Worrying signal for telecom companies as rentals for towers come down

As Vodafone Group looks to monetise its stake in the Bharti Infratel-Indus Towers merged entity, analysts point out that valuations of tower companies have been affected of late as customers exited on account of consolidation in the sector. 

Reports suggest that Vodafone Group may look to use proceeds from the stake monetisation to release the pledged shares in Vodafone Idea. The valuation of the tower business thus, assumes significance. It has been affected as tower rentals have been under pressure. 

CRISIL analysis of the past few quarters of tower rentals indicates that in the second half (H2) of 2017-18 (FY18), rentals dropped. Tower companies saw tenant exits on account of consolidation in the sector, further affecting valuation.

“A look at the past 16 quarters of tower rentals indicates a increasing/stabilising trend till the first half of FY18, finally leading to a drop in rentals for the first time in the past five years in H2 of FY18. Telecom companies have divested their stake in tower companies, amid a need for funds in the capital-intensive telecom sector,” said Hetal Gandhi, research director, CRISIL.

Over the next 15-18 months, asset sale may fetch telecom players the much-needed money, added Gandhi. The impact of emerging trends such as more tower additions in rural areas, focus on improving network density with continued investment in technologies like small cells, and others needs to be factored into tower valuations. 

Between tower companies Bharti Infratel and Indus Towers, approximately 20 per cent of opening co-locations were lost 2018-19 to around 75,000 co-locations on an overall basis and 40,000 co-locations on a consolidated basis, mainly due to the Vodafone Idea merger. The joint venture (JV) of Bharti Infratel and Indus Towers is expected to create the largest tower firm in India. 

At present, Indus Towers is jointly owned by Bharti Infratel (42 per cent), Vodafone Group (42 per cent), Aditya Birla’s Idea Group (11.15 per cent), and Providence (4.85 per cent). After the merger, Bharti Airtel and UK’s Vodafone Group are set to hold 37.2 per cent and 29.4 per cent stake, respectively, in the JV. However, market sources claim that both Vodafone Group and Bharti Airtel may look to bring down their stake in the JV further to raise funds for their telecom businesses and strengthen their respective balance sheets. 

During a recent interaction before the fourth quarter (Q4) results, the Vodafone India management had indicated that more than a JV, it is keen on seeing a third party operator for the infrastructure. “A JV is where we operate it together, but we are essentially looking for a third party that will take it and operate it. It makes sense for a buyer to get a combined portfolio because it will not only get a large portfolio, but also two committed customers,” said Vodafone Idea Chief Financial Officer Akshaya Moondra, reiterating it would be an option, not a necessity to monetise their stake.  

During the recent Q4 results, Bharti Infratel posted revenue and profits below Street estimates. Analysts expect demand to remain muted, while Vodafone Idea continues to rightsize their tower requirements. That said, the Q4 telecom results have raised hopes of tariff stabilisation in the telecom sector and may have a trickle-down effect on the tower business in the long run. Bharti Infratel’s co-locations were also down 2,241 quarter-on-quarter and 16.7 per cent year-on-year to 306,000, resulting in lower revenue per tower.

There are reports that Vodafone Group is likely to monetise its stake in the JV to release its pledged shares in Vodafone Idea. Last week, Vodafone Group pledged 44.39 per cent shares (its entire stake in Vodafone idea) to foreign banks to finance Vodafone Idea’s capital-raise issue. Vodafone Group declined to comment on emailed queries. Bharti Airtel did not respond till the time of going to press.

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