Motilal Oswal Financial Services

Telecom | Update

18 March 2019

Telecom

Densification of network to continue

Tower capex to realign with lesser tenants/towers, pricing could see

pressure

We met a senior telecom expert working in the tower industry to understand the current

issues in the entire telecom network space. Below are some key takeaways:



The huge hype surrounding 5G, massive MIMO technology and small cells seems to

have lost steam. While 5G is still a good five years away, the huge MIMO deployment

has not picked up well, while small cells have limited utility.



Increasing 4G network densification via site addition across players should support

tower industry growth, but rental rates will come under pressure when contracts

come up for renewal. The capex/tower is also reducing with a capacity of 2-3 tenants

v/s the earlier 4-5 tenants.



New investments should grow; fiberization is growing but its monetization model has

not evolved yet. Demand for IBS is also on the rise.



Competition for Bharti Infratel is expected to increase. ATC (American Tower

Company) has grown rapidly with Vodafone and Idea’s independent tower acquisition.

Also, RJio too is in the fray with recent tower, fiber hive-off plans.

5G, Massive MIMO, small cells — more hype, less substance

Massive MIMO deployment not picking up

The massive MIMO as a technology has not picked up due to (a) high capacity

requirements, (b) high equipment cost of ~2.5-3x of normal BTS, and (c) MIMO’s

performance-related benchmarks not being met. In 2H2018, there were limited

massive MIMO towers deployed. Large players chose to shelve deployments. Also,

massive MIMO may not substitute independent towers.

5G still a good five years away

A question mark still lurks over spectrum bands, equipment and the standard of 5G

technology — all three factors that needs to be addressed. The 5G technology may

not actually supplement 4G technology. 5G is likely to see auctioning in the 2800-

3500 mhz band and capex for 5G may take another 3-4 years to get deployed from

the time of the auction. Further, equipment cost for 5G technology will depend on

its usage; it may largely be used for enterprise and automation services, instead of

data throughput increase, which can be done through network densification. The 4G

commercial services took nearly six years to advance from auction to operations and

therefore, 5G may not evolve before 2023.

Small cells have limited utility

Small cells are still in an evolutionary phase. Since it has a mere 25-35 meter

radiation capability, it has low utility, which translates into limited deployment

opportunities. Currently, small cells are deployed on single-port restricting tenancies

to one/equipment and moving to deployment of multi-port small cells will be more

economical. Operators use small cells to cover a small but dense location with high

capacity requirement. According to the IP1 (Infrastructure Provider) contract, DoT

does not allow tower companies to own small cells, which has restricted its

deployment.

Investors are advised to refer through important disclosures made at the last page of the Research Report.

Aliasgar Shakir – Research Analyst

(Aliasgar.Shakir@motilaloswal.com); +91 22 6129 1565

Hafeez Patel – Research Analyst

(Hafeez.Patel@motilaloswal.com); +91 22 6129 1568

18 March 2019

Motilal Oswal research is available on

www.motilaloswal.com/Institutional-Equities,

Bloomberg, Thomson Reuters, Factset and S&P Capital.

Telecom | Update

Tower industry to see tenancy growth, but pressure on pricing

Rising data consumption is increasing the need for network densification and

increased number of sites. However, tenancies may be restricted due to the number

of operators. Further, the strained balance sheet of telecom companies is likely to

put pressure on tower companies when (a) contracts come up for renewals, and (b)

telecom companies sell their stake in tower companies.

Increased densification required by Bharti, VIL to match RJio

RJio intends to have ~300k 4G sites over a period of time. Therefore, even Bharti

and VIL (Vodafone Idea Ltd) may be compelled to match RJio’s network capability,

thus totaling ~900k tenancies for the overall industry. Currently, industry has ~680k

sites and 485k towers, implying tenancy ratio of ~1.5x.

So far, large part of the 4G site addition has been done at the existing 2G sites, but

now unique towers will be required. Thus going forward, network densification

should happen at fresh sites, instead of loading additional BTS (base transmission

station) at existing sites. Over the next three years, there is scope to add 50-60k new

towers in the industry and about 100k+ tenancies, apart from loading (additional

technology loaded at exiting sites) sites.

According to discussions with vendors, VIL is likely to have the fastest rollout this

year. RJio may focus on other technologies like small cells and IBS. Bharti may need

to add 50k 4G sites to densify its network — of this, about 25-30k could be through

loading at existing sites, while the rest could materialize through additional

tenancies.

Tower capex realigning with tenancies

Lack of space in cities and towns has led to the evolution of GBM (group base mass)

sites. These can have maximum 1-2 tenants. Also, consolidation in the telecom

industry has lowered the number of tenants per tower. New towers are now being

built with 2-3 tenant capacity compared to the earlier 4-5 tenant, thereby reducing

capex/tower. Definitely, there will be more points of connectivity required in the

country, but in the form of new age sites like poles, small cells and IBS.

Rentals to fall as contracts come up for renewals

Rentals should decline when the next leg of contracts expire over the next 3-4 years.

For instance, RJio had entered into a 5-year lock-in contract with a third party tower

company; the contract expires in 2019 and is likely to see rental negotiations. Other

telcos have 7-9 year contracts with tower companies. As these contracts come up

for renewals and telcos sell out their stake in tower companies, telcos may

negotiate rentals to share burden of the declining earnings and stretched balance

sheets. Also VIL’s incremental tenancy cancellations to reduce overlapping network

may have higher impact on Bharti Infratel v/s other players.

18 March 2019

Telecom | Update

New investments should grow

Fiberization growing, but no monetization model evolved yet

Industry estimates suggest that ~60% of RJio’s towers may get fiberized, while for

the rest of the industry, 40% may get fiberized. Given the high investments required

in fiber roll-out, telcos are keen to hive off their fiber assets; however, there is no

clear sharing or monetization model that has evolved in the market. Fiber rollout

cost includes, fiber, duct and ROW (right of way) cost, of which cost of fiber is

minimal but rest of the deployment cost is high. Also, large portion of the inter-

circle fiber was laid long back and may have high maintenance costs involved due to

multiple cuts. Fiber monetization and pricing will also need to evolve as the FTTH

business comes into play.

Demand for IBS on the rise

Given that the largest data consumption is happening indoors, data networks have

to be rejigged from the conventional connectivity through outdoor macro sites to

indoor sites. In-Building Solution (IBS) is already seeing traction with commercial

buildings and soon it should d be deployed in high-rise residential buildings in

metros and Tier-1 cities. However, at present, telcos are deploying IBS

independently with builders, instead of renting it from a neutral network

infrastructure host. Eventually, the infrastructure ownership and IBS deployment

will have to move to tower companies to extend the sharing model to all telcos. ATC

has already taken the lead with 3.5-4lac sqft space acquired for IBS.

Expanding competition for Bharti Infratel



Bharti Infratel’s near dominance in the tower industry could be contested by

other deep pocket players like ATC and RJio. This is due to (a) ATC’s recent

acquisition of Vodafone and Idea’s independent towers increasing its own size,

(b) RJio’s plans to hive off its tower and fiber assets, and (c) Telco’s selling out

Bharti Infratel/Indus’ stake may turn them Neutral towards the tower business.

Tower companies’ key strength comes from location, AGL (above ground level -

height) and commercials/rental rates.

BSNL is the most valuable tower company and has towers in prime locations.

ATC turning stronger

At present, ATC has about 75k towers, including those that belonged to the

erstwhile Vodafone India and Idea Cellular (of which, 28% towers are fiberized), and

130k tenancies (of which, VIL would have 50k tenancies while RJio/Airtel would have

25k/20k tenancies each). ATC’s 30% towers (20-22k) have single tenancy. ATC faces

limited risk of tenancy cuts from VIL given that VIL’s share of overlapping/close-by

sites may not be over 5.5k tenancies (out of total 50k tenancies with ATC). Also,

ATC’s rental rates are about 10-15% lower v/s Bharti Infratel, which gives it an edge.

The recent acquisition of Vodafone and Idea’s independent tower assets further

gives it ROFR (Right of First Refusal) in seven out of VIL’s 22 circles. This should give

ATC a healthy share of the incremental tenancy from VIL.

18 March 2019

Telecom | Update

RJio too in the fray

Most RJio towers are on GBM and can accommodate two tenancies. Over 25% are in

the rural areas. RJio has given 5-year tenancies to ATC and Bharti Infratel; the same

is expiring in 2019-20. RJio may plan to switch these sites to its own tower over a

period of time. Earlier, GBT (Ground-Based Towers) required capex of INR2.5m and

took 5-6 years for break-even (at tenancy ratio of 1.6x). RJio towers are GBM-based

and require cost of INR1-1.2m, but can accommodate only 1-2 tenants. Lower capex

and operating cost allows them to breakeven faster.

Exhibit 1: Industry likely to have ~545k towers, 900k tenancies over the next three years

Towers ('000)

Tenancies ('000)

900

680

485

545

Current

Over next 3 years

Source: Industry estimates, MOFSL

Exhibit 2: Top-3 operator-wise unique 2G, broadband sites

2G sites

198

165

158

3G+4G sites

220+

Exhibit 3: Top 3 operator-wise fiber network

Fiber Network ('000 R kms)

550

175

274

158

Bharti

*Industry estimates

Vodafone-Idea

RJio*

Source: MOFSL, Company

Bharti

Vodafone Idea

RJio

Source: MOFSL, Company

Exhibit 4: Players in the tower industry

Source: Bharti Infratel presentation, MOFSL

18 March 2019

Telecom | Update

Exhibit 5: Comparison of towers and sharing factor across players in India and globally

Source: Bharti Infratel presentation, MOFSL

Exhibit 6: BHIN (standalone) and Indus Tower portfolio

(000’s)

Infratel Standalone

142

147

149

153

Indus (100%)

158

162

Total Towers

163

164

Exhibit 7: BHIN (standalone) and Indus co-locations’

portfolio (000’s)

Infratel Standalone

Indus (100%)

329

352

Total Co-locations

378

367

308

289

278

230

274

112

113

116

120

123

124

214

285

303

109

222

233

254

270

Source: MOFSL, Company

Exhibit 8: Average sharing factor for BHIN (standalone) and

Indus stands at ~1.95 (x)

Infratel Standalone (x)

2.22

2.30

Indus (x)

2.30

2.26

1.85

1.95

Exhibit 9: Tenancy exits by VIL has led to steep rise in rental

sharing per operator in 3QFY19

Infratel Standalone (INR'000)

Indus (INR'000)

41.6

37.0

32.9

37.9

34.0

37.4

1.90

1.97

2.02

2.13

36.9

37.0

37.1

36.9

32.1

37.0

32.7

1.79

1.81

1.87

1.98

2.08

2.20

31.5

31.7

Source: MOFSL, Company

18 March 2019

Telecom | Update

Exhibit 10: Massive MIMO technology

Exhibit 11: Small cells technology

Source: Bharti Airtel presentation, MOFSL

Exhibit 12: Different kind of sites

Source: Bharti Infratel presentation, MOFSL

Exhibit 13: How densification is expected to play out

Source: Bharti Infratel presentation, MOFSL

18 March 2019

Telecom | Update

Exhibit 14: New type of opportunities for tower companies

Source: Bharti Infratel presentation, MOFSL

18 March 2019

Telecom | Update

Bharti Airtel – India wireless

Exhibit 15: Data traffic and QoQ growth

Data traffic (b MB)

QoQ growth (%)

109.8

65.9

31.0

21.7 14.2 12.1 17.8 12.7 16.5 9.6

7.7 12.7 -3.5

41.1 39.2 39.7

23.7 20.9

Source: MOFSL, Company

Exhibit 16: Bharti’s network has 175k unique 2G cell sites…

Cell sites ('000)

QoQ Sites added ('000)

Exhibit 17: …of which 165k are unique broadband towers

Broadband sites ('000)

QoQ Sites added ('000)

Source: Company, MOFSL

Exhibit 18: Bharti has 372k mobile Broadband Base stations

Mobile Broadband Base stations ('000)

QoQ adds ('000)

Exhibit 19: Bharti has a fiber network of ~275k kms

Fiber network ('000 kms)

QoQ Fiber added ('000 kms)

5 4 3

5 5 6

2 2

2 4 4 4

1 1 2

Source: Company, MOFSL

18 March 2019

Telecom | Update

Vodafone Idea

Exhibit 20: Data traffic and QoQ growth

Data traffic (b MB)

QoQ growth (%)

*represents Vodafone Idea merged entity performance

Source: MOFSL, Company

Exhibit 21: VIL’s network has 198k unique 2G cell sites…

Cell sites ('000)

QoQ sites addded (000')

Exhibit 22: While VIL has 377k broadband sites as at Dec’18

Broadband sites ('000)

QoQ sites addded (000')

*represents Vodafone Idea merged entity performance Source:

Company, MOFSL

*represents Vodafone Idea merged entity performance Source:

Company, MOFSL

18 March 2019

Telecom | Update

NOTES

18 March 2019

Telecom | Update

Explanation of Investment Rating

Investment Rating

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BUY

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Rating may undergo a change

NOT RATED

We have forward looking estimates for the stock but we refrain from assigning recommendation

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following 30 days take appropriate measures to make the recommendation consistent with the investment rating legend.

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18 March 2019

Telecom | Update

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na@motilaloswal.com,

Contact No.:022-38281085.

Registration details: MOSL: SEBI Registration: INZ000158836 (BSE/NSE/MCX/NCDEX); CDSL: IN-DP-16-2015; NSDL: IN-DP-NSDL-152-2000; Research Analyst: INH000000412.

AMFI: ARN 17397. Investment Adviser: INA000007100. Motilal Oswal Asset Management Company Ltd. (MOAMC): PMS (Registration No.: INP000000670) offers PMS and Mutual

Funds products. Motilal Oswal Wealth Management Ltd. (MOWML): PMS (Registration No.: INP000004409) offers wealth management solutions. *Motilal Oswal Securities Ltd. is

a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs, Insurance and IPO products. *Motilal Oswal Real Estate Investment Advisors II Pvt. Ltd. offers Real Estate

products. * Motilal Oswal Private Equity Investment Advisors Pvt. Ltd. offers Private Equity products.

* MOSL has been amalgamated with Motilal Oswal Financial Services Limited (MOFSL) w.e.f August 21, 2018 pursuant to order dated July 30, 2018 issued by Hon'ble National

Company Law Tribunal, Mumbai Bench. The existing registration no(s) of MOSL would be used until receipt of new MOFSL registration numbers.

18 March 2019