Thursday, September 25, 2008

Boom in Telecom Sector: Emerging Tower Business

Ever Since Hewlett-Packard began its journey from a garage and became one of the world’s largest companies, the idea of a start-up has often been connected with humble beginnings. You pooled in some savings, quit your job and started with nothing but a laptop, mobile phone and a dream. 

Funds were initially raised in small installments and investments were also made in modest complements. To start small, learn and then expand was the route entrepreneurs took.

But what if you worked in an industry where a billion dollars is no big deal? What if you need hundreds of millions of dollars to start, and as much to scale up? Can you make it big in an industry that thrives on megabucks and compete with big business groups playing in the same field? Or should you just stick with pickle-making, sericulture, or a one-person consultancy? 

Welcome to the era of ivory tower start-ups. It no longer takes an industrial conglomerate and surname-led brand to start cash-rich start-ups. Investment companies are on the lookout for managers with entrepreneurial spirit and the right skill sets to start killer companies. And the combination is creating some start-ups in the big league. 

The telecom tower business is a classic example. From being almost a non-existent business few years ago, it now has all major telecom players scrambling to hive off their tower infrastructure to unlock value, and international players vying for a toehold in this growth story. And as India’s mobile subscriber base continues its fairy-tale run, the towers which power the cellular networks are enjoying a dream run too. 

Today, the country has 1,10,000 telecom towers. By 2012, it is projected to balloon three times as the mobile subscriber base touches 500 million. Is there room in it for an entrepreneur with the skill and the knowledge? “Yes,” according to Xcel Telecom MD Sandip Basu. 

Besides financial muscle, start-ups in this space need skilled teams that can set up towers fast and scale the business quickly. “And skilled manpower to set up and maintain towers is not easily available because it is still a relatively new industry,” says Mr Basu. This is where entrepreneurs with the knowledge and the urge to play the big stakes come in. 

In October 2006, Q Investment incubated Xcel Telecom, a standalone tower firm, and roped in Sandip Basu to manage it. Mr Basu had been eyeing the tower segment and knew that subscriber numbers made leasing towers to operators a viable business proposition. So he grabbed the chance. 

“I knew it was an emerging opportunity,” says Mr Basu. “But it is a very capital intensive business. Q Investment had done a lot of research in this phase. When I met them, Q Investment was already looking at tower opportunities.” Q Investment is pumping in $500 million into Xcel Telecom and is targeting 25,000 towers in three years both through expansion and acquisitions. 

Entrepreneurs looking to set up tower networks need not be overwhelmed by the need to raise large sums as a lot of companies were looking to finance these ventures, according to Mr Basu. “There is an assured cash stream and no ambiguity about accruals. Though the industry is new, it is not difficult to get funding (both on debt and equity) because of the huge growth potential.” 

The payback time for phone operators is typically more than a decade, but it is just five years or less for tower companies. Tower companies have been found to be 10% more capital efficient and 20% more operation-efficient than operators because, this is their core business. Monthly rents, varying from Rs 40,000 to Rs 1 lakh depending on location, don’t diminish but only see annual increases. While incremental costs go up only 10%, revenues increase by 80%. 

There are quite a few survival tips from industry veterans who say the telecom towers business is all about costs and scale. The first challenge, of course, is to secure capital at reasonable costs. “If you are putting up infrastructure at a cost of capital that is higher than that of operators like Airtel and Idea Cellular, then you are starting at a disadvantage. The ability to get smart capital and a moratorium for two-three years when you are scaling up operations is critical,” says Arun Kapur, president and executive director of the Srei group-backed Quipo Telecom Infrastructure.

Expansion is also crucial to grow rapidly. For instance, Bharti Airtel, also a player in this space, plans to add 30,000 towers in this fiscal year and that means nearly 100 towers would come up each day. 

And a tight lease on costs, that good old startup virtue, would be required too. “It is essential to have the ability to bring operating expenses down. With operators lowering the tariffs and reaching out to lower paying subscribers, they want partners who can take costs off on the operating side. The ability to innovate and bring down capex and opex is crucial,” says Mr Kapur. 

Also, the ability to bring in more tenants on towers is important. The more the number of operators sharing the tower, the more the rent and quicker the returns on investment. With a single tenant, the gestation period can be as long as ten years. “If you get the number of tenants right, you got the business model right,” he adds. 

A big boon for the industry is the absence of any kind of licensing, though the telecom sector is highly regulated. So, the entry barriers are not high. But on the flip side, the setting up of a single telecom tower requires nearly 40 clearances, ranging from those from the Wireless Planning Commission and municipal corporation to soil investigation clearance and state electricity boards. These are, clearly, barriers to entry despite the massive need to expand telecom networks to every nook and corner of the country. While the huge demand for towers continues to make it a lucrative industry, those who started earlier are better placed. Firms which have already signed master service agreements are better than those starting up now. 

With the mushrooming of many small tower companies that have just about 50 to 100 towers in their portfolio, acquisition opportunities are also emerging in the sector. Xcel Telecom, for instance, has an acquisition war chest of $2 billion. 

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