Independent telecom tower companies (towercos) are expected to spend Rs 21,000 crore over fiscals 2025 and 2026 to support the telecom companies (telcos) in expanding rural networks and improving service quality in urban areas. The push for better coverage and connectivity, along with rollout of 5G, had driven a ~Rs 23,000 crore capital expenditure (capex) over the past two fiscals as well.

While the capex is expected to see limited demand risk, navigating the counterparty risks will be crucial. However, healthy cash accruals, which will also be used to fund the capex, provides comfort to the credit profiles.

An analysis of three towercos, accounting for ~90% of the towers in the independent telecom tower industry indicates as much.

Says Anand Kulkarni, Director, Crisil Ratings, “The industry witnessed robust addition¹ of towers in the past two fiscals to support 4G and 5G services. Now that the major rollout of 5G services is done, network capex of telcos is expected to decrease gradually. Nevertheless, healthy addition of towers will continue as a geographically diversified tower portfolio is critical for telcos to gain competitive coverage. Telcos will remain focused on tower densification in underpenetrated rural areas, which had a tele density² of just 59% at fiscal 2024-end, compared with 134% in the urban areas. Plans by some telcos to expand their 4G and 5G coverage can also drive the tower capex.”

While the tower industry is highly capital-intensive requiring upfront spending, towers are typically installed only when there is at least one confirmed tenant — to ensure minimum rental income from the start. In the recent years, following the consolidation in the telecom industry, the towercos’ tenancy ratio³ has been on a downtrend. This is crucial, given that a higher tenancy ratio for a towerco translates into better returns. On average, a 0.1 moderation in the tenancy ratio will shave 60-100 bps from the returns of the towercos.

Going forward, the tenancy ratio is expected to remain steady at 1.41-1.42 tenants per tower, but this would be on the back of additional tenancies coming from telcos with relatively weaker credit profiles. Hence, the ability of the towercos to optimally pursue better returns on their capex while managing their counterparty risk will be crucial. Historically, this has led to substantial provisions against receivables, although, there have been signs of recovery, particularly in the first half of fiscal 2025.

Further, the consolidation in the telecom industry has also prompted a shift in the bargaining power in favour of the telcos. Over the past few fiscals, even as the number of towers rose, average rental realisation moderated 3-5% because of discounts on renewals and demand for leaner⁴ towers. Yet the outlook on the earnings of towercos remains stable, given their annuity-like cash flows on the back of long-term price contracts with telcos, cost passthrough clauses and inbuilt annual price escalations. The EBITDAR⁵ margin of towercos is expected to stabilise at 46-48%, a slight moderation from the past.

Says Nitin Bansal, Associate Director, Crisil Ratings, “While the expected capex through this and next fiscal is sizeable, external debt and lease liabilities of towercos would increase only slightly to Rs 65,000-68,000 crore from ~Rs 60,000 crore in the past two fiscals. The capex will largely get funded through internal accrual as the returns continue to remain attractive. In the past as well, despite the 5G rollout of telcos and associated tower capex, the debt levels did not rise materially. The credit profiles will remain stable supported by leverage of the players being under control with debt-to-EBITDAR of 2.6-2.8 times vis-à-vis ~2.6 times in the last two fiscals.”

Going forward, any changes in the telecom operator landscape and its impact on towercos will bear watching.

¹ ~58,000 tower additions over fiscal 2023 and 2024, including new tower addition and acquisition of towers by independent towercos
² Tele-density is the number of telephone connections for every 100 individuals within an area
³ No. of tenants per tower
⁴ Relatively compact towers supporting 1-2 tenants
⁵ Earnings before interest, tax, depreciation, amortization, and rent cost. EBITDAR is calculated pre-rent/lease expense for use of land. Base revenue includes sharing rentals and energy pass-through.