The Indian telecom industry got its biggest shock in February 2012 when the Supreme Court quashed 122 telecom licences handed out in 2008 during the tenure of Andimuthu Raja. It sent shock waves not just amongst the cellular operators in the world's second-largest telecom market, but also amongst the back-end infrastructure providers. With so many licences cancelled, their business projections went awry. It was in this background that Syed Safawi, the president and CEO of Reliance Communications, took over as the CEO of Viom Networks, the telecom infrastructure provider majority owned by Tata Teleservices, in July 2012.
The move surprised one and all in the industry: Safawi had moved from a company with more than Rs 11,000 crore in annual revenue to a much smaller company with revenue of around Rs 4,800 crore. Viom had reported a loss of more the Rs 325 crore in 2011-12 and was sitting on debt of around Rs 8,000 crore. Moreover, the company was saddled with corporate governance issues. A former company secretary of Viom had alleged that a senior executive had misappropriated company funds causing a loss to shareholders. However, KPMG gave a clean chit to the executive after probing the issue.
On the growth path
In spite of the naysayers, Safawi was able to turn things around. Viom reported a profit after tax of Rs 80 crore at the end of March 2013 - just nine months after he took charge. And, by 30 September 2013, its debt had come down by Rs 1,300 crore. Monthly operating expenses have reduced by about 15 per cent in the past 12 months. As part of the cost-cutting measures, the company reduced its workforce by 30-40 per cent in phases to bring it down to around 1,500. In fact, Viom is now planning for an initial public offering (IPO) overseas. Also, it is the first Indian tower company to enter Myanmar, and has plans to tap other international markets in Asia and Asia-Pacific to offer managed infrastructure services.
Viom's run-rate per month has increased to almost twice the run-rate of last year in terms of tenancies. Viom's tenancy of around 2.2 per tower is higher than the industry average of 1.5 to 1.6. The company targets to take it above 3 in the next four to five years.
Tricks of the trade
The tower business survives on sharing the infrastructure: multiple tenants on the same tower. While Viom is in the process of getting a second tenant for its 1,500 new category towers, Safawi says the company has re-engineered its towers to make them profitable even if there is a single tenant. The new ultra-lite anchor tower requires 15 per cent lower cap-ex because of efficient use of steel, electrical materials and instruments. Also, it takes low-capacity power back up - instead of 25 KB, it requires less than 10 KB -which brings the operational cost down. This can be upgraded when the second tenant comes. On an average, it takes about Rs 18-20 lakh to build a normal tower, while the ultra-lite anchor site can be built for about Rs 10 lakh. Viom has already built more than a thousand such towers in the past year.
"These are built for two, but can be profitable with just one tenant from the first month. This model also enables us to build double the number of towers with the same investment," says Safawi. In order to keep costs on a tight leash, the company decided not to add too many towers. Thus, in 2012-13, Viom built just 250 new towers. But the plan this year is to ramp up the number of towers with fresh additions of 1,500. This will take its total towers to 43,500. "Having turned around the company with ensured profitability for two years, we are clearly looking at growth as operators focus on data, primarily 3G. This will require network investments. We see us building on a number of anchor towers that we built this year almost doubling it next year," Safawi says.
According to a top executive of another tower company, there would be six to seven national telcos in India, down from almost ten now, and they would need just about three national tower companies. (There are 10-12 tower companies in India now). Safawi believes that Viom could be one of the top three tower companies. With 42,000 towers, it is placed fourth after Indus Towers (1,12,900 towers), state-owned Bharat Sanchar Nigam (60,000 towers) and Reliance Infratel (45,000 towers). However, Viom is the largest independent tower company in India. "We will have 55,000 to 60,000 towers in our portfolio over the next two to three years. Another 30,000-40,000 towers will be added to our entity by virtue of cashless mergers with smaller tower companies," he says. Over the next few years, Viom targets to spread in circles like Jammu & Kashmir and The Northeast.
However, all is not well with Viom. An analyst with a global equity research firm that tracks 10 tower companies globally says Viom's dependence on Tata Teleservices is certainly an area of concern. "More than 40 per cent of its tenancy is from Tata Teleservices. Viom has to look to reduce its dependency on Tata Teleservices. Otherwise, even sustenance could be a challenge in the long term," adds the analyst. Tata Teleservices owns 54 per cent of Viom, while the Srei group holds 18.5 per cent and the remaining 27.5 per cent is owned by a group of financial investors, including IDFC Private Equity, SBI Macquarie, Oman Investment Fund and GIC of Singapore. However, Viom has managed to get more telcos such as Bharti Airtel and Vodafone as its tenants, which now account for about 20 per cent of its business. Last week, it also signed a tower sharing deal with Reliance Jio.
The other issue is growth capital. Over the next five years, Safawi says Viom will need to invest almost Rs 5,000 crore, a large chunk of which will go into building new towers. Thus, Viom has appointed Credit Suisse, Citigroup and STJ Advisors to mobilise about Rs 1,500 crore, preferably through an IPO on the London Stock Exchange. It is also considering the New York Stock Exchange and the Singapore Stock Exchange. The listing is expected over the next six to nine months. Meanwhile, private equity players like Apollo, Bain Capital and Advent International have reportedly shown interest in getting a significant minority stake in the company.
Analysts say the overseas listing is likely to ensure better valuation for Viom. While in India, tower companies' valuation is low at around 5-6 times Ebitda (earnings before income tax depreciation and amortisation), it is about 15-17 times in foreign markets, says an analyst with an equity research firm. According to industry sources, Viom could be valued at between Rs 25,000 crore and Rs 27,000 crore. Bharti Infratel, which has 35,000 towers and a tenancy ratio of 1.8, is valued at more than Rs 39,000 crore on BSE.