Little offset to ~750 bps operating margin fall foreseen for towercos by FY20

The telecom tower business is characterised by high operating leverage, as energy and rentals for sites constitute major cost items (~44% of total revenue). Energy cost, however, doesn’t have any substantial impact the margins of tower companies (towercos) as gets completely passed through to telcos.

The sector's overall operating margin was in the 43-44% range in the past four-five years ending March 2018. In fiscal 2018, it remained healthy at ~44%, as rental and energy margins expanded.

In fiscal 2019, CRISIL Research expects operating margins to contract ~450 bps because of:

• Co-location exits: Vodafone Idea is in the process of exiting ~27,500 co-locations (nearly 3% of the industry), and is expected to announce more in the near term. In addition, there will be loss in tenancies of smaller players such as Aircel and Telenor as they, too, hang up.
  
• Decline in rentals per tower: Industry’s rental per tower is expected to decline by 7-9% on-year owing to co-locations exits and lower tenancies. However, increase in number of towers and exit penalties will limit the decline in rent revenues of the industry.
  

In the first half of fiscal 2019, towercos such as Bharti Infratel have already seen a ~350 bps on-year slide in operating margins. We believe the trend would continue in the second half of the year as well.

In fiscal 2020 as well, operating margins are expected to drop another ~300 bps primarily due to a dip in rentals (expected at ~1-1.5% on-year) and further loss in tenancies of Vodafone-Idea and Bharti-Tata, post-merger.