The elimination of licences, the implementation of open market policies and other liberal economic policies have helped the Indian telecommunication sector to record remarkable growth over the past 5 years. The Indian telecom sector is today the second largest and fastest growing telecom market in the world only after China. Competition is intense with 4 of the top 10 telecom players accounting for two-thirds of the entire mobile market.
While all the major telcos like BSNL, Bharti, MTNL, Reliance and Tata Infocomm have seen a drastic increase in their subscriber base in recent years, the average revenue per unit (ARPU) remains a big concern as the price competition shows no signs. of boiling According to TRAI, in December 2008, the total subscriber base was 346.9 million, an increase of 0.9 million in March 1998. Despite the increase in the subscriber base, mobile penetration still remains at a down 27% compared to 94% in the US. Furthermore, the growth has been mainly from metropolitan areas and Class A circles.
Due to increasing competition and declining ARPU, the big telecom players including Bharti, BSNL and Reliance are now increasingly targeting rural and Class B and C circles to capture the untapped subscriber base. Since the growth will come from the lower income strata, it can be safely assumed that the APRU will continue to fall further.
ARPU and MoU (minutes of use) are two critical factors for a telecommunications company, as they directly affect its EBITDA margins (earnings before interest taxes depreciation and amortization) and its IRR (internal rate of return). In the past, telcos have been able to improve their EBITDA numbers by amortizing the cost over a large and growing subscriber base. However, fierce competition and the decrease in ARPU increase the pressure on the EBITDA and IRR of these companies.
Sharing telecommunications infrastructure seemed like the most logical step to improve capital efficiency and reduce the cost of maintaining passive telecommunications infrastructure, as well as allowing them to focus on their core operations. Return on capital employed (RoCE) and profits are also positively affected when telecom operators prefer to lease towers rather than own them.
A tower infrastructure company provides passive telecommunications infrastructure on a shared basis to telecommunications carriers by entering into Master Service Agreements (MSAs) with them. While sharing telecommunications infrastructure is now the order of the day around the world, the extent to which it is shared depends on the competition and regulatory climate of each country.
To improve capital and operational efficiency, large telecommunications companies including Bharti Airtel, Reliance Communications and Tata Teleservices have spun off their tower divisions as separate companies. This benefited them not only in the form of reduced operating costs and capital requirements, but also in unlocking significant value. Tower infrastructure affiliates always have the advantage of an assured occupant. According to ICRA, telecommunications infrastructure can generate good returns after achieving an average occupancy rate of 1.7.
In addition to the separate telecommunications infrastructure subsidiaries, there are a number of independent telecommunications infrastructure companies (ITICs) that build active and passive telecommunications infrastructure in advance and lease it to operators. For example, Essar Telecom Infrastructure Limited, Xcel Telecom Private Limited, GTL Infrastructure Limited, Quippo Telecom Infrastructure Limited, Vision India Private Limited, Aster Infrastructure Private Limited, and TVS Interconnect Systems Limited.
ITICs are at a disadvantage compared to other telecommunications infrastructure subsidiaries, since they do not have insured occupants. In addition, the large telecommunications operators have their own infrastructure subsidiaries. As such, ITICs focus on regional and new operators. Unitech, Swan Telecom and S Tel Limited are some of the new entrants that will bet on these ITIC to optimize their investment.
Mobile rates are currently so low that any further reduction in rates will be impossible. The only distinguishing factor will be the quality of service provided by the telecommunications operators. Given the scarce spectrum coupled with the ever-increasing number of subscribers, providing a good quality of service will require additional passive and active telecommunications infrastructure, which will increase the demand for ITIC. The introduction of mobile number portability with limited switching costs is seen as another important factor that will drive the ITIC sector.
Driven by intensifying price competition, mobile rates are now the lowest in the world. Consolidation is now expected to be the strategic and most logical step in the future, which will be supported by the rapid increase in the number of ITICs.
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