Why telecom sector's bracing for more tower deals

Indian telecom sector is getting ready to monetise its towers as it needs more liquidity to invest in the 3G services, HSBC said in a report today. The telecom companies do not need to spend any more on additional towers immediately as they have enough for the first phase of the 3G roll out.

Towers are crucial as they make up for 18 percent of the valuations of telcos in this space. This means a lot for an industry with such high debt levels. Indus Towers is the best player in the tower space “with potential market share gains, high quality tenants and potential upside on data usage growth.” But since it is not listed, it is not possible to directly benefit out of this monetisation process. Bharti Airtel and Idea, which have stakes in this tower company, would be good choices to play into this sector.

Bharti Airtel, in fact has stakes in power through both Indus and its subsidiary Infratel. It is planning to monetise both assets. HSBC thinks this could be the best bet as they estimate a 26 percent upside in the stock as against a neutral rating they have on Idea.

Reliance Communications also needs to monetise its assets to lower its debts. But this unlocking of value cannot happen unless they either reduce the valuations of assets or buyers see enough potential in them.

Even Idea and Vodafone (not listed in India) are looking at selling their assets outside the Indus JV. Idea has more than 9, 000 towers while Vodafone has around 7, 000. With rural India still largely unpenetrated when it comes to cell phones, the telecom sector has lot of potential to grow.

In the medium term, as the country’s mobile subscriber base expands from 858 million as of 31 July 2011 to an estimated 1.1billion by 2015, an additional 49,900 towers will be required, which represents a cumulative increase of 14 percent or a 2 percent CAGR over the next four years. The tenancy of the towers is also expected to grow at 21 percent.

But the telecom sector is also heading towards some consolidation as increasing competition and roll out of 3G spectrum could make smaller players’ business unviable. In that case the tower space might face some difficulty but it will all depend on who acquires whom and how the telecom sector reorganises itself. Though Indus will remain the biggest beneficiary in the tower space, HSBC says, “given the number of variables in play, we believe the impact of the sector consolidation on tower sector tenancies remains uncertain.”