical highs of more than 1.8 times. These tenancy ratios are expected to become the new normal for the industry, given that it’s a ‘3+1’ structure for the telecom services industry,” Majumdar said.

The receivable cycle also increased to more than 60 days in FY2021, against less than 30 days in 2017 but the liquidity position of tower companies remains strong, he said.

“The capital structure also remains healthy with limited external net debt, which coupled with healthy profitability translate into strong debt protection metrics, with interest coverage of around 5x and net debt (including leases)/OPBDITA of around 1.5x for FY2021,” Majumdar added.

The credit rating agency underscored that the telecom services industry has been witnessing a steady improvement in its performance led by demand for data services and migration of subscribers from 2G to 4G, which has resulted in sequential improvement in average revenue per user (ARPU) levels despite declining in Q4FY2021 due to an absence of interconnect usage charges (IUC).

ICRA has also revised the sector outlook to ‘Stable’ from ‘Negative’ following the alleviation of issues such as AGR penalty and concerns on the continuity of operations of one of the service providers, which may have led to tenancy losses for the tower operators.

Moreover, the implementation of the revival package of the state-owned telco and the planned or completed fundraising by private telcos has improved their liquidity position, and payments to tower operators, which remain essential to the telecom service providers.

“…The tower industry is set for a journey towards exploring new revenue sources and opportunities for growth. Some of these can come from active infrastructure sharing, apart from partial monetisation of existing tower spaces as well as small cells, data centers, smart cities, etc. The business plans and extent of revenue and return generation from these would remain a key monitorable,” said Majumdar.