The telecom tower industry in India is facing headwinds as telecom service providers delay payments, leading to elongated receivables. The prolonged weakness in the credit profile of some telecom service providers has resulted in the working capital cycle of tower companies stretching, impacting the liquidity profile of the industry. The industry's gross receivable days are likely to remain above ICRA's outlook revision threshold of 80 days, leading to sizeable provisions of around Rs 10,000 crore in FY2023, denting the profitability of tower companies.
ICRA, a leading rating agency in India, has revised the outlook on the telecom tower industry from Stable to Negative. The agency expects the provisions to continue going forward, although the quantum is likely to moderate from the FY2023 levels. Furthermore, the increased reliance on external debt is expected to keep net debt levels elevated, with net debt/OPBDITA settling at around 2x for FY2024.
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Despite steady growth in the infrastructure-provider business, 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. ICRA expects the revenue growth of the tower companies to remain low at 3-4%, with operating margins (adjusting for energy revenues) at around 60% going forward (lower than 75-77% in the past).
The demand for telecom services, especially data, witnessed strong growth in the past, translating into consistent network expansion and upgradation by the telcos. This kept the demand for tower companies buoyant, resulting in the steady addition of tenancies. The tenancy ratio has largely stabilised and is likely to remain at around 1.2-1.3 times in the medium term. However, the tower industry's dependence on weaker telcos in terms of tenancies remains high at around 34%. Thus, until there are liquidity pressures on such customers, the tower industry's health is likely to remain affected.
While the technology upgrade to 5G brings with itself a favourable demand outlook for the tower companies, their capex intensity is likely to increase. ICRA expects the annual capex to be in the range of Rs 6,000-7,000 crore for the industry. 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 to around 11-12% levels from 18-20% levels earlier.
