Telcos & Towercos

The Trilogy is here to stay

Major players
- Telecom: Reliance Jio Infocom Limited (Jio); Vodafone Idea Limited (VIL); Bharti Airtel Limited (Airtel)
- Tower: Jio InVIT, Indus-Infratel and ATC India

2 major events in the sector

- AGR verdict
o SC ordered upfront payment of 10% of the dues (by March 31, 2021) and balance in 10 equal annual
instalments (starting March 31, 2022 and every year thereon).
o Favourable for all the top 3 players. Breather for Vodafone.
o Justice Mr. Arun Mishra remitted office on September 2, 2020. Any review goes back to the same
bench. Here, probably a new judge will be admitted in his place in the 3 member bench.
- Merger of Bharti Infratel and Indus Towers
o The long-pending merger concluded, albeit some caveats.
§ VIL to take INR 40 bn cash for its 11.15% stake in Indus Towers.
§ Airtel and Vodafone PLC shall be the major shareholders with 36.7% and 28.2% stake,
respectively.
§ VIL to make advance payment of INR 24 bn, 50% of which will offset outstanding dues and
balance shall be adjusted against future charges. VIL will earn 6% on this cash deposit.
o Whether spectrum can be considered in IBC proceedings will be decided by NCLT, though this isn’t
relevant for VIL and Airtel.

Clarity on AGR liability awaited

- Airtel isn’t liable for INR 12.4k crs AGR dues of Aircel as it bought only a portion the spectrum but may be liable
for INR 1.4k crs of Videocon’s AGR dues as it acquired the entire spectrum of the former.
- Jio is using RCom’s 800MHz spectrum through a spectrum sharing deal so it isn’t liable for the latter’s INR 25.2k
crs AGR dues. This is a major respite for Airtel and Jio.

Components of a Telecommunication System

A telecommunication system includes a transmitter (to take information and convert it to a signal), a transmission
medium (to carry the signal) and a receiver (to take the signal and convert it back into usable information). This applies
to any communication system. There are six basic components to a telecommunications network.

1. Input/ output devices or 'terminals' – starting/ stopping points of all communication. E.g. telephone, nodes in
computer networks.
2. Telecommunication channels - which transmit and receive data. This includes various types of cables and
wireless radio frequencies.
3. Telecommunication processors - which provide control & support functions. For example, to convert convert
data from analog to digital and back.
4. Control software – controls functionality and activities of the network
5. Messages - data being transmitted. For telephone network, messages consist of audio as well as data.
6. Protocols specify how each type of telecommunication systems handle the messages

For example, GSM and 3G are protocols for mobile phone communications, and TCP/IP is a protocol for
communications over the Internet. While early telecommunication systems were built without computers, almost all
systems we use today are computerized in some way.

4G or LTE (Long Term Evolution) - drawback of this network is that if you are using it in your smartphone and someone
calls your number, then the internet connectivity stops. Airtel launched the first LTE network. service in India in 2012.
supports download speed up to 100 Mbps and upload speed up to 50 Mbps

VoLTE (Voice over Long Term Evolution) is an improved, more refined version of 4G LTE. Reliance Jio had launched the
full-fledged VoLTE service in India in 2016.

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 Industry Terminology

Dynamic Spectrum Sharing (DSS) allows operators to use same spectrum bands for different radio access technologies.
(for e.g., to evolve 4G networks to support 5G)

Spectrum Sharing allows an existing LTE carrier to operate 5G New Radio (NR) and LTE simultaneously – with a simple
software upgrade

Spectrum re-farming is the process of re-deploying spectrum from available users and re-allocating it to others.

In India, GSM technology works in the frequency band of 900 MHz and 1800 MHz while CDMA in the 800 MHz band.
Telecom providers used 900 MHz band to provide services. But, this 900MHz band is more efficient than other bands
say 1800MHz. The reason being lower the frequency, larger the distances that it can travel. If the operations in the
900MHz band is shifted to 1800MHz band, then it is termed Spectrum Re-farming. E.g. The Government found that
900MHz band is valuable, so the 900MHz licenses were put into auction again when they were due for renewal in
2014.Re auction cost a lot for the telecom operators especially because the equipment that is used in the 900MHz
band is not compatible to work in the 1800MHz band.

Carrier aggregation (CA) is one of the most important features of LTE-Advanced. This feature allows the combination
of two or more carrier channels into a single aggregated channel, thus enabling higher throughput as well as more
efficient use of the highly fragmented LTE spectrum. It increases bandwidth and the speeds.

Radio Access Network (RAN) is the part of a telecommunications system that connects individual devices to other parts
of a network through radio connections. A RAN provides access and coordinates the management of resources across
the radio sites.

Single radio access network (SRAN), which involves installing a single base station unit that provides the functionality
of a new LTE base station and also replaces legacy 2G and 3G base stations at every radio site

Sectorization antenna technique is used to increase the capacity in wireless cellular networks by reusing air interface
resources (time, frequency, and space). One way to increase to subscriber capacity of a cellular network is replace the
omni-directional antenna at each base station by three (or six) sector antennas of 120 (or 60) degrees opening. The
use of directional sector antennas substantially reduces the interference among co-channel cells. This allows denser
frequency reuse.

MIMO - antenna technology for wireless communications in which multiple antennas are used at both the source
(transmitter) and the destination (receiver). The antennas at each end of the communications circuit are combined to
minimize errors and optimize data speed.

There are three types of telecommunications providers, and they are separated into tiers. Each of them represents a
varying level of autonomy and ability to provide services. The three tiers are:
- Tier 1 or Transit-Free Providers - Providers in the this tier are able to provide telecom services to their clients
without needing to transit another provider’s network.
- Tier 2 or Internet Transit and Peering Dependent Providers - Many of the biggest internet service providers are
tier 2 networks. They are provide services through a combination of peering and Internet transit purchases.
- Tier 3 or Regional and Specialty Services Providers - The third tier of telecommunications providers relies
completely on tier 1 and 2 providers for network access. They are able to provide access to their customers
by selling the access that they have purchased through Internet transit.

Personalization is one of the greatest mechanisms to grow and retain telco customers.

OEM & ODM contracts for rolling out 5G network

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 Global Markets

- Total internet users in the world (in 2020) - 457 crs.

- Country wise ranking: China - 85 crores, India - 56 crore, USA - 31 crore
- Telcos have a massive digitisation opportunity across B2B and B2C services
o On the B2B side, apart from connectivity, they can provide several tools like cloud services,
collaboration tools, cyber security and blockchain/IoT solutions among others.
o Apart from content bundles, retail consumers will demand seamless home broadband, security
solutions and new age digital experiences.
- Sector forms base for supply chain, communications, technology

US telecom
- Operators and handset makers have a tieup

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 Indian markets

- Telcos contribute a third to India’s GDP today, as compared to circa 6% pre-covid.

- 22 telecom circles
- Sector is an oligopoly currently, was threatened to become a duopoly; massive consolidation – from 8
players to 3+1 players
- Companies trade at 9-10x EV/ EBITDA
- 68.7 crs subscribers in total
- Government revenues from the sector – 1.3 lakh crores (FY21) by way of license/ spectrum fees
- Developments – Price wars, aggressive 4G investments, spectrum refarming, carrier aggregation,
sectorisation, Massive MIMO and Single RAN.
- Renewed industry revenue structure:
o Data (conventional) and content (contemporary) and format of consumption
o wireless services, mobile commerce, fixed line services, high speed home broadband, DTH,
enterprise services including national & international long distance services to carriers
- Industry cost structure
o Network costs = cost of sites + Passive infra charges
o License fee or Service Usage Charges (SUC, charged at ~12% of revenues)
- Sites refer to the telecom towers and one site can usually handle ~150 GB/site/day
- Market opportunities - digitization of offices, home broadband, media distribution and IoT
- Growth expectation ~14% telecom sector revenue CAGR over FY20-30E and capex intensity of 18% of sales,
vis-à-vis 3% revenue CAGR and 25% capex/sales over FY10-20E.
- Indian carriers have a ‘homes’ opportunity (unlike global peers) that they can cater to via wireless broadband
- Telcos are preferred over towercos given the former’s superior reinvestment opportunities
- Key metrics of the industry are Revenue Market share, number of subscribers and ARPU, DDA, circle
presence, spectrum assets
- Jio has been trying to increase allowances and increase validity. Incumbents are eager to do the reverse, in
addition to incentivising users to upgrade to higher bundles by providing content, insurance and other digital
services. But unable to do so, amidst predatory pricing by Team Ambani.
- 45 crs unique users smartphone users
- Cables - consortium and private cable models

AGR (Adjusted Gross Revenue) issue and background:

Telcos owe INR 1.47 lakh crore to DoT, including INR 92,600 crore as licence fee and INR 55,100 crore as spectrum
usage charges; of total amount, Vodafone Idea owes maximum INR 53,000 crore

Indian government liberalised the telecom sector as per the National Telecom Policy in 1994, under which licences
were given in accordance to the Indian Telegraph Act, 1885. Under this century-old law, telcos are required to pay a
fixed annual licence fee for licences granted to them. Since fixed licence fee was high, telcos often defaulted on their
payments. The government in 1999 announced the National Telecom Policy, which gave these companies an option
to migrate from fixed licence fee to revenue sharing fee. As per the new policy, 15% AGR was fixed as a licence fee
under the revenue-sharing model, which was later reduced to 13% and then 8% in 2013.

In 2003, telcos objected and filed a case alleging that DoT had illegally included new elements in the definition of AGR,
including installation charges, value-added services, interest income, dividend, profit on the sale of assets, insurance
claim and forex gain.

Government agencies too are divided on this topic, with both TRAI and TDSAT supporting telecom companies. In 2015,
TRAI excluded non-telecom revenue from AGR definition but DoT challenged TRAI's recommendations.

Pending amounts: Bharti Airtel – INR 35,600 crore; Vodafone Idea – INR 53,000 crore; Reliance Communication – INR
21,200 crore, Tata Group INR - 13,800 crore.

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 Bharti Airtel Limited

- Headquartered in New Delhi, India, the company ranks amongst the top 3 mobile service providers globally in
terms of subscribers.
- Operations in 18 countries across Asia and Africa
- Products
o India - wireless services, mobile commerce, fixed line services, high speed home broadband, DTH,
enterprise services including national & international long distance services to carriers
o Other geographies - wireless services and mobile commerce
- premium subscribers
- aggressive network investments
- Partnerships
o Google Cloud (G Suite for SMBs),
o Verizon (secure enterprise-grade VC services),
o IBM-Red Hat (for its network cloud),
o Cisco (networking and connectivity for SMBs),
o Zoom (Unified Communication Solutions for Businesses)
o Nokia (LTE Industry 4.0 solutions to enterprises).
- In India, the company's product offerings include 2G, 3G and 4G wireless services, mobile commerce, fixed line
services, high speed home broadband, DTH, enterprise services including national & international long
distance services to carriers. In the rest of the geographies, it offers 2G, 3G, 4G wireless services and mobile
commerce. Bharti Airtel had over 423 million customers across its operations at the end of March 2020.
- Facts
o Covers 95.4% of India’s population
o 3.03 lakh crs minutes on network
o 21.02 lakh crs MBs of data on network
- Infrastructure
o 7 Submarine Cable Systems
o 503,883 Mobile Broadband Base Stations
o 304,907 Rkms Optic Fiber Network
o 194,409 Mobile Network Towers
- Customer base (as on March 31, 2020)
o Mobile Services;
§ India: 28.37 crs
§ Africa: 11.06 crs
§ South Asia: 0.29 crs
o 0.24 crs Homes
o 1.66 crs Digital TV Services
- Airtel Business (B2B segment): Leading ICT service provider (Enterprise mobile and data services)
o 10 Large data centres
o 120+ Edge data centres
o 1200+ Global Partners
o 2000+ Enterprise & Government clients
o 5,00,000+ Small and medium enterprise clients

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 o 3,00,000+ RKMS Domestic Fiber network
o 2,50,000+ RKMS Global Fiber network

- 42.3 cr customers across segments

- Customers
o Mobile – 28 crs
o Homes – 1.8 crs

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 Vodafone Idea Limited

- first annual AGR payment of INR 7.5k crs kicks in from Mar’22
- Rs155bn of spectrum instalment dues will need to be paid from FY23.
- Needs alteast 20,000 crs but realiastically ~30,000 crs by way fo equity
- Vodafone Plc owns 28% stake in Indus towers, valued at 15K crs.
- will need to raise massive ~Rs250-300bn to ensure survival once the spectrum dues kick in from FY23E
- Partnerships
o IBM (secure device management solution)
o Nokia (for SD-WAN services)
o Microsoft (for cloud connectivity)

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 Reliance Jio Infocomm Limited

- Partnerships
o Microsoft – MS Azure
o Facebook – Focussing on the 6 crs MSME users, 12 crs farmers, 3 crs small merchants
o Google – to develop entry level/ affordable phones on Android platform
-

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 Things to watch out for:

- Upcoming 5G auction
- Vodafone Idea plans raising overall INR 35,000 cr (INR 10,000 Cr via sale of fibre biz & data centre & INR
25,000 cr via debt/equity). Co’s target is to complete the sale of fibre & data centre assets by year end.
- Investments in Jio fibre business, post Jio Platforms.
- ARPU uplift
- Online marketing budgets set to expand
- Trends - Digitization, WFT
- Segmentation will drive ARPU
- Industry moving form data allowances to content consumption
- Sector heading towards monetization of full stack telecom infrastructure by the telecos
- Telecom penetration has grown, average screentime in india is 5-6 hours per day, propensity to spend has
increased
- Advertisement shifts – below the line spends (dealer incentives, commissions) will move to above the line
spends. Effects already visible; to get further boost

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