4G rollouts - more beneficial to tower companies than 3G rollouts

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1 Moderate BTS growth expected BTS growth in India has plummeted from 38% in FY11 and 20% in FY12 to a mere 4-5% in FY13 and FY14. The robust growth in FY11 and FY12 was driven by heavy rollouts by the new operators who entered the market in 2008 and undertook a massive expansion of their networks in the subsequent years. The cancellation of 122 licenses by the apex court coupled with the closure of operations by a few players retarded the pace of growth due to loss of tenancies. Moderate upside in BTS growth is expected on account of aggressive expansion plans by the players in 2G, 3G and 4G, with policy stability returning to the sector. A couple of operators like Bharti and Reliance Jio having plans to use 1800 MHz spectrum to offer 4G FD-LTE services, thereby attracting more tenancies for the tower companies rather than using the spectrum for existing 2G operations. Tenancy ratio to get a boost by rural expansion and 3G/ 4G rollouts Though rural population accounts for 70% of Indian population, rural teledensity is mere 43% as compared 140% in urban areas as on March In rural areas, penetration into less populated villages will need more towers, with lower than average tenancies. Indian telecom operators have incurred a capex of Rs. 1,800 billion collectively on 3G and 4G auctions between 2010 and 2014 and rolling out the respective 3G and 4G services is the only way to recover these expenses. Thus, the telecom tower industry is expected to be the biggest beneficiary of the technology shift from 2G to 3G and 4G. As 3G and 4G services use spectrums in higher frequency bands i.e and 2300 respectively, more BTS are required as compared 2G services. 4G rollouts - more beneficial to tower companies than 3G rollouts Most of BWA spectrum holders (apart from Bharti Airtel and Aircel) do not have a legacy 2G network similar to that of 3G operators. Hence, any rollout of 4G services by these BWA holders will attract additional BTSs, thereby attracting more tenancies for the tower companies unlike in case of 3G rollout, which happens predominantly at the existing 2G sites with minimal or no benefits to the tower company. Tower addition to remain flattened over next two years Tower addition in India has slowed down considerable over the last two years on account of huge capacity addition in the last 3-4 years in anticipation of increased demand from 3G and 4G services and aggressive expansion plans of new telecom operator leading to oversupply situation in most of the urban areas; lower pace of expansion by telecom operators considering policy instability, high debt burdens, lower profitability etc and increased focus on enhancing tenancies rather than adding more towers. CARE Research believes that most of these factors will play in the near future too, leading to sluggish demand for towers. Revenue growth will fall behind BTS growth Tower companies generate majority of their revenue from renting out towers to telecom service providers. Though the BTS growth would be driven by 3G and 4G roll out over the next couple of years, its contribution to the tower companies topline would not be proportionate as most of the 3G roll out happens at existing 2G sites attracting nil or extremely low rental; whereas 4G operators like are going for bulk deals attracting lower rentals.

2 SECTION I CARE Research Outlook Growth in number of BTS will be moderate Demand drivers Player-wise BTS Circle-wise subscribers per BTS will decline Tower addition will take a back seat Tenancy ratio will improve marginally Revenues will grow in lower single digits Improved tenancy will enhance profitability Capex outlook SECTION II Industry Section Overview of Indian Telecom Tower Industry Telecom tower industry overview Business models for tower sharing Captive Model Operator controlled entity model Pool and share model Build and operate model Evolution of telecom tower industry in India Characteristics of telecom tower industry Elements of Telecom Infrastructure Telecom tower site components Types of towers Factors considered for designing telecom towers In Building Solution (IBS) Distributed Antenna System (DAS) Cost Analysis Revenue analysis Installation costs Components of tower capex Operating costs

3 Telecom Infrastructure Sharing Infrastructure sharing in India Categories of infrastructure sharing Segments of infrastructure sharing Payback period analysis of telecom tower Advantages of infrastructure sharing Regulatory initiatives for facilitating infrastructure sharing International practice in infrastructure sharing Infrastructure sharing pacts in the telecom tower space Regulations Proposed licensing of IP-I licenses Telecom tower rollout in rural region under USOF scheme Radiation emission norms on electromagnetic waves NTP-2012 strategies Infrastructure status to telecom tower industry The Rural Challenge Mergers and Acquisitions Factors driving M&A in the Indian telecom tower industry Key M&A deals Declining telecom tower valuations Lowering FDI limit Global telecom tower comparisons Emerging Trends Green Telecom Power needs of telecom tower industry Grid power is intermittent and not available fully Tower companies have to rely on diesel generators Grid power vs. diesel generators Methods of reducing carbon footprints Use of energy efficient equipment Tapping renewable energy Capital cost of SPV-WTG Payback period Benefits of carbon credits

4 Limitations of solar PV wind hybrid systems Global success stories Green initiative RESCOs Government s directions GTL Infrastructure Ltd Indus Towers Ltd Bharti Infratel Ltd Reliance Infratel Ltd Viom Networks Ltd SECTION III Company Section LIST OF GRAPHS and TABLES SECTION I CARE Research Outlook BTS growth and forecast Total wireless subscribers forecast Active wireless subscriber forecast Subscriber forecast urban & rural (FY09 FY16E) 3G subscriber forecast Player-wise BTS (December 2013) BTS market share vs. active subscribers (Bharti, Vodafone and Idea) (December 2013) BTS growth January 2013 to December 2013 Active subscribers per BTS circle-wise Number of towers across circles December 2013 to March 2016E Revenue growth December 2013 to March 2016E Overview of Indian Telecom Tower Industry Telecom tower market share FY2012 Captive model in India Operator entity controlled model in India Pool and share model in India Build and operate model in India SECTION II Industry Section

5 Capex of tower companies in India Elements of Telecom Infrastructure International practices in IBS deployment Cost Analysis Cell-site capex components Telecom operator s power consumption Regulatory fees charged by state/local authorities Telecom Infrastructure Sharing Payback period analysis Assumptions for the payback period calculations International practices in infrastructure sharing Regulations Region-wise guidelines for erecting mobile towers The Rural Challenge Commissioning status of towers under USOF scheme (August 2013) Commissioning of BTS under shared mobile infrastructure scheme under USOF (November 2013) Grid power availability in rural India Mergers and Acquisitions Major M&A deals in the Indian telecom tower industry Global comparison of telecom tower companies Emerging Trends Green Telecom Telecom operator s power consumption BTS power consumption Sources of power for telecom towers Grid power availability pattern Grid power vs. diesel generators overall & rural Renewable initiatives in telecom towers Capital cost of different sources of power DoT study on payback periods for various solar-wind based towers Global initiatives on green telecom

6 SECTION III Company Section GTL Infrastructure Ltd Region-wise towers of GTL Infra in India as on March 2013 Annual financials 9 monthly financials Share price movement (June 2013 May 2014) Shareholding pattern as on March 2014 Indus Towers Ltd Indus Towers client base Annual financials Shareholding pattern as on March 2014 Bharti Infratel Ltd Bharti Infratel client base Consolidated annual financials Share price movement (June 2013 May 2014) Shareholding pattern as on March 2014 Reliance Infratel Ltd Reliance Infratel client base Annual financials Viom Networks Ltd