The telecom towers industry in India is in the process of a structural overhaul. Change in the base transceiver station (BTS) technology mix (2G/3G to 4G), consolidation in the industry, and gradual exit of smaller tower operators have changed the landscape.

The Indus Towers-Bharti Infratel merger, expected to be completed by late 2019, is set to create the world’s second-largest mobile tower operator, with over 163,000 towers and 36% tower market share in India. Post-merger, the industry will have three large players controlling over 70% tower market share. The balance will be shared among smaller towercos and telcos having captive towers.

Meanwhile, the telecom industry is also in the midst of structural changes. The consolidation wave has reduced the number of players to about five as of 2019, from ~15 players in 2012. With telecom operators divesting in tower assets, the towers industry is expected to the shift to pure-play independent towercos from the operator-led model.

Towercos hit hard by tenancy losses

Consolidation in the telecom industry has changed the dynamics of towercos. The latter reported massive tenancy losses over the past one and half years. For instance, the recent merger of Vodafone and Idea has resulted in over 57,000 tenancy losses. Further reduction of ~21,000 tenancies is expected in the first half of fiscal 2020. While exit penalties are expected to partially offset the revenue loss, the impact of tenancy losses is expected to spill over to fiscal 2020 as well.

The telecom sector moving towards an oligopolistic structure, with three players accounting for more than 90% market share, will pose challenges for towercos. This will put pressure on rent revenue per tower as the number of tenants per tower would go down. Further, the stressed financial condition of debt-laden telecom incumbents will restrain any material hike in rentals, at least over the medium term. In addition, through the towers added by Bharat Sanchar Nigam Ltd and Reliance Jio account for a considerable share of captive towers, the revenue from these towers does not flow to the industry.

A look at tower rentals in the past 12 quarters indicate a stabilising trend in till the first half of fiscal 2018 and then a drop for the first time in five years in the second half of fiscal 2018 owing to tenancy losses.