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TELECOM INDUSTRY OVERVIEW

Indian Telecom Tower Companies witnessing a shifting landscape, with new growth opportunities that are primarily driven by the arrival of 5G and an expanding network. India saw a growth of more than 60 percent

(Department of Telecommunications) in the number of telecom towers installed in the last five years, growth concentration being closer to October 2022, coinciding with the launch of 5G in the country.

India has an installed base stations at more than 7.5 lakhs telecom towers with proliferation of Internet services in urban and rural areas. OFC (optical fiber cable) rollout has crossed 30.6 lakh kilometers and theres an ambitious 85 per cent of the telecom towers need to be fiberised and 12 lakh towers need to be deployed by 2023-24. This infrastructure makes India one of the biggest telecom markets in the world. Worldwide, there are an estimated 40 lakh 30 thousand telecom towers, and that number is expected to increase by another million by 2026. This creates a picture of the level of hectic activity one will see in this market in the coming years.

This exponential volume growth is redefining industry dynamics, thereby setting new trends and opportunities.

5G infrastructure is capital intensive. Traditionally, Mobile network operators ("MNOs") used to own their telecom towers, but that model has progressively seen a shift to divestment of cell sites to Tower Companies while the MNOs focuses on their core business. 5G implementation and expansion continues to support the Tower Company asset ownership model. However, with MNOs finding it challenging to improve profitability through CAPEX-based network expansion, they are now looking towards OPEX cost savings, opening opportunities for Tower Companies to expand their revenues into exciting new areas. Tower Companies see themselves as real-estate Companies and their objective is to maximize monetization of telecom towers in urban as well as rural areas – by maximizing sharing and offering new services.

Despite proactive support from the government and Department of Telecommunications (DoT), the telecom infrastructure providers are still facing hurdles in faster infrastructure deployment of 5G with issues pertaining to discoms not following the 5G rollout policy in alignment with the State / Central RoW Policy and facility for bulk RoW permission since number of such poles, which may be used for 5G cell deployment, may be in thousands. (Source: News Articles) Telecommunication has been recognized all over the world as a powerful tool of development and poverty reduction through empowerment of the masses. It is one of the key elements of the Sustainable Development Goals (SDGs) of the United Nations Agenda for Sustainable Development for 2030. The telecom sector exhibited strong growth over the last few years on the back of strong consumer demand and supportive policies of the Government of India.

Industry Structure and Key Developments

The telecom industry has been undergoing widespread changes in recent years. Data usage in the industry has been increasing year on year, while existing towers are being loaded with equipment to handle the increased coverage requirements. Further, coverage gaps are being addressed through new infill sites. With time, low-footprint, small cell and FTTH will become more & more critical, and many more small cell sites will be required as telecom operators plans to reach closer & closer to customer.

Despite the growth, the industry still faces certain key challenges, as the need for more network outreach and To optimize the use of street furniture along with various innovative solutions like camouflaged sites need to deployed. Falling profit levels have prompted telecom companies to look for innovative solutions in order to reduce tower and foundation costs significantly. Several measures can help cut costs, including adopting triangular cross-sections and circular profiles for reduced wind drag. Using tubes can also help cut costs.

Built-in equipment platforms have been designed to enable optimal utilisation of a tower and the overall space. They allow for all equipment, including the base transceiver system, the power bank and the diesel generator, to be placed within the tower itself. This renders the earlier procedure of using a system shelter for such equipment obsolete. This, in turn, reduces the size of the plot and ensures that the fencing is protected by the foundations of the tower itself, without harming the safety of the equipment.

Another sustainable technology is the rapid deployment solution (RDS), used while assembling or deploying the tower structure. Different from traditional concrete foundations, RDS does away with the steps of excavation, pouring concrete and creating an embankment. RDS reduces the time needed to set up or deploy the tower structure. It also facilitates easy relocation, not needing cranes to be shifted from one location to another. Moreover, it functions independently of soil type and thus provides steady and strong support to the tower. As cityscapes are getting overcrowded, and the need to keep streets and roads accessible is increasing, tower structures are now supporting multiple functions. These include LED lights, surveillance cameras and environment sensors, meant to facilitate the safety of pedestrians. Add-ons such as Wi-Fi routers, mobile charging ports and electric vehicle charging points are also being offered. In restricted spaces, towers may have equipment racks, placed above or below ground.

Towers also need regular life cycle management and maintenance. Structure inspection, load validation activities and maintenance inspection need to be performed occasionally. Currently, such check-ups are performed individually for stations as per their need. However, in time, they will be part of a comprehensive audit conducted as per Department of Telecommunications guidelines.

With the rise of green finance, sustainable energy has also levelled up in the telecom industry. Solar panel structures are now being used to supply electricity to telecom infrastructure in rural areas. In rural areas with an average wind speed of 5-6 meters per second, telecom installations are also deploying wind turbines. This helps telecom networks work independently of the erratic electricity supply in the rural parts of the country.

The use of sustainable and other new materials in tower structures has drawn interest from international clients.

India currently does not see much demand for new materials due to cost factors. Timber, bamboo and carbon fiber structures will gain prominence in the near future. Such structures can ensure that signal strength is unaffected by any hindrance from metals. Some of these technologies, such as RDS, have eased several concerns around safety, while built-in equipment platforms have simultaneously enabled compact designs and efficiency. Others, including timber tower structures, are yet to be tested for feasibility in terms of safety and performance. Many more, such as camouflage for tower structures, are yet to be explored by the Indian telecom industry. (Source: tele.net.in)

Government Support: In October 2022, the Government has approved 26,000 crore for installation of 25,000 mobile towers in 500 days. This financial support for the project will be provided by Universal Services Obligation

Fund and it will be implemented by Bharat Broadband Network. PM GatiShakti National Master Plan Platform for 5G rollout

The Telecom assets are being mapped on PM GatiShakti NMP (National Master Plan) platform. About 20 lakh

Telecom Towers of all Telecom Service Providers (TSPs) have been mapped with details such as ‘fiberized and ‘non fiberized. The tool developed by BISAG on PM GatiShakti NMP calculates the required length and route of the nearest OFC to a particular unfiberized tower. This helps in Fiberization of unfiberized towers i.e. for connecting the available nearest OFC with nearest unfiberized tower and Companies who want to explore the option of buying available OFC to connect their unfiberized towers can do so without much effort.

OPPORTUNITIES AND THREATS

Opportunities:

Renting and Leasing of Towers

Tower Companies can lease available tower space to multiple MNOs, ISPs, and others needing vertical assets to support their wireless or point-to-point facilities. If co-location isnt viable or available, MNOs can ask Tower Companies to build a greenfield site for them and then lease it back. This Build-to-Suit (BTS) model is a win-win for both the Tower Companies gets a guaranteed anchor tenant while the MNO shifts from a CAPEX to OPEX model. The Tower Companies can further lease this tower space to additional tenants through co-location. In another model, Buy and Lease Back (BLB), MNOs can free up investment capital by selling off their existing tower assets and leasing them back from Tower Companies.

Turnkey Infra Solutions

Another new trend is Tower Companies delivering a turnkey infrastructure solution that goes beyond just leasing the cell towers and ground space around them. They are deploying and managing their own fiber networks, offering new alternatives to MNOs toward network densification. Given limited real estate for multiple networks, office complexes, hotels, malls, airports, hospitals, stadiums, and convention centers are often more willing to work with Tower Companies. These neutral hosts can build infrastructure to service multiple MNOs or build multiple parallel systems in the same space.

Private 5G Wireless Networks

5G is expected to see an explosion in demand for private wireless networks, a trend that started with LTE; much of the 2G and 3G focus was on the consumer phone user. Indias large public sector organizations such as Indian

Railways, BHEL, SAIL, Coal India, ONGC and others have existing private networks that will require modernization and an upgrade to 5G. Private 5G wireless networks enable opportunities for warehouse operations, ports, mines, and manufacturing operations to utilize 5G speed, bandwidth, low latency, security, and energy savings characteristics to implement high-bandwidth technologies such as IoT, AI/ ML, and VR/AR.

There are more technology-driven opportunities that can be leveraged by Tower Companies. For instance,

Network Function Virtualization (NFV) is a significant transformation element in all networks. Its genesis lies in ITs willingness to decrease the need for custom-tailored equipment and enable on-the-fly network adjustments virtually. Today, MNOs would like Tower Companies to also support a similar transition in the RAN space.

Venture in Active Equipments:

Department of telecommunications (DOT), India has already released consultation papers to increase the scope of IP1 license company. Currently only Passive equipments & OFC are in scope of IP1 license companies which they intend to expand by including active equipments. This move will change the landscape of telecom tower companies as it can add big revenue stream in their portfolio and it will immensely benefit telecom industry as it will help telecom operators to reduce the cost and increase the speed of deployment. It has potential to also become one of the key pillars of "Digital India".

"With innovation at the core, Indian telecom tower industry has carved a global niche in infrastructure sharing. By focusing on the right mix of competencies and business opportunities, the tower industry can drive the next infrastructure revolution and realize the vision of ‘broadband for all."

Threats: liquidity pressures

The tower industry is not immune to liquidity pressures faced by a few telcos. Several payments between weaker telcos and tower companies remained unfulfilled, and thus pressures continued to mount on the working capital cycle of the latter.

While the technology upgrade to 5G brings with itself a favorable demand outlook for the tower companies, their capex intensity is likely to increase. In a scenario where 5G deployment has remained pocket-specific, these investments are likely to give returns over a relatively long period, thereby further impacting the return metrics of the tower industry, with the RoCE expected to drop.

Operator Consolidation:

Few years have seen the number of operators reduce materially. from 14 at its peak to 3 in 2019-22. The current structure of 2 large private players is considered optimal and any further consolidation could impact the Companys business materially in terms of probable reduction in revenues and profitability. Consolidation of tenancy on sites reduce the sharing of resources and could also result in increased cost.

Electromagnetic Field (EMF) emissions

Electromagnetic Field (EMF) emissions from Mobile towers are non-ionizing Radio frequencies having very minuscule power and are incapable of causing any adverse environmental impact. The International EMF Project of World Health Organisation (WHO) has published an information sheet in 2005 on effect of EMF emissions on animals, insects, vegetation and aquatic life and has concluded that the exposure limits in the Non-Ionizing Radiation Protection (ICNIRP) guidelines for protection of human health are also protective of the environment. The present norms for Electromagnetic Field (EMF) emissions from mobile towers in India are already ten times more stringent (even lower) than the safe limits prescribed by ICNIRP and recommended by WHO.

The field units of Department of Telecommunications regularly carry out the EMF audit upto 10% BTS Sites annually on random basis. DoT also imposes financial penalty on Telecom Service Providers (TSPs) whose BTSs are found exceeding the prescribed EMF emission limits.

Business outlook

STL is actively involved in bringing to fore Indias telecom revolution. We are investing forward across circles and are working on various new fronts like Fiberization, FTTH, Rural Sites to secure our future growth.

Playing our role in Digital India

From our standpoint, we will play a significant role in further widening the scope of broadband in India and will assist TSPs in deploying their technology on the infrastructure space we provide.

5G will accelerate our growth

We view 5G and broadband as macro drivers for our growth. We expect to capitalise on the demand for connectivity in India, driven by aspiration, affordability and innovation. With a strong pedigree in laying optical fibers and installing tower infrastructure, we will aim to be the preferred choice for all our clients, and in turn, strive to maintain our service excellence.

Expanding our footprint

We are also expanding our geographic footprint, and are expecting to increase our presence strongly in at least 10/22 telecom circles in India by the end of FY 2024.

Listing on the NSE and deleveraging balance sheet

In the near-to-medium term, we expect to grow faster with an infusion of equity capital by listing our stock in the National Stock Exchange (NSE) and rebalance our balance sheet to minimize our debt. We believe this will add on to our stakeholder centricity and deliver better returns every year.

Human resources

Our people remain our core strength. Even amidst the challenges of the COVID-19-induced lockdowns, our people proved their mettle by serving through the pandemic and ensuring continued servicing of our towers. At present, we have over 386 employees on roll, who are engaged across various functions of the Company.

Risk management

Risk management and internal control are fundamental to effective corporate governance and development of a sustainable business. The Company has a robust process to identify key risks across its operations and prioritize relevant action plans that can mitigate these risks. Key risks that may impact the Companys business include:

1. Economic Conditions in India:

A significant change in the governments policies, commodity pricing and other global and domestic macro factors, could affect business and economic conditions in India. Issues such as tax changes, impact of litigations or new taxes or levies; could lead to significant financial exposure, loss of reputation or disruption of business.

2. Natural disasters damaging telecom networks:

The Companys telecom networks are subject to risks of natural disasters or other external factors. The Company maintains insurance for its assets, equal to the replacement value of its existing telecommunications network, which provides cover for damage caused by fire, special perils and terrorist attacks. Such failures and natural disasters even when covered by insurance may cause disruption, though temporary, to the Companys operations. The Company has been investing significantly in business continuity plans and disaster recovery initiatives which will enable it to continue with normal operations and offer seamless service to our customers under most circumstances.

3. Changes in Technological Affecting the Demands of Existing Tower

With new technologies coming to market and ever-evolving customer requirements, agility is required to develop the right product portfolio and deliver new products profitably.

We dont foresee any risk in the near future and the Company keeps assessing all the new technological advancements in the sector for better understanding and preparedness.

Internal Control Systems

The Company deploys a robust system of internal controls that facilitates the accurate and timely compilation of financial statements and management reports, ensures regulatory and statutory compliance, and safeguards investor interest by ensuring the highest level of governance and periodic communication with investors.

The Audit Committee reviews the effectiveness of the internal control system in the Company and also invites the senior management/ functional directors to provide an update on their functions from time to time. A Certificate forming part of the Corporate Governance Report confirms the existence of effective internal control systems and procedures in the Company.

The Companys Internal Assurance Group also conducts periodic assurance reviews to assess the adequacy of internal control systems and reports to the Audit Committee of the Board. The Company has taken several steps to enhance the internal control systems across all its circle operations such as: significantly improving the quality and frequency of various reconciliations, enhancing the scope and coverage of revenue assurance checks, segregation of duties, rolling out self-validation checks, regular physical verification, systems audits, desktop reviews as well as continuous training and education.

The company has also started Automaton Journey to further strengthen its process and to ensure Zero Tolerance to any revenue leakage.

Financial Ratio

Sr. No Ratio March 31, 2023 March 31, 2022 % Deviation
1 Current Ratio 0.99 1.14 -12.58%
2 Debt-to-equity Ratio 0.41 0.30 35.93%
3 Debt Service Coverage Ratio (9.57) (4.15) 130.51%
4 Return on Equity Ratio(in %) 0.22 0.34 -35.54%
5 Inventory Turnover Ratio 3.84 3.53 8.64%
6 Receivables Turnover Ratio 4.27 - 0.00%
7 Payables Turnover Ratio 0.75 - 0.00%
8 Net working capital turnover Ratio (212.12) 14.70 -1543.20%
9 Net profit Ratio(in %) 0.32 0.33 -1.58%
10 Return on Capital employed Ratio 0.18 0.21 -17.28%
11 Return on investment 0.18 0.20 -8.69%