Investment Opportunities in Indian

Telecom Infrastructure Sector

Major Project report

Submitted by:
Ramit Malhotra

In partial fulfillment for the

Degree of MBA (Infrastructure)

Submitted to:
Department of Policy Studies
TERI University
Plot No. 10 Institutional Area
Vasant Kunj, New Delhi-70
INDIA

25th , May 2009

 Declaration

This report has been prepared by Ramit Malhotra, student of MBA (Infrastructure
program at TERI University.

The Report has been prepared based on the information and documents made available
by ABC Limited. It includes certain statements, estimates and projections made by
promoters of the company. Actual results may vary from the projected results contained
herein. It should be recognized that projections of future events are inherently subject to
significant economic, regulatory, policy and competitive uncertainties or other force
majeure circumstances and that actual results for the periods covered thereby may vary
materially from the projected results. There cannot be any assurance that the
assumptions or data upon which these projections have been based are accurate or that
the results contained in the projections will be realized.

No representation, warranty or undertaking (expressed or implied) is made, and no

responsibility is accepted by me or PricewaterhouseCoopers or TERI University, as to
the accuracy, adequacy, completeness or reasonableness of the facts, opinions,
estimates, forecasts, projections, or other information set forth in this report, or the
underlying assumptions on which they are based or the accuracy of any computer model
used and nothing contained herein is, or shall be relied upon as a promise or
representation regarding the future events or performance of the project.
 TERI University
FINAL REPORT SUBMISSION FORM

1 Name of the student: Ramit Malhotra

2 Program: MBA (Infrastructure)

3 Name of the Internal Supervisor from TERI University Dr. Saon Ray

4 Name of the external supervisor from Mrs. Sakshi Marwah

5 Title of the research project: Investment Opportunities

in Indian Telecom
Infrastructure Sector

6 Date of completion of project:

Signature of the student

Signature of external guide: Signature of internal guide:

Name and designation Name and designation

Date Date:
 Acknowledgement

I offer my reverences to TERI University by whose efforts I have been able to complete
my major project at PricewaterhouseCoopers.

The persons who shaped my efforts and provided the guidance to me are none other than
my renowned faculty members Dr. Saon Ray, Dr. Kaushik Deb, and Dr. Neeraj Khera. I
feel highly privileged to express my sincere regards and gratitude to them for their
dynamic leadership, guidance, careful supervision, invaluable suggestions and liberal
attitude during the course of my dissertation.

Also my endeavors at this project could not have been satisfactorily completed without
the active participation and co-operation of Mr. Deepak Mahurkar, Mr. Manish Bhagla,
Mr. K Ramachanran and Mrs. Sakshi Marwah. I am really thankful to them for their
guidance and co-operation.

I also acknowledge and express my deepest gratitude to all the team members of PwC,
GRID for guiding me throughout the project. I am indebted to them for extending their
valuable guidance, comments, suggestions and inspiration for this project.

(RAMIT MALHOTRA)
 Table of Contents
ABBREVIATIONS............................................................................................................... I
ABSTRACT......................................................................................................................... II
LIST OF TABLES.............................................................................................................. IV
LIST OF FIGURES ............................................................................................................ IV
1. INTRODUCTION ....................................................................................................... 1
2. OBJECTIVES ............................................................................................................. 5
3. LITERATURE REVIEW ............................................................................................ 6
3.1. INTERNATIONAL EXPERIENCE IN INFRAST RUCTURE SHARING................................................ 6
3.2. DOMESTIC TELECOM MARKET ASSESSMENT ............................................................................. 9
3.3. TELECOM MARKET - COMPETITIVE LANDSCAPE...................................................................... 11
3.4. TELECOM INFRAST RUCTURE OVERVIEW .................................................................................. 13
3.5. TELECOM INFRAST RUCTURE - DOMESTIC MARKET ................................................................. 15
3.6. TELECOM INFRAST RUCTURE MARKET - COMPETITIVE LANDSCAPE ...................................... 16
4. BUSINESS PLAN...................................................................................................... 19
4.1. PASSIVE INFRAST RUCT URE......................................................................................................... 19
4.2. INFRAST RUCT URE SHARING ....................................................................................................... 19
4.3. INT RODUCTION TO THE BUSINESS .............................................................................................. 20
4.4. BUSINESS PROPOSAL ................................................................................................................... 21
4.7. EXPANSION SCHEDULE................................................................................................................ 24
4.8. PROPOSED SERVICES ................................................................................................................... 24
4.9. PROPOSED ORGANIZATIONAL ST RUCTURE .............................................................................. 25
5. METHODOLOGY .................................................................................................... 27
6. OBSERVATIONS AND ANALYSIS ......................................................................... 31
6.1. DEAL DIAGRAM............................................................................................................................ 31
6.2. FUNDING PLAN.............................................................................................................................. 32
6.3. RESULT S: ....................................................................................................................................... 32
6.4. SENSITIVIT Y A NALYSIS............................................................................................................... 34
7. RISK ASSESSMENT................................................................................................ 39
8. CONCLUSION.......................................................................................................... 41
REFERENCES.................................................................................................................. 46
ANNEXURES.................................................................................................................... 47
 ABBREVIATIONS

ARPU Average Revenue per User

BOO Build Own Operate
BTS Base Trans-receiver Station
CDMA Code Division Multiple Access
COAI Cellular Operators Association of India
DoT Department of Telecommunications
DSCR Debt Service Coverage Ratio
EBITDA Earnings Before Interest, Tax, Depreciation and Amortization
EIRR Equity Internal Rate of Return
FCFE Free Cash Flow to Equity
FDI Foreign Direct Investment
GBS Ground Based Site
GBT Ground Based Tower
GSM Global System for Mobile Communication
IP Infrastructure Provider
IRR Internal Rate of Return
IT Information Technology
LFCF Levered Free Cash Flow to Firm
LOI Letter of Intent
MSI Managed Services Infrastructure
NOC Network Operating Centre
PAT Profit After Tax
PIRR Project Internal Rate of Return
QoS Quality of Service
TRAI Telecom Regulatory Authority of India
ROA Return on Asset
ROE Return on Equity
RTS Roof Top Site
RTT Roof Top Tower
SLA Service Level Agreement
SLM Straight Line Method
TRAI Telecom Regulatory Authority of India
UFCF Unlevered Free Cash Flow to Firm
VPN Virtual Private Network
WACC Weighted Average Cost of Capital
WC Working Capital
WLL Wireless Local Loop

i
 ABSTRACT
Indian telecom industry was dominated by government organization till 1991, after which
many private players have entered into this market. Since, its liberalization the industry
has experienced impressive growth, because of strong demand, investor friendly
regulatory schemes and strengthening economy. At present, India, is the second largest
mobile market in the world, and is also among the fastest growing mobile markets
globally. The total number of mobile subscribers in India (i.e., the subscriber base) has
crossed 300 million with 300.49 million subscribers as on 31st March 2008 (TRAI
database).
With increase in market competition and pressure on margins, telecom service providers
are being forced to increase their focus on marketing and customer acquisition. This has
led to opportunities in passive infrastructure outsourcing to independent third party
infrastructure providers and also sharing the infrastructure with other service providers.
Recently Telecom Regulatory Authority of India has awarded new licenses to new
players such as Unitech, Swan Telecom, and S Tel Limited. The significant expansion
plans of the new entrants and their need to optimize investments so that they can compete
with existing players will further drive the demand of passive infrastructure in the
country.
ABC Limited is an independent infrastructure provider company which proposes to build,
own and operate passive infrastructure sites for telecom service providers. ABC Limited
is planning to raise capital to start its operation in FY 10. Based on the details regarding
capital expenditure, operating expenditures and future expansion plans of ABC Limited,
provided by the promoter of the company, a detailed financial model has been prepared
and key financial ratios has been estimated to assess the financial feasibility and returns
on investment.
Total investment required to meet the target of around 12000 tower sites (both GBT and
RTT), is estimated to be INR 36,343 million. ABC has planned to raise 70% of required
capital through long term debt and remaining as equity. Results of financial model shows
that IRR for such project will be more than 18% and equity IRR will be around 36%,
provided that ABC will meet the above target of 12000 tower sites by FY14. Project IRR
is very sensitive to Capital costs, tenancy ratio, and monthly tariff for each site. On the

ii
other hand equity IRR is sensitive to loan moratorium period and interest rate on long
term debt. The project will generate enough cash flows to cover its debt obligation and
also to generate high return on equity invested.

iii
 LIST OF TABLES
Table 3.1 Telecom Circles ............................................................................................. 17
Table 4.1 Expansion Plan .............................................................................................. 31
Table 6.1 Funding Proposal ........................................................................................... 39
Table 6.2 Income Statement .......................................................................................... 39
Table 6.3 Balance Sheet ................................................................................................ 40
Table 6.4 Key financial ratios ....................................................................................... 40
Table 6.5 Profitability ratios .......................................................................................... 41
Table 6.6 Financial returns ............................................................................................ 41
Table 9.1 Expected Tenancy Ratios .............................................................................. 50
Table 9.2 GBT and RTT Capital Cost ........................................................................... 51
Table 9.3 Operating Costs ............................................................................................. 52
Table 9.4 Long term debt .............................................................................................. 52
Table 9.5 GBT and RTT Tariff ..................................................................................... 53
Table 9.6 Life of the project .......................................................................................... 53
Table 9.7 Profit & loss account statement ..................................................................... 54
Table 9.8 Balance sheets ............................................................................................... 55
Table 9.9 Cash flow statements ..................................................................................... 56

LIST OF FIGURES

Figure 3-1 Growth of Subscriber base .............................................................................. 10

Figure 3-2 Mobile Penetration Rate.................................................................................. 10
Figure 3-3 Market Share ................................................................................................... 11
Figure 3-4 Licensed Circles .............................................................................................. 12
Picture 3. 1 Telecom Tower .............................................................................................. 14
Figure 3-5 Telecom Infrastructure Market Players........................................................... 16
Figure 3-6 Telecom Tower Growth Scenario ................................................................... 17
Figure 6-1 Project IRR v/s GBT and RTT CAPEX.......................................................... 35
Figure 6-2 Project IRR v/s GBT Tariff ............................................................................ 36
Figure 6-3 Project IRR v/s RTT Tariff ............................................................................ 36
Figure 6-4 Project IRR v/s Tenancy ratio for RTT sites and GBT sites ........................... 37
Figure 6-5 Equity IRR v/s long term debt interest rate for different leverage level ......... 37
Figure 6-6 Equity IRR v/s long term debt repayment period at different level of
moratorium periods ........................................................................................................... 38

iv
 1. INTRODUCTION
ABC Ltd. 1 is an Infrastructure Provider company that builds, owns, operates and
maintains passive network infrastructure on a shared basis for mobile telecom operators
and ITES providers. The Company was formed in Jan 2009. Its objective is to provide
network design and planning, network deployment, network operations & maintenance,
infrastructure management, application management and professional services to telecom
operators and enterprises.

The company is planning to raise capital in the form of equity and debt to start its
operation by Aug. 09. The purpose of this project is to prepare detailed financial model
for assessment of feasibility of such projects, building scenarios and sensitivity charts,
calculation of risk and returns associated with the project and valuation of ABC Limited
subjected to present and expected future market conditions.

ABC’s vision is to provide world class managed infrastructure & allied services to the
service providers to optimize their service delivery capability. In the initial years of
operation the company will focus on telecom sector, with almost 100 % of its proposed
capital expenditure till FY 14 earmarked for developing and owning passive
infrastructure for sharing among mobile service providers.

Passive Telecom Infrastructure Sharing

Mobile networks have base stations (or cell sites) which have active and passive
infrastructure components. Active components include the antenna, trans-receivers,
switches, feeder cables, Node B, and microwave radio equipments. Passive (or non-
electronic) components include the land, tower, shelter, air-conditioning equipment,
diesel electric generator, battery, electrical supply, technical premises and easements,
pylons etc. Passive infrastructure in a mobile network essentially involves acquiring land,

1
Actual name o f the company is not stated as per the instructions given by external supervisor.

1
setting up towers and electrical and civil works that needs to be in place before operators
can install the active infrastructure which brings mobile services to the consumers. In a
typical cell site build-out, almost 65% of the total cost is attributed to passive
infrastructure and 35% to active infrastructure. In this report, passive cell site
infrastructure has also been henceforth referred to as towers or sites.

Mobile operators are required to setup more and more BTS (cell) sites due to the
exponential growth of mobile subscribers in India (currently growing at almost 152
million subscribers a month) and limited availability of spectrum. B and C Circles (where
traffic density may not be as high as metros and Circle A) are expected to drive future
subscriber growth and requirements for cell sites will be higher to ensure greater
coverage.

To cover large stretch of almost 65,000 Kilometers of national highways, additional

18000 towers (one tower for every 3 Kilometers of highway) will be required in near
future to ensure better connectivity. Proposed build out of 3G networks are expected to
further drive substantial growth in the number of towers over the next few years.

However, creating new infrastructure by each operator separately leads to duplicating

huge capital investments. It also contributes to mushroom growth of telecom towers and
deteriorating skylines in urban areas, which has already led to some local municipal and
state governments to regulate and restrict the erection of new mobile towers.

The continued pressure on cellular tariffs, higher infrastructure costs for network
deployment particularly in semi- urban and rural areas and compelling need to reduce
time to market for network roll outs have led operators to share and even outsource their
infrastructure requirements from third party infrastructure providers like ABC, GTL and
Indus towers.

2
As published in ET 8th May, 09 Edit ion

2
Sharing promotes capital efficiency as it allows more than one service provider to
leverage and ride on common infrastructure. In its simplest form, it involves two or more
operators jointly using the common passive infrastructure in a cell site. While viewed
largely as a measure to reduce CAPEX and operating expense, such sharing also leads to
improvement of service quality (by ensuring site space for service providers and reducing
black spots) and the environment (by reducing number of cell sites and towers).

In outsourcing, operators take passive infrastructure and tower space from third party
infrastructure companies on a monthly rental basis to host their radio and transmission
equipments. Outsourcing provides significant benefits to operators. It enables them to
save on capital expenditure (it actually converts CAPEX into OPEX in the form of lease
rentals) and focus on their core activities of sales, marketing and branding, while leaving
the cumbersome task of managing the site development process and site operation and
maintenance to third parties who exclusively deal with such activities.

Active infrastructure sharing is not popular across the globe for several reasons, the most
important being increased inter dependency among competing service providers.
However, tower sharing and outsourcing of tower ownership is an accepted practice in
many developed markets. In countries like USA, UK and Australia there are
independently owned tower companies who rent tower space to various mobile operators.
The United States has arguably the most developed independent mobile tower market,
with independent tower companies owning over half of all mobile towers in that country.

Mobile tower owners generate revenue by owning the towers and leasing space on the
towers to mobile telecommunications operators, under long-term contracts. Under this
business model, ownership of the base station equipments coupled to the towers is
retained by the mobile telecommunications operators. In addition to rental payments,
mobile tower owners generally receive a fee for installing customers' base station
equipment on the tower. Mobile tower owners also receive services revenue for
operations and maintenance of the passive infrastructure. Regulators all over the world
favor passive sharing of infrastructure.

3
The concept of passive infrastructure sharing is increasingly gaining market acceptance
in India. So far, it has been largely limited to bilateral sharing between operators in the
form of barter, where the operators split the site related CAPEX and OPEX costs. The
available information suggests that about 25% of the existing 90,000 tower sites in India
are currently being shared for passive infrastructure, predominantly in rural areas and
small towns.

ABC Limited is expecting to get shortlisted by Department of Telecom for setting up

passive cellular infrastructure in rural areas with support from the Universal Services
Obligations (USO) Fund. The recent announcements by some operators like Bharti,
Hutch (Vodafone), Reliance, Idea for mutual sharing of infrastructure through new
companies and entry of third party infrastructure providers has further expanded the
tower market in India.

Results of detailed financial model indicate that with given expansion plans and
assumptions, ABC will create value for its shareholders, investors, clients and promoters.
The project is expected to generate high cash flows which will be sufficient enough to
pay back its debt liabilities and to generate and equity IRR of 36%.

4
 2. OBJECTIVES

The scope of work for this Study project involves the following:

Market assessment for Indian telecom Infrastructure sector

Collection of data related to capital and operating costs (from pro moter)

Forecasting operating costs

Preparation of detailed financial model

Calculation of UFCF ( Unlevered Free Cash Flows), LFCF (Levered Free Cash
Flows)

Estimation of Project and Equity IRR’s

Preparation of balance sheet, P&L, and cash flow statement for expected life
cycle of project

Sensitivity analysis and Scenario analysis

5
 3. LITERATURE REVIEW

3.1. International Experience in Infrastructure Sharing

Different countries have adopted different approaches in order to safeguard the level of
competitive independence between co-operating operators. Measures include mandating
a distinct and differentiated cost base between operators; the development of different
business plans, marketing and distribution strategies; and the independent development or
acquisition of content and services. Requiring the independent control over the respective
frequency resources of each operator is also an important competitive safeguard.

In the EU, for example, operators are allowed to share infrastructure as long as they
maintain full operational control of their network. Sharing the radio access network is
permitted, but sharing frequencies and the core network is not. In particular, the databases
used to administer subscriber and interconnection information are required to be kept
separate. Exemptions, however, are generally granted in special cases which advance the
objectives of government policy and the economic benefits to the consumers of the
services. It is important to note that any infrastructure sharing agreement could also be
subject to review by the EC Commission under Article 81 of the EC Treaty and/or the EC
Merger Regulation.

USA
In USA, the number of wireless service subscribers has increased from 128.4 million to
2433 million between December 2001 and December 2007, representing an increase of
approximately 88% and market penetration of approximately 70%. The tower business in
USA is a $5 billion industry consolidated around four large players -- American Tower
(ATC), Crown Castle International (CCI ), SBA Communications (SBAC ), and Global
Signal (GSL ), which control 40% of the approximately 210,000 (P & Lisa, 2009) towers
across the U.S. The primary business of these companies involves leasing antenna space
on multi-tenant communications sites to a variety of wireless carriers including radio and

3
Source: CTIA-The Wireless Association, Website

6
television broadcast companies under long-term lease contracts. Typically, these leases
are long-term (five to 10 year) contracts with renewal terms at the option of the customer.
Some companies offer tower related services on a limited basis including site acquisition,
zoning and permitting services and structural analysis services, and project management
of antenna installations that support their site leasing operations and the addition of new
tenants and equipment on their sites.

Towers are a relatively scarce asset in USA, as zoning laws often do not permit a new
tower to be built in the immediate vicinity of an existing tower. Tenant churn tends to be
low as towers are an integral part of the networks of the wireless service providers.
Tenants own their own equipment (and therefore bear the technology risk), generally
handle installation and maintenance, and pay for electricity and most ongoing assets,
greatly simplifying the tower business model.

Germany
In Germany, the main concern faced by the regulator involved a possible threat to the
competitive independence of potential 3G operators that could result from a tight
integration of the networks as a result of infrastructure sharing. Infrastructure Sharing is
allowed only if the mobile systems can be independently operated, for example, if they
can be shut down or maintained independently by software, and that no customer data is
shared (OECD report, 2004). In Germany, the sharing of antennae and sites is relatively
common; however, the sharing of transmission management equipment and core
networks is not commonly done (Vogelsang, 2002).

Sweden
In Sweden, the regulator has agreed to allow significant infrastructure sharing for 3G
operators. Each operator only has to cover 30% of the customers; while for the remaining
70% infrastructure can be shared. This is the approach being taken by the Europolitan
companies Vodafone, Hi3G and Orange, which jointly own 3G Infrastructure Services.
However, with competition concerns, the regulator only allows radio components such as
antennas, cables and base station electronics to be shared (Khurram Mahmood, 2008).

7
Singapore
In the case of Singapore, the regulator’s infrastructure sharing approach is guided by the
primary policy goal of encouraging facilities-based competition. Under the current
regulatory framework, licensees are generally not required to share any infrastructure that
it controls with its competitors. Each licensee is expected to build or lease the use of the
infrastructure it requires. Notwithstanding this however, infrastructure sharing is
mandated in areas where there are clear space and operating constraints. For 2G and 3G
licensees, such matters relate to infrastructure in the Mass Rapid Transit and underground
road tunnels. The regulator has also allowed the co-location of base stations and sharing
of transmission towers and masts to reduce the impact on the environment and to
minimize the inconvenience to building owners and residents (IDA, 2009).

Malaysia
Taking a different approach, in Malaysia operators owning network facilities have bee n
encouraged by the regulator to share infrastructure as a means of lowering costs and
expanding coverage as well as to avoid a duplication of resources. To this effect, a
Memorandum of Understanding to share infrastructure has been executed between the
mobile operators. To further catalyze infrastructure sharing, the concept of a third party
provider of facilities is also being promoted in Malaysia. Under this concept of a third
party will build the infrastructure and lease capacity or space to existing se rvice
providers. This concept, not only provides ready- made sites, but will also help reduce the
numbers of telecommunication towers that have to be dealt with by local authorities
(MAXIS, 2009).

8
 3.2. Domestic Telecom Market assessment

The Indian Telecom Industry-Historical pers pective

The Indian telecommunication industry was originally a government controlled

monopoly comprising three state owned operators;
MTNL, (which provided wire- line services in Mumbai and Delhi metropolitan
areas)
DOT, (which provided wire-line services to rest of the country)
VSNL, (which provided international services)

Liberalization started in 1991 with opening up of mobile services to private sector

participation. The country was divided into 23 circles, comprising of four metropol9otan
areas (Chennai, Delhi, Kolkata and Mumbai) and 19 other circles broadly defined by
parameters of states (K, 2008). These 19 non-metropolitan circles have been categorized
as A, B, and C circles, in descending order of their reve nue generation potential (as
shown below).

Table 3.1 Telecom Circles

Metropolitan
Areas Circle A Circle B Circle C
Punjab, Kerala,
Haryana, U.P (West),
Gujarat, Karnataka, Rajasthan, U.P H.P., J&K, North-
Delhi, Chennai, A.P., Tamil Nadu, (East), M.P., West East, Orissa,
Mumbai, Kolkata Maharashtra Bengal Assam, Bihar

In 1997, TRAI was formed for regulating the operations and policy making process of
Indian telecommunication sector. Since its liberalization, India has experienced sustained
and impressive growth in its telecommunication sector, primarily because of progressive
regulatory regime, strong demand for mobile telecommunication services, and
strengthening economy. The country has achieved distinction of having world’s lowest
tariff, fastest growth ion subscriber base and availability of some of the cheapest mobile
handsets.

9
Figure 3-1 Growth of Subscriber base
Growth of Subscriber base

350
300
250
Million

200
150
100
50
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Year

Source: Telecom Regulatory Authority of India Database

India, is the second largest mobile market in the world, is also among the fastest growing
mobile markets globally. The total number of mobile subscribers in India (i.e., the
subscriber base) has crossed 300 million with 300.49 million subsc ribers as on 31st
March 2008. The growth of subscriber base during the past decade (1998-2008) is
indicated above in a chart.

Figure 3-2 Mobile Penetration Rate

Delhi (Metro)
Mumbai (Metro)
Chennai (Metro)
Kolkata (Metro)
Karnataka (A)
Andhra Pradesh (A)
Tamil Nadu (A)
Gujarat (A)
Maharashtra (A)
Kerala (B)
West Bengal (B)
Punjab (B)
Haryana (B)
Rajastan (B)
Madhya Pradesh (B)
Uttar Pradesh (B)
Himachal Pradesh (C)
Orissa (C)
Jammu & Kashmir (C)
Bihar (C)
Assam (C)
North-East (C)

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Source: TRAI and Pw C Database

Note: As on Dec. 08

10
Indian telecom industry has experienced a high growth rate in Metros and class A circles,
with coverage reaching around 90% and 35 % respectively. However, coverage in the
Class B and Class C cities is still low at 15-25%. Growth in Class B and Class C circles
has concentrated in urban area while penetration in rural area remains lower. Thus future
growth is likely to come largely from Class B and C circles and rural areas. Keeping this
in view, larger players like Bharti Airtel Limited, Reliance Communications Limited, and
Bharat Sanchar Nigam Limited (BSNL) are largely focusing on increasing their
geographical coverage in Class B and C circles.

3.3. Telecom Market- Competitive landscape

Figure 3-3 Market Share

Market Share Spice
1.81%
BPL HFCL
Aircel 0.56%
4.57% 0.13%
Idea
10.33% Shyam
Tata
10.47% 0.05%

Vodafone Bharti
6.61% 26.68%

Reliance
19.71%

BSNL/MTNL
19.08%

Source: TRAI and Pw C Database

Indian mobile sector is largely concentrated with top 4 market players (Bharti Airtel,
Reliance Communication, Vodafone Essar and BSNL) out of 10, capturing almost three-
fourth of the entire market. This is also partly on account of the fact that these four
operators have their presence in a larger number of circles as compared with other
players.

11
Figure 3-4 Licensed Circles

25
20
15
10
5
0

Licensed Circles (Dec. 07) New Circles (Sep. 08)

Source: TRAI and CRISIL Database

The competition in Indian telecom sector is expected to intensify in near future, because
recently new licenses have been granted to some of the existing operators for new circles
and also to new entrants like; Unitech, Datacom, Swan Telecom and Stel. These new
players are expected to capture the rural and semi- urban cities of Circle B and Circle C as
they are now expected to grow at a much faster rate. Shorter network rollout time a nd
competitiveness in the industry will force these entrants to start their operation as early as
possible. Tower companies like ABC will allow incumbents to start operations in a
particular region just by installing their electronics on the ready-to-use towers, thereby
significantly shortening the rollout time

Moreover, a rapidly increasing subscriber base and spectrum crunch would force the
existing telecom operators to maintain the minimum level of QoS Thus to retain existing
subscribers by preventing subscriber churn, operators will require additional
infrastructure in their existing areas of operation to be able to offer better QoS. This will
also result in increase in demand for telecom infrastructure in the existing markets
(Ramachanran, 2009).

12
 3.4. Telecom Infrastructure Overview

Passive infrastructure is one of the most important components of a mobile network. It

has been a critical area of operations for telecom companies in the past. However, with
increasing competition posing an urgent need for telecom companies to expand their
coverage and sharpen their focus on core operations so that they can sustain and improve
their market position, passive infrastructure has assumed the status of an independent
industry during the past few years. The industry (COAI) estimates that there will be a
requirement of around 350,000 towers for 500 million subscribers by 2010 (COAI,
2009).

Each site has active and passive infrastructure components. Active components include
the antenna, trans-receivers, switches, feeder cables, Node B, and microwave radio
equipments. Passive (or non-electronic) components include the land, tower, shelter, air-
conditioning equipment, diesel electric generator, battery, electrical supply, technical
premises and easements, pylons etc. Passive infrastructure in a mobile network
essentially involves acquiring land, setting up towers and electrical and civil works that
needs to be in place before operators can install the active infrastructure which brings
mobile services to the consumers. In a typical cell site build-out, almost 65% of the total
cost is attributed to passive infrastructure and 35% to active infrastructure.
(Ramachanran, 2009)In this report, passive cell site infrastructure has also been
henceforth referred to as towers or sites.

The components of a typical base station are shown below:

13
Picture 3. 1 Telecom Tower

Telecom towers are broadly classified on the basis of their placement as Ground-based
and Roof-top.

1. Ground-Based Tower: Ground-based towers (GBTs) are taller (typically 200 to 400
feet) and are mostly used in rural and semi- urban areas because of the easy
availability of real-estate space there. GBTs involve a capital expenditure in the range

14
 of Rs. 3 to 4 million, depending on the height of the tower, land prices, etc
(Ramachanran, 2009).

2. Roof-Top Towe r (RTT): Roof-top towers (RTTs), are generally placed on the roofs
of high-rise buildings. They are shorter (than GBTs) and more common in urban and
highly populated areas, where there is paucity of real-estate space. Typically, these
involve a capital expenditure of Rs. 1.5 to 2 million (Ramachanran, 2009).

The height of a telecom tower determines the number of antennas that can be
accommodated, which in turn determines the capacity of the towers, apart from factors
such as location and geographical conditions (wind speeds, type of terrain, etc.).

3.5. Telecom Infrastructure- Domestic market

In India there are broadly two kinds of operators in the tower infrastructure industry;

Tower infrastructure subsidiaries:

Reliance Infratel Limited
Bharti Infratel Limited
Indus Towers Limited
Wireless TT Info Services Limited (WTTIL)

Independent tower infrastructure companies (ITICs)

GTL Infrastructure
Xcel Telecom
Essar Telecom Infrastructure
Aster Infrastructure
Bharat Telemast

15
These companies have their business model based largely on contract or anticipatory
approaches. Under the contract approach, tower companies set up tower sites going by
the requirements of the telecom operators, and the terms of the contract are specified
beforehand in the MSAs signed by the two parties. Under the anticipatory approach
however, tower companies set up tower infrastructure at sites with reasonable demand
potential and subsequently invite telecom operators to set up their network on these
towers. The latter model involves higher business risks as the tower company may not be
able to achieve reasonable tenancy for its tower infrastructure and at profitable terms.
BPTL proposes to follow contract approach for its business model

3.6. Telecom Infrastructure market- Competitive landscape

Figure 3-5 Telecom Infrastructure Market Players

Market Players

Indus Towers Limited 32.69%

Others 26.92%
Reliance Communications Limited’s… 16.92%
Bharti Infratel Limited 10.38%
Wireless TT Info Services Limited… 6.92%
GTL Infrastructure 3.65
Essar Telecom Infrastructure 1.54%
American Towers 0.58%
Aster Infrastructure 0.38%

0 20000 40000 60000 80000 100000

Number of Towers

Source: Telecom Regulatory Authority of India and ICRA

Note: Others include tower portfolios of BSNL, MTNL, Sistema Shyam Teleservices, Aircel, etc.

In Indian Telecom Infrastructure market competition has intensified significantly, with

several players spinning of their tower portfolio and independent operators expanding
their operations.

16
Bharti Airtel Limited, Reliance Communications Limited, and Tata Teleservices Limited
have hived off their tower assets into separate tower infrastructure subsidiaries, namely
Bharti Infratel Limited, Reliance Infratel Limited, and Wireless TT Infoservices Limited,
respectively. Also Bharti Infratel Limited together with Vodafone Essar Limited and Idea
Cellular Limited in a joint-venture agreement has created India’s largest tower
infrastructure company – Indus Towers Limited, which has an estimated portfolio of
around 88,000 towers (Anjan, V, & N, 2009). Whereas in past few years number of
independent tower infrastructure companies have ventured into the domestic telecom
tower industry. These include, GTL Infrastructure Limited, Essar Telecom Infrastructure
Limited, Xcel Telecom Private Limited (American Towers), Tower Vision India Private
Limited, Aster Infrastructure Private Limited, TVS Interconnect Systems Limited, etc.

Figure 3-6 Telecom Tower Growth Scenario

700

600

500

400
Telecom Towers (Thousands)

300

200

100

0
2008 2009 2010 2011 2012

Source: Telecom Regulatory Authority of India

Assumptions: Subscriber growth rate of 28% till 2011-12
1400 subscribe per site

As shown above, it is expected that in next 4-5 years there will be a requirement of
additional 85,000 towers (both GBT and RTT) each year to meet the subscriber base of
800 million by 2011-12 (PwC, 2009). This shows that huge investment have to be made
in Indian telecom Infrastructure sector in near future. Now, since both passive and active

17
infrastructure sharing is allowed (except spectrum). Independent service providers will be
benefited. Increase in subscriber base, introduction of new technologies like 3G, Wi- max,
etc and increase in market healthy market competition in telecom services sector will
drive the growth in telecom infrastructure sector.

18
 4. BUSINESS PLAN
4.1. Passive Infrastructure

Mobile networks have base stations (or cell sites) which have active and passive
infrastructure components. Active components include the antenna, trans-receivers,
switches, feeder cables, Node B, and microwave radio equipments. Passive (or non-
electronic) components include the land, tower, shelter, air-conditioning equipment,
diesel electric generator, battery, electrical supply, technical premises and easements,
pylons etc. Passive infrastructure in a mobile network essentially involves acquiring land,
setting up towers and electrical and civil works that needs to be in place before operators
can install the active infrastructure which brings mobile services to the consumers. In a
typical cell site build-out, almost 65% of the total cost is attributed to passive
infrastructure and 35% to active infrastructure.

4.2. Infrastructure Sharing

Mobile operators are required to setup more and more BTS (cell) sites due to the
exponential growth of mobile subscribers in India (currently growing at almost 15 4
million subscribers a month) and limited availability of spectrum. B and C Circles (where
traffic density may not be as high as metros and Circle A) are expected to drive future
subscriber growth and requirements for cell sites will be higher to ensure greater
coverage.

However, creating new infrastructure by each operator separately leads to d uplicating

huge capital investments. It also contributes to mushroom growth of telecom towers and
deteriorating skylines in urban areas, which has already led to some local municipal and
state governments to regulate and restrict the erection of new mobile towers.

The continued pressure on cellular tariffs, higher infrastructure costs for network
deployment particularly in semi- urban and rural areas and compelling need to reduce

4
As published in ET 8th May, 09 Edit ion

19
time to market for network roll outs have led operators to share and even outsource their
infrastructure requirements from third party infrastructure providers like BPTL, GTL and
Indus towers. It promotes capital efficiency as it allows more than one service provider to
leverage and ride on common infrastructure. In its simplest form, it involves two or more
operators jointly using the common passive infrastructure in a cell site. While viewed
largely as a measure to reduce capital and operating expense, such sharing also leads to
improvement of service quality (by ensuring site space for service providers and reducing
black spots) and the environment (by reducing number of cell sites and towers).

In outsourcing, operators take passive infrastructure and tower space from third party
infrastructure companies on a monthly rental basis to host their radio and transmission
equipments. Outsourcing provides significant benefits to operators. It enables them to
save on capital expenses (it actually converts capital expense into operating expense in
the form of lease rentals) and focus on their core activities of sales, marketing and
branding, while leaving the cumbersome task of managing the site development process
and site operation and maintenance to third parties who exclusively deal with such
activities.

The concept of passive infrastructure sharing is increasingly gaining market acceptance

in India. So far, it has been largely limited to bilateral sharing between operators in the
form of barter, where the operators split the site related CAPEX and OPEX costs. The
available information suggests that about 25% of the existing 90,000 tower sites in India
are currently being shared for passive infrastructure, predominantly in rural areas and
small towns.

4.3. Introduction to the business

BPTL is an Infrastructure Provider company that builds, owns, operates and maintains
passive network infrastructure on a shared basis for mobile telecom operators and ITES
providers. Its objective is to provide network design and planning, network deployment,

20
network operations & maintenance, infrastructure management, application management
and professional services to telecom operators and enterprises.

The company is planning to raise capital in the form of equity and debt to start its
operation by Aug. 09. ABC’s vision is to provide world class managed infrastructure &
allied services to the service providers to optimize their service delivery capability. In the
initial years of operation the company will focus on telecom sector, with almost 100 % of
its proposed capital expenditure till FY 14 earmarked for developing and owning passive
infrastructure for sharing among mobile service providers.

4.4. Business Proposal

ABC will provide passive telecom infrastructure on build, own, operate (BOO) basis in
both ground based (GBS) as well as roof-top sites (RTS). It will undertake full range of
responsibilities in building, owning and maintaining the sites and will serve as a single
window one-stop-shop provider of infrastructure services. Typical responsibilities are
summarized below:

Site planning, keeping in view the network rollout plans of prospective customers.

Site acquisition, including entering into long-term agreements with land owners.

Obtaining of necessary regulatory approvals.

Erection and commissioning of tower and allied equipment.

Provision of support services such as back-up power, air-conditioning and

security.

Provision of turnkey solutions to telecom companies such as sourcing of

equipment, testing and maintenance.

21
Bharat Telemast Private Limited will identify the sites required for setting up the Passive
infrastructure by first of all getting a commitment from one operator who is called as
“Anchor Operator”. Then Bharat Telemast will go ahead to lease (or) buy out the site as
appropriate and commences construction of the cellular sites. But the Cellular site will be
typically designed for three to four operators. While construction is in progress the
marketing team will work towards getting the second and third operator. But care will be
taken in such a way that at least two operators are ava ilable at the time of completion of
construction.

4.5. Sources of revenue

1. Infrastructure Provisioning Fees –fee paid by the operators on a monthly basis.

With annual escalation

2. Site lease rental – Paid at actual on a monthly basis.

3. Operations and maintenance charges: Paid on a monthly basis.

4. The contract also provides a fixed annual escalator.

4.6. Attractiveness of business model

Stable and predictable cash flow business: Once a tower asset is rented out, it
usually generates a stable and predictable cash flow in the form of tower rentals
from occupants over the term of the MSA between the two parties.
Low working capital require ment: ABC’s business model is also characterized
by low working capital requirements, as most of the operating expenses (such as
electricity and fuel and other variable operating expenses) are reimbursable by the
tenants on actual basis. Moreover, BPTL is may also be able to get rentals for the
towers in advance and also obtain better credit terms from their suppliers, thus
further improving their working capital cycle.

22
High incre mental profitability: The operating costs associated with this
business, are largely fixed in nature. Thus each increment in tenancy is
accompanied by a minimal increase in costs. This leads to a more than
proportionate increase in profits for every increase in occupancy.
Reduction in capital investments due to present market conditions: Due to
present market situation average capital requirement for RTT and GBT sites have
dropped from 2 million and 4 million to 1.5 million and 3.3 million. ABC wishes
to grab this opportunity, which will result in competitive advantage in near future.
Extensive usage: While on an average, a GSM BTS can handle around 1,00-
11,00 subscribers, but in the case of high usage areas the figure can be as low as
600-700 subscribers, which means a larger number of cell sites would be required
for the same area. Moreover, the country has the problem of spectrum scarcity,
which increases the requirement of towers to maintain a reasonable leve l of
service quality.
New entrants: Many operators including Vodafone Essar Limited, Idea Cellular
Limited, Aircel Cellular Limited and Sistema Shyam Teleservices Limited have
received licenses as well spectrum in new circles, which would enable them to
become pan-India operators in the next one-two years. Also, new licenses have
been issued to new players such as Unitech, Swan Telecom, and S Tel Limited.
Given the significant expansion plans of new entrants over the medium term and
the need for them to optimize investments in order to maintain returns, demand
for towers is expected to report a sharp increase.
Shorter rollout time: Indian telecom industry is highly competitive and doing
business for new entrant may not be easy. Shorter network-rollout time would be
a critical success factor for the new entrants and a longer rollout time could mean
loss of substantial market share to other operators. Tower companies allow
players to start operations in a particular region just by installing their electronics
on the ready-to-use towers, thereby significantly shortening the rollout time.
New technologies: 3G services are already launched in the country and to
augment their services, various operators plan to launch Wi-Max services as soon

23
 as they receive additional spectrum from Government. This would further
increase the demand for sharing of passive infrastructure.

4.7. Expansion Schedule

BPTL would rollout both RTT and GBT sites, of which the RTT sites. GBT sites
normally would have a tower height of 50 meters or 60 meters depending on the need for
additional height for installation of microwave antennae based on the location of the site
and number of tenants on the cell site. Details of BPTL’s expansion plan are summarized
below:

Table 4.1 Expansion Plan

Expansion Schedule 2009-10 2010-11 2011-12 2012-13 20013-14
GBT
Addition 210 700 1400 2450 3850
Total 210 910 2310 4760 8610
RTT
Addition 90 300 600 1050 1650
Total 90 390 990 2040 3690

4.8. Proposed Services

As indicated earlier, ABC proposes to provide passive telecom infrastructure on a

sharing/ co- location basis to cellular operators. The sites would either be Ground Based
Sites (GBS) or Roof Top Sites (RTS). As the sites are meant for co- location of the active
components of two to three operators, they would be built to either 2-Tenant or 3-Tenant
specifications.

The different components of the passive infrastructure facility and the related services
that would be offered by BPTL to the operators are as under:

Infrastructure provisioning comprising

24
 Communication tower built to host multiple antennae

Weather-proof communication shelter with air-conditioning and power backup

arrangement

Diesel generating set and battery bank for power backup

A mobile standby generator to act as backup in case o f breakdown

Warehousing facility

Infrastructure operations and maintenance including

Regular operations and maintenance of the facility

Security of all the equipments at the site at all times

A dedicated team of technicians for a group of 40-50 sites to ensure effective and
efficient functioning of the components at all times

4.9. Proposed Organizational Structure

A senior management team will work under the leadership of the “Chief Operations
Officer” who will be responsible for smooth implementation of project activities. He will
also assist the managing director in marketing. This team will coordinate with Stallion
Telecom Pvt Ltd which will take over the role of procuring Capital Equipments.

Chief Operating
Officer

Project Manager Infrastructure Commercial Head (Legal and

Manager Manager (projects) Company Affairs)

Senior management will consists of project manager, infrastructure manager, commercial

manager and head (legal and company affairs. Apart from this there will be a requirement

25
of security sentries (3 per GBT site), supervisors (one for every 10 sites), and cluster
manager (one for every 50 sites).

Bharat Telemast will carry out the complete Project execution with the assistance of third
party “Quality control organization” and a third party “Project management team”.
Quality control and project management activities will be outsourced to a third party.

26
 5. METHODOLOGY

The changing face of infrastructure services creates a complex situation, which demands
greater understanding of roles of competition, regulatory structures, and modes of
financing. Knowledge of such things is a key decisive factor in building confidence
among investors, promoters and government. In project finance, the project, its assets,
contract, and cash flows are separated from promoter in order to permit credit appraisal
or loan to the project.

As part of the financial feasibility analysis, a series of related financial statements based
on projected sources and uses of funds during the development and operating phase
project were created. Financial statements consist of expenses associated with
development activities including capital costs like; acquisition of land for GBT sites, cost
of tower, generator, shelter, batteries, etc. Most of the data regarding capital costs are
obtained from the promoter of ABC Limited. All these capital costs related details are
provided in annexure 1.

Assumption regarding depreciation, capital structure, operating expenses, expansion

schedule, tenancy ratios, tariff or rent, operator’s fees and loan amortization schedule are
obtained from professional accountants, Promoter, and bankers of ABC Limited.

Due to unknown factors that could influence the cost of towers or fees associated with
completing the project (soft costs), contingency costs were estimated at 5% of hard and
soft costs respectively. If contingency is set too low, developers could easily encounter
funding shortfalls upon slight changes in market forces. All other costs were estimated
based on talking with industry professionals. (Promoters)

A detailed financial model was prepared based on existing accounting standards and
following financial ratios were estimated:

27
 EBITDA margin: Profit and loss accounts for the estimated project period (15
Years) were prepared, based on which estimated earnings before interests, tax,
depreciation and amortization were calculated for each year. Detailed P&L,
balance sheet and cash flow statements are provided in annexure 2, 3, and 4.

EBITDA = Total Revenue – (Variable expenses + Fixed Expenses)

EBITDA margin = EBITDA/ Total Revenue

PAT margin: PAT is calculated by subtracting interests paid on capital debt and
working capital debt, depreciation and applicable corporate income tax from
EBITDA.

PAT = EBITDA – Interest Payable – Depreciation – Income tax

PAT margin = PAT/Total Revenue

Working Capital: Working capital requirement is calculated by subtracting

current liabilities from current assets. Current assets are estimated based on 30
days cash requirement and current liabilities are estimated as half of salary
monthly expenses

W.C = Current Assets – Current Liabilities

UFCF: It is defined as the free cash flows available to the firm, if the firm has
zero debt liability. Purpose of calculating UFCF for project period is to determine
the project IRR.

UFCF = PAT + Depreciation + Interest (tax adjusted) + Release of W.C + Salvage

value of the assets – CAPEX – Change in W.C

28
 LCFF: It is defined as the cash floes available to the firm after paying interests on
long term and short term debts.

LCFF = UFCF – Interest (tax adjusted)

FCFE: It is defined as the free cash flow available to equity holders. It is

determined to calculate equity IRR for equity investors. It also includes the tax
benefits which are available as per the Income Tax Act.

FCFE: PAT + Depreciation + Salvage Value – Equity Investment – Long term debt
repayment.

PIRR: Project IRR is defined as the discount rate at which NPV (Net Present
Value) of UFCF is zero. It is calculated by using following formula:

UFCF1 / (1+PIRR) 0 + UFCF2 / (1+PIRR) 1 + UFCF3/ (1+PIRR) 2 + ……………… = 0

UFCF1 = UFCF at the end of first year of operation.

UFCF2 = UFCF at the end of second year of operation.
PIRR = Project IRR

EIRR: Equity IRR is defined as the discount rate at which NPV of FCFE is zero.
It is calculated by using following formula:

FCFE1 / (1+EIRR) 0 + FCFE2 / (1+EIRR) 1 + FCFE3/ (1+EIRR) 2 + ……………… = 0

FCFE1 = FCFE at the end of first year of operation.

FCFE2 = FCFE at the end of second year of operation.
EIRR = Equity IRR

29
 WACC: It is defined as the percentage of return expected by the investors, who
otherwise would have earned some return by investing in some other project.

WACC = Cost of Debt * (Debt/ Capital) + Cost of equity * (Equity/ Capital)

30
 6. OBSERVATIONS AND ANALYSIS

6.1.Deal Diagram
Deal diagram for the project may be depicted as below:

Private Promoters Other Banks/ FI

Equity Investors
Investor
Debt
Equity

ABC

Passive Telecom Infrastructure

(Fresh Rollout/ Acquisition) –
- Infrastructure Provisioning
- Infrastructure Maintenance

Network Operating Centre

Revenue

Cellular Operators

31
 6.2.Funding plan
As the telecom sites are rolled out over a 5 year period till FY 2014, investment will be
required for each year. ABC Limited will start generating profits from FY 10 only. Such
internally generated cash accruals will be ploughed back into the business to meet part of
the project cost. Investment required for each year is tabulated below:

Table 6.1 Funding Proposal

Million INR FY 10 FY 11 FY 12 FY 13 FY 14
GBT Tower (Additional) Nos. 210 700 1400 2450 3850
RTT Tower (Additional) Nos. 90 300 600 1050 1650
D/E ratio 2.33 2.33 2.33 2.33 2.33
Additional CAPEX 838.92 2,793.74 5,587.48 9,778.09 15,365.57
Debt 587.25 1,955.62 3,911.24 6,844.66 10,755.90
Equity 251.68 838.12 1,676.24 2,933.43 4,609.67

6.3.Results:
Based on assumptions given in Annexure 1, a detailed financial model was prepared.
Results of the financial model, such as P&L account, Balance Sheet, and cash flow
statements are provided in Annexure 2, 3 and 4. Forecasts for the key financial figures for
first five years are provided in the Table below:
Forecasts

Table 6.2 Income Statement

Million INR FY-10 FY11 FY12 FY-13 FY-14
Sales 71.24 505.11 1,567. 66 3,474. 76 6,677. 00

Cost of sales 19.50 138.52 392.52 876.12 1,700. 21

Gross 51.74 366.59 1,175. 14 2,598. 64 4,976. 79

% 72.63% 72.58% 74.96% 74.79% 74.54%

Admin costs 1.12 1.79 1.90 2.03 2.16

32
 Finance cost 0 0.21 74.01 313.30 777.25

Taxation 1.70 42.33 145.36 290.73 535.47

PAT 24.54 194.58 594.70 1,220. 96 2,232. 67

As shown in Table above during the expansion period revenue will gro w exponentially.
In the first year of operation ABC will earn a revenue of INR 71.24 million from 300
(210 GBT and 90 RTT) sites, with a tenancy ratio of 1.5 for GBS and 1.7 for RTS. In the
first 2 years of operation the company will not pay any interest on long term debt, due to
2 years moratorium period. Major cost associated with the project is depreciation, due to
which PAT is lower than the operating profits. But cash flows to the firm are enough to
result in reasonable returns.

Table 6.3 B alance Shee t

Year ending Mar-10 Mar-11 Mar-12 Mar-13 Mar-14

Assets
Gross Block 757.42 3,282.16 8,331.64 17,168.23 31,054.30
Accumulated depreciation 24.39 152.08 511.25 1,282.87 2,712.12
Net Block 733.03 3,130.09 7,820.40 15,885.36 28,342.19
Net Working Capital 0.64 2.41 6.20 13.35 25.15
Cash Balance 129.79 720.89 2,165.13 4,888.56 9,479.82
Total Assets 863.46 3,853.39 9,991.72 20,787.27 37,847.15
Liabilities
Equity 251.68 1,089.80 2,766.04 5,699.47 10,309.14
Reserves & Surplus 24.54 219.12 813.81 2,034.77 4,267.45
Long term Debt 587.25 2,542.86 6,407.22 13,043.02 23,251.71
WC Borrowings - 1.61 4.65 10.01 18.86
Total Liabilities 863.46 3,853.39 9,991.72 20,787.27 37,847.15
Note: All figures are in M illion INR

Table 6.4 Key financial rati os

Mar-11 Mar-12 Mar-13 Mar-14 Mar-15
Revenue Growth 609.02% 210.36% 121.65% 92.16% 38.90%
EBITDA Growth 620.61% 221.61% 121.32% 91.58% 40.20%
PAT Growth 692.93% 205.64% 105.31% 82.86% 29.55%

As shown in table above increase in EBITDA is higher than that of revenue. This is due
to better operational efficiency of ABC’s management and economies of scale. S imilarly

33
increase in PAT is lesser than that of EBITDA, because of high depreciation and interest
expenses.

Table 6.5 Profitability ratios

Mar-11 Mar-12 Mar-13 Mar-14 Mar-15
EBITDA Margin 72.22% 74.84% 74.73% 74.50% 75.20%
PAT Margin 38.52% 37.94% 35.14% 33.44% 31.19%
Return on Net Worth 6.22% 7.60% 7.69% 7.88% 10.87%

Key profitability ratios are shown in table above. Return on net worth in the initial years
is lower because of the ambitious expansion plans of ABC Limited. Thereafter return on
net worth increases with increase in PAT.
Returns on Investment

Table 6.6 Financi al returns

Financial Indicators
Project IRR 18.13%
Equity IRR 36.09%

6.4.Sensitivity Analysis

A sensitivity analysis has been carried out on the project financials to determine the
impact of key variables on the financial indicators namely,
Project IRR

The key variables on which sensitivity analysis have been carried out are:
Capital expenditure for GBS and RTS
1st and 2nd tenant tariff for GBS
1st and 2nd tenant tariff for RTS
Tenancy Ratio

Similarly sensitivity analysis has been carried out for:

Equity IRR

The key variables on which sensitivity analysis have been carried out for EIRR are:

Capital structure and interest rate for capital debt

Repayment period and moratorium period.

34
The impact on the financial indicators is shown below:

Figure 6-1 Project IRR v/s GBT and RTT CAPEX

As shown in Figure 6-1, project IRR is more sensitive to change in CAPEX of RTT sites
as compared to change in CAPEX of GBT sites, because tenancy ratio and tariff for RTT
sites are higher than those of GBT sites.

35
Figure 6-2 Project IRR v/s GBT Tariff for 1st tenant (X-axis) and 2nd tenant (right-hand side)

As shown in Figure 6-2, project IRR varies linearly with GBT tariff. In the best case
scenario when GBT tariff for 1st tenant is INR 34000/month and GBT tariff for second
tenant is INR 26000/month, Project IRR is 21.01%.

Figure 6-3 Project IRR v/s RTT Tariff for 1st tenant (X-axis) and 2nd tenant (right-hand side)

As shown in Figure 6-2, project IRR varies linearly with RTT tariff. In the best case
scenario when RTT tariff for 1 st tenant is INR 24000/month and RTT tariff for second

36
tenant is INR 20000/month, Project IRR is 19.32%. Project IRR is more sensitive
towards RTT tariff than GBT tariff, because in practical business situation, RTT sites
have a tenancy ratio of more than two due to which effect of tariff for 1st tenant almost
get nullified after few years.

Figure 6-4 Project IRR v/s Tenancy ratio for RTT sites (X-axis) and GBT sites

As shown in Figure 6-4, project IRR is very sensitive to tenancy ratio. In the best case
scenario where GBT sites have a tenancy ratio of 2 and RTT sites have a tenancy ratio of
3, project IRR can be as high as 20%.

Figure 6-5 Equity IRR v/s long term debt interest rate for different leverage level

37
As shown in figure 6-5, equity IRR is more sensitive to interest rate on long term debt for
high level of leverage (lower debt equity ratio), because as the debt equity ratio increases,
interest paid on long term debt also increases significantly.

Figure 6-6 Equity IRR v/s long term debt repayment period at different level of moratorium
periods

As shown in figure 6-6, Equity IRR increases with increase in moratorium period and
debt repayment period. The variation is from 16.54% to 60% for worst case and best case
scenarios.

38
7. RISK ASSESSMENT
Risk
Execution Risk
(Project management , land
acquisition, etc)
Market Risk
(No entry barriers, operators may
share infrastructure between
themselves, large players with
high capital may increase
competition)
Financing Risk
(Availability of equity capital,
availability of long term debt,
interest rate and moratorium
period)
Commercial Risk
(Tenancy ratio and tariff for
GBS and RTS)
Mitigation strategy
Management of ABC has proven expertise in
telecom infrastructure rollout and has executed
various projects with large telecom operators and
MNC vendors.
ABC’s top management team consists of a group
of professionals drawn from leading telecom
Infrastructure Company who have immense
expertise and experience in rolling out telecom
infrastructure projects
India has a huge potential for telecom
infrastructure market. With increasing
competition, falling tariffs and pressure on
margins, telecom service providers are being
forced to increase their focus on marketing, and
reduce their expenses.
Experienced management, healthy capital back-
up, effective presence in the telecom
infrastructure market and value added services at
relatively lesser cost will help ABC to meet the
set targets. .
ABC is seeking private equity partner to secure
equity capital. Company has already entered into
NDA with 2 major investors.
Long term debt at an interest rate of 12.5% can
be easily arranged, because of the credibility of
the promoters in the market.
Many other similar firms, like Indus and GTL
have already secured long term debt for a
moratorium period of 2 years. Promoters of ABC
Limited are confident to secure a long term debt
with a moratorium period of 2 years and a
payback period of 8 years.
ABC Limited would minimize the working
capital requirements of its business by securing
rentals and operating revenues in advance from
its clients and / or by suitably structuring its
payment liabilities to match its cash inflows.
ABC would aim to enter into long term contracts
with the “anchor tenant” operator and then
rollout the infrastructure so that at least single
39

Revenue Risk
(Operating fees may decrease,
credit worthiness of the clients,
delay in payment of rentals)
Natural Calamities Risk
occupancy of each site is ensured at all times.
Promoters will use its knowledge of the business
and its expertise to identify and roll out sites in
locations which have strong multi- tenancy
potential to minimize occupancy risk.
As per the industry sources, till now, not even a
single operator have dishonored the long term
lease contract.
The credit risk is diversified as there will be
multiple operators.
ABC would aggressively market to get 3G and
WiFi broadcasters to use the sites and earn
additional revenues in addition to the assumed
revenue streams
The Company shall maintain insurance, for the
sites against these risks and the cost of insurance
will be priced in and passed on to the tenants.
40
8. CONCLUSION

India is the fastest growing wireless telecom market in the world. The continuing
growth in the number of wireless subscribers and MoUs and increasing trend of
outsourcing of business processes to India has led to growing demand for large
investments in the telecom infrastructure in the country

However, with increasing competition, falling tariffs and pressure on margins,

telecom service providers are being forced to increase their focus on marketing,
customer acquisitions and branding and minimize their efforts and overheads in
project management and asset acquisition.

Further, with rising prices of steel, cement and real estate the cost of developing
and owning passive infrastructure is increasingly becoming a costly proposition
for most operators and service providers.

The compulsion on the part of service providers to reduce their operating costs
and capital expenditure requirements has led to opportunities in passive
infrastructure outsourcing to independent third party infrastructure providers and
also sharing the infrastructure with other service providers. It is expected that
cellular operators will outsource their communications site infrastructure needs as
a means of accelerating access to their markets and preserving capital, rather than
constructing and operating their own communications sites and maintaining their
own communications sites service and development capabilities.

Passive infrastructure is highly capital intensive and an integral part of the cellular
service providers’ networks. Yet being a simple and low technology asset, it is
amenable to outsourcing and sharing. By transferring the responsibility of
ownership, development and maintenance of passive infrastructure, service

41
providers have an opportunity to transfer a substantial part of their business risk to
third parties.

Most telecom operators are facing capacity constraints on their networks.

Coverage obligations, increasing pressure to improve network quality and
competition has led to aggressive roll out plans by existing cellular operators.
Installation of cell sites has become a cumbersome process as there are a number
of clearances required and involves labor- intensive micro management.
Availability of ready infrastructure from third party providers would enable the
operators to reduce their time to market and accelerate their access to their
customers. Cellular service providers generally want to move quickly when
adding more sites and co-location on an existing site is always faster than
building.

Ownership and maintenance of telecom towers and other infrastructure by third

parties is an established practice in developed nations like USA and is
increasingly gaining market acceptance in India

The Indian government is seriously considering promoting the infrastructure

sharing route between the telecom operator and private players to achieve future
national tele-density targets and improve rural telecom penetration

ABC being an independent entity with no business conflicts with other service
providers in the telecom space will be best positioned and have an early mover
advantage to capitalize on this emerging opportunity

Further, the task of operating and maintaining the passive infrastructure in the cell
is increasingly becoming a cumbersome exercise for the service providers to
handle. ABC’s composite offering to build passive infrastructure for the cellular
operators and also operate and maintain them will provide a turnkey solution to
address the infrastructure needs of the service providers.

42
The business model proposed to be followed by ABC is fairly simple with stable
and predictable cash flows as is the case with the business model of the tower
renting companies in USA. Most contracts are long term for a period 10 or more
years with annual price escalators generally ranging from 3% to 4%. However,
wireless carriers normally tend to renew rentals because suitable alternative sites
may not exist or be available and repositioning a site in a carrier’s network is
expensive and may adversely affect network quality.

Site ownership and operations is a “scale” business, operating, administration,

marketing expenses etc. do not rise as quickly as revenues when portfolios are
expanded. Incremental operating costs associated with adding wireless tenants to
a communications site are minimal. Therefore, as additional tenants are added to a
site, the substantial majority of incremental revenue contributes to margin
expansion. Most tower companies have high EBITDA margins as may be seen
from the financial indicators of some of the tower rental companies in USA.

It is expected that site location and capacity, price and quality of service and
successful execution of contracts will be the most significant competitive factors
in this business

ABC’s revenue and returns on investment will be primarily driven by its ability
to:
o Increase the utilization of the space and infrastructure capacity owned by it by
increasing the number of tenants per site and renting out to maximum number
of users. As discussed above return on capital employed (PIRR and EIRR) are
very sensitive to tenancy ratio. In worst case scenario project IRR can be as
low as 8% and in the best case scenario it can be as high as 20%.
o Develop/ acquire sites of strategic importance and high growth potential that
will enable them to secure better commercial terms from users and attract
more number of tenants. Infrastructure provisio ning fees / rentals for sites are

43
 extremely location sensitive. There is a potential to acquire more land than
that of required to capitalize on the increase in real estate prices.
o Develop sites in a cost effective manner. ABC would consider purchasing
land only for those GBS sites which have sufficient demand and are
strategically located. Else, for most of its sites land will be leasehold. As
shown above returns (PIRR and EIRR) are very sensitive to capital costs. In
the worst case scenario project IRR can be as low as 15%, whereas it can as
high as 27%, in the best case scenario.
o Negotiate and secure long term contracts with good credit quality users with
built in price escalation provisions to mitigate financing risk.
o Leverage and secure long term financing at attractive terms and involve in
active treasury management to keep low financing cost. Results of the
sensitivity analysis indicate that equity IRR can be as high as 60% foe a
moratorium period of 4 years and interest rate of 10%.
o Minimize working capital requirements
o Maintain low operating and administration expense;
o Secure better O&M margins from operators and retain a healthy share of it in
ABC
o Maintain high service standards and build strong customer relationships

The business would have the potential to capture new revenue opportunities
around the existing assets. As demand for towers is expected to grow, and as
operators migrate to speedier, next-generation wireless technologies they will
need the towers and associated passive infrastructure to transmit their new
services, in addition to their existing offerings. In addition to increasing capacity
and coverage and improving the quality of their networks, cellular service
providers are deploying high speed data networks driving incremental dema nd of
sites. The business therefore, has potential upsides in the form of adding
customers (tenants) in wireless broadband, third generation (“3G”) and wireless
data capabilities and also other incremental value propositions by way of hosting

44
 Billboards, Hoardings etc. in some of the high visible sites owned and maintained
by it.
.

Based on the assumptions and subject to satisfactory resolution of the key risks
factors, project cash flows will be able to meet debt service obligations.

This business model is a lucrative investment option for a private equity player,
because valuation of each site will increase in the coming years due to
improvement in market conditions, increase in the value of land, and increase in
the demand for passive infrastructure in rural and semi- urban areas.

45
REFERENCES
Anjan, G., V, A., & N, M. (2009). telecom infrastructure industry in india. Gurgaon:
ICRA.

Bessler, W., Norsworthy, J., & Shusterman, T. (2001, 12 1). Mergers in the US
telecommunications industry and market valuationeffects. IEEE , p. 288.

COAI. (2009, march 14). Subscriber Figures. Retrieved march 14, 2009, from
COAI.com: http://www.coai.com/statistics.php

IDA. (2009, march 23). Highlights. Retrieved march 23, 2009, from ida.gov.sg:
http://www.ida.gov.sg/home/index.aspx

K, R. (2008). Time for new business model. Delhi: Cybermedia.

MAXIS. (2009, march 8). the malaysian telecommunications industry. Retrieved march
9, 2009, from maxis.com.my:
http://www.maxis.com.my/personal/about_us/investor/prospectus/prospectus4.pdf

P, J., & Lisa, A. (2009). Stimulas spending and American Telecom Industry. USA:
Coracle group.

PwC. (2009, march 12). Indian Telecom Industry. Gurgaon, Harayana, India.
Ramachanran. (2009, march 1). Investment in Telecom Infrastructure sector. (M. R,
Interviewer)

Vogelsang, I. (2002). The German Telecommunications Reform. Verein für Socialpolitik

(p. 26). Innsbruck: Boston Press.

46
ANNEXURES

ANNEXURE 1: Key Assumptions

The occupancy of each site by single/ two/ three operators for green- field sites is assumed
to be as follows:

Table 9.1 Expected Tenancy Ratios

FY 10 FY 11 FY 12 FY 13 FY 14 FY15
GBT Tenant
Ratio 1.50 1.50 1.70 1.70 1.70 2.00
Single Operator 50% 50% 30% 30% 30% 0%
Two Operator 50% 50% 70% 70% 70% 100%
RTT Tenant
Ratio 1.70 1.70 2.00 2.00 2.00 2.50
Single Operator 30% 30% 0% 0% 0% 0%
Two Operator 70% 70% 100% 100% 100% 50%
Three Operator 0% 0% 0% 0% 0% 50%
From FY 15 onwards tenancy ratio of 2 and 2.5 for GBT and RTT sites is considered.

47
Capital costs related assumptions are tabulated below:

Table 9.2 GB T and RTT Capi tal Cost

Million Million
GBT Capital Costs INR RTT Capital Costs INR
Delivery cost of Ground Based Delivery cost of Roof Top
0.63
Tower (GBT) Tower (RTT) 0.30
Delivery cost of Generator 0.30 Delivery cost of Generator 0.20
Civil Work 0.40 Civil Work 0.20
Shelter 0.12 Shelter 0.12
Electrical Works 0.30 Electrical Works 0.30
Other Equipments (UPS, Battery, Other Equipments (UPS,
0.45
etc.) Battery, etc.) 0.30
Construction cost 0.45 Construction cost -
Land 0.35 Land -
Contingency & Financial Charges 0.35 Contingency & Financial
Total cost 3.35 Charges 0.08
Total cost 1.50

The lease rentals for RTT sites are reimbursed from the operators and therefore have not
been factored in the revenues as well as the expense. For GBT sites land purchase cost of
0.35 millions assumed, which has been escalated by 6 % annually to determine the
salvage value of assets.

48
Ope rating costs related assumptions are tabulated below:
Table 9.3 Operating Costs
Ope rating Costs
Security Sentries (INR/Month) 4,000
Supervisors (INR/Month) 6,000
Cluster Manager @ One for Fifty Towers (INR/Month) 15,000
Annual increase 5.00%

Number of Security Sentries per tower 3.00

Number of supervisors per tower 0.10
Number of Cluster manager per tower 0.02
Fixed Expenses
Selling & Maintenance (INR/Month) 40,000.00
Annual Escalation 5%
Administration overhead (INR/Month) 100,000.00
Annual Escalation 7%
A.M.C Cost of Generator 15% (cost of generator)
Annual Escalation (A.M.C) 3%

For RTT sites, security sentries are not required, because it will be the responsibility of
the site owner. A supervisor will for every 10 sites and a cluster manager for every 50
sites will be required.

49
 Table 9.4 Long term debt
Interest Rate 12.5% per annum

Moratorium 2 years

Repayment Period 8 years

Tariff related assumptions and date of operations are tabulated below:

Table 9.5 GB T and RTT Tariff

Tariff Plan Table 9.6 Life of the project

Tariff (INR/Month) Commercial Operation Date 1-Aug-09

No. of Quarter Ending 30-Sep-09
operators. GBT RTT FY ending COD 31-Mar-10
1 28000 18000
2 22000 14000 Project life, years 15
3 0 12000
Annual End of comme rcial
31-Aug-24
increase 3% 3% operations
Quarter ending comme rcial
30-Sep-24
operations
FY ending comme rcial
31-Mar-25
operations

50
 Annexure 2: Profit & Loss accounts
Table 9.7 Profit & loss account statement
Income Statement (MN
INR)
Year ending Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15

Revenue
GBT 40.6350 288.11 890.80 1,974.47 3,794.09 5,270.15
Operator Fees (GBT) 14.11 100.04 306.78 679.98 1,306.64 1,796.64
RTT 12.09 85.75 272.69 604.43 1,161.46 1,642.64
Operator Fees (RTT) 4.40 31.21 97.39 215.87 414.81 564.66
Net Re venue 71.24 505.11 1,567.66 3,474.76 6,677.00 9,274.10

Expenses

Variable
Security Sentries 13.55 97.90 283.39 640.33 1,254.33 1,582.38
Supervisors 0.97 6.99 20.24 45.74 89.59 113.03
Cluster Manager 0.48 3.50 10.12 22.87 44.80 56.51
A.M.C Cost of Generator 4.50 30.13 78.77 167.19 311.48 545.41
Sub-total 19.50 138.52 392.52 876.12 1,700.21 2,297.34

Fixed
Selling & Maintenance
0.32 0.50 0.53 0.56 0.58 0.61
(INR/Month)
Administration overhead
0.80 1.28 1.37 1.47 1.57 1.68
(INR/Month)
Sub-total 1.12 1.79 1.90 2.03 2.16 2.30

EBITDA 50.62 364.80 1,173.24 2,596.61 4,974.64 6,974.47

Interest on LT loan - - 73.41 312.00 774.79 1,561.98

Interest on ST loan - 0.21 0.60 1.30 2.45 3.61

EBDT 50.62 364.59 1,099.23 2,283.31 4,197.39 5,408.88

Depreciation 24.39 127.69 359.17 771.62 1,429.25 1,740.06
EBT 26.24 236.91 740.06 1,511.69 2,768.14 3,668.81
Income Tax 1.70 42.33 145.36 290.73 535.47 776.34

PAT 24.54 194.58 594.70 1,220.96 2,232.67 2,892.47

51
 Annexure 3: Balance sheet

Table 9.8 B alance sheets

Yearend Balance Sheet (MN
INR)
Year ending Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15

Assets
Gross Block 757.42 3,282.16 8,331.64 17,168.23 31,054.30 31,054.30
Accumulated depreciation 24.39 152.08 511.25 1,282.87 2,712.12 4,452.18
Net Block 733.03 3,130.09 7,820.40 15,885.36 28,342.19 26,602.12
Net Working Capital 0.64 2.41 6.20 13.35 25.15 37.07
Cash Balance 129.79 720.89 2,165.13 4,888.56 9,479.82 12,947.34
Total Assets 863.46 3,853.39 9,991.72 20,787.27 37,847.15 39,586.53

Liabilities
Equity 251.68 1,089.80 2,766.04 5,699.47 10,309.14 10,309.14
Reserves & Surplus 24.54 219.12 813.81 2,034.77 4,267.45 7,159.92
Long term Debt 587.25 2,542.86 6,407.22 13,043.02 23,251.71 22,089.67
WC Borrowings - 1.61 4.65 10.01 18.86 27.80
Total Liabilities 863.46 3,853.39 9,991.72 20,787.27 37,847.15 39,586.53

52
 Annexure 4: Cash flow statement

Table 9.9 Cash flow statements

Year ending Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15

Inflows
PAT 24.54 194.58 594.70 1,220. 96 2,232. 67 2,892. 47
Depreciation 24.39 127.69 359.17 771.62 1,429. 25 1,740. 06
Tax adjusted int erest - 0.14 49.59 209.91 520.76 1,048. 95
Release of WC - - - - - -
Salvage Value - - - - - -
Sub-Total 48.93 322.41 1,003. 45 2,202. 49 4,182. 68 5,681. 48

Outflow s
Capex 757.42 2,524. 74 5,049. 48 8,836. 59 13,886.07 -
Change in Working
0.64 1.77 3.79 7.15 11.80 11.92
Capit al
Sub-Total 758.06 2,526. 51 5,053. 27 8,843. 74 13,897.87 11.92

UFCF (709.13) (2,204.10) (4,049.82) (6,641.25) (9,715.19) 5,669. 56

LFCF (709.13) (2,204.24) (4,099.40) (6,851.16) (10,235.95) 4,620. 62

53