Telecom tower companies face margin erosion

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KOLKATA: The Telecom tower trade’s working margins are prone to shrink by as a lot as 750 foundation factors (bps) by way of FY19-20, to 37% from over 44% now, amid plunging leases and a pointy fall in co-location of Telecom websites amid fast trade consolidation, analysts mentioned.

“Operating margins of the tower sector are estimated to fall by 450 bps in FY19 and by another 300 bps in FY20, due to a likely dip in rentals coupled with heavy tenancy losses triggered by the recent Vodafone Idea merger, which are likely to further increase once Bharti Airtel concludes its acquisition of Tata Teleservices’ mobility business,” Hetal Gandhi, Telecoms knowledgeable and director (analysis) at Crisil, informed ET.

Crisil estimates the tower trade’s rental per tower “to decline by 7-9% on-year” as a result of co-location exits and decrease tenancies. But it expects enlargement of tower networks for 4G Companies coupled with restoration of exit penalties for untimely winding up of tenancies to restrict the decline in rental income for tower corporations.

Co-locations are factors the place a tower firm deploys cell Telecom antennae of a number of carriers on a single construction. With the Telecom trade shrinking down to simply three personal gamers — Vodafone Idea, Bharti Airtel and Reliance Jio — tower Companies are prone to see sizeable co-location exits within the coming quarters.

Syed Safawi, trade veteran and ex-CEO of Viom Networks (which acquired acquired by ATC), backed the view, saying the “tower sector is likely to lose a whopping 1,50,000-2,00,000 tenancies as a one-time impact of aggressive telco consolidation underway, which would shave off tower industry margins by at least 400-500 basis points in the immediate term to settle at a new normal, and could hasten further consolidation in the towers space”.

Safawi although expects large tower Companies corresponding to “Bharti Infratel, Indus and ATC to attempt partial financial mitigation amid falling margins by enforcing the `take-or-pay’ nature of contracts, which means a telco would have to pay the monthly rental even if it winds up tenancies during the lock-in period”.

Experts estimate tower additions within the coming years to be at roughly 8,000-10,000 each year, which might be nicely under present ranges of 15,000 additions recorded in FY18. Such a state of affairs suggests “tower network capacity expansion over the next 4-5 years is unlikely to offset the impact of tenancy reductions triggered by sector consolidation”, mentioned Crisil’s Gandhi.

Analysts count on future tower additions to largely occur in rural areas, that are prone to drive the subsequent wave of wi-fi subscriber progress. By distinction, community enlargement in city areas, they are saying, could also be hindered by persevering with Right of Way (RoW) challenges coupled with the truth that large telcos are investing in new applied sciences corresponding to huge MIMO to small cells to enhance community capability amid surging knowledge progress.

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