Wednesday, July 29, 2009


RCOM-Etisalat Deal – First Visibility Of Towerco Value

Tower deal is a positive — RCOM today announced Etisalat DB (Swan Telecom) as the first external tenant on its towerco (RTIL). We believe this is a material positive for RCOM given: 1) it helps increase credibility around RCOM’s towerco value which till now had only captive tenancy (GSM + CDMA), and 2) capex recovery at 13-14% is also higher than our base case for RTIL (12.5%) and the industry (~10%).

Etisalat’s base load goes to RTIL — As per the company, the deal involves Etisalat becoming tenant on 30k of RCOM’s towers across 15 circles over next 18-21 months. As a result, tenancy could be >2.0x by 2011 (1.6x being captive) vs. our long-term assumption of 2.3x. The deal, while not exclusive, gives first preference to RTIL for the proposed cell site locations.

Deal terms ensure good return potential — Management claims incremental revenue potential of Rs100bn over 10 years. On a base of 30k towers, assuming marginal opex increase, capex recovery is estimated at 13-14%. Though high capex recovery could partly be attributed to inclusion of backhaul in the deal (~10-15% of capex), it is still materially higher vis-à-vis our industry estimates (i.e. Indus/Bharti Infratel). At first glance, based on the sharing targets and capex recovery, we estimate towerco could add up to Rs30/share to RCOM’s value.

Trends to watch — 1) Ability to attract other tenants at 13-14% capex recovery given its adverse impact on a new entrant’s cost structure, and 2) ability to offer deeper coverage – 50k towers vs. 100k of Indus.

To see full report: RCOM