In today’s Finshots, we explain the role of tower companies in the telecom industry.

The Story

Vi survives!

For now.

Yup, the telecom operator formerly known as Vodafone Idea managed to sell shares worth ₹18,000 crores.

And it can now use that money to repay its vendors and the government of India for the licences it bought to run the telecom company. Maybe it can use part of the money to even upgrade its infrastructure and convince its subscribers to stay.

While everyone’s happy that Indian telecom won’t end up being a duopoly with just Airtel and Jio, another company is breathing a sigh of relief too. We’re talking about Indus Towers. It’s one of the ‘vendors’ to Vi. And Vi owes them quite a bit of money.

But what’s Indus Towers’ role in the telecom space, you ask?

See, the telecom industry is quite a capital-intensive proposition. You have to shell out money in the form of licence fees. Then you have to bid big money for spectrum which will give them the right to use the airwaves for communication. Then there’s the usage fee which is taken out of the adjusted revenue. And on top of that, you might need to set up massive towers too. You need a lot of them if you want your customers to have a lag-free network wherever they go, because the phone network latches on to the signals emitted by these towers to communicate.

Yup, it’s a tough industry.

Now here’s the thing. Telecom operators don’t ‘share’ the airwaves. They could in certain cases. But it seems they have all the spectrum they need. So sharing doesn’t make sense anymore.

But one thing they can ‘share’ is the tower network.

And that’s what Indus Towers helps with. It sets up those telecom towers you see everywhere — on top of buildings, open fields and grasslands, and university campuses. And then rents out the infrastructure so that the telcos can use it. Each telco can simply add its own equipment to the tower it desires and this prevents duplication of towers too — we don’t need to have a tower each from Airtel and Jio right next to each other. Sharing also ends up reducing overall cost for telcos and that trickles down into lower prices for users too.

A point of presence (PoP) is a site where a mobile network operator (MNO) is “present” and provides a network signal. Source: EY

So everyone’s happy with this arrangement. The telco doesn’t need to spend a truckload of money to set up all its towers. The independent tower company gets rent for its troubles. And customers like us experience a smooth network at a lower cost.

But we do have to add one caveat here.

Indus Towers isn’t actually an independent tower company. Airtel owns 48% of the company and Vodafone has 21% of it. The rest of the shares are held by public shareholders since it’s listed on the stock exchange. But it still caters to all the telcos in the country. It doesn’t mete out preferential treatment to Airtel. And it can’t because it does have competition. For instance, there’s American Tower Corporation (ATC) India which has been around since 2007 and has around 75,000 towers across the country. So if Indus does discriminate, it will eventually cede business to these rivals.

So, how can the business of a tower company like Indus really expand?

Well, there are 3 factors that analysts point to right now.

Firstly, research firm Jefferies points out that telcos such as Airtel have been expanding their rural operations and trying to cover more remote areas. And they need more towers in order to meet those needs.

Secondly, the rollout of 5G is still in progress. And if telcos want to improve speeds and connectivity, they require a higher density of towers even in urban areas. That means folks like Indus Towers will benefit from that too.

And thirdly, Vi’s revival itself is a boon. Sure, you could argue that the latest funding is just a stopgap for the next few years. But even in that interim, Indus can be assured of having another potential tenant on many of their towers. They’re not just depending on Airtel and Jio for their rents. This is crucial because some experts believed that the demise of Vi was imminent. But with fresh money flowing into Vi’s coffers, they believe that there’s a “100% probability of a three-player market.”

That’s important because for Indus Towers, the best scenario is to have even more telcos in the mix. If they could go back to the days of 12 operators, it would probably be a fantastic outcome. But since that’s not happening, they’d be better placed with at least 3. And they’ll be hoping it remains that way.

And one way to gauge how this improves is by looking at something called the tenancy ratio. Think of this as the number of telcos that Indus hosts per tower. It’s currently at 1.7 and the hope is that with Vi in the mix, this should trend higher.

Oh, and the near-term bonus is that Vi will finally be able to pay Indus what it owes them. In fact, IIFL Securities is already getting rid of something it was accounting for earlier — the ‘doubtful debts’ provision worth ₹100 crores per annum.

Because of all this, most brokerages seem to think the only way for Indus Towers’ share price is 'up' for now.

But hold on, we do have to point out a couple of things here.

For starters, Indus Towers’ average rental revenue from each tower is around ₹74,000 a month. And this actually dropped from FY21 to FY23. Which means that it’s not able to squeeze out higher charges from the telcos.

And that could be because of increased competitive intensity.

A rival firm called Summit Digitel has been causing a bit of a flutter. It signed up Airtel as a key client a couple of years ago. And it has also signed Jio to what Emkay Research calls a “non-cancellable, 30-year contract.” That makes Jio its anchor client and puts pressure on Indus.

So yeah, while Vi’s revival is a cause for a party, Indus definitely has some dark clouds over its backyard too.

Until then…

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