case study on icraÆs approach

8/9/2019 case study on ICRAs approach

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Submitted by- Navdeepkumar(infra)

Roll no-11

NavdeepSingh(Telecom & IT)

Roll no-06

A case study on ICRAs approach torating

Telecom Tower Infrastructurecompanies


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ICRAs Approach to Rating Telecom

Tower Infrastructure companies

The strength of a telecom tower infrastructure

company lies in its ability to generatesustainable cash flows and to maximizereturns on the capital invested, both of whichin turn are exposed to the risk factors


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INTRODUCTIONICRA Limited (formerly Investment Information

and Credit Rating Agency of India Limited)It was set up in 1991 by leading

financial/investment institutions, commercialbanks and financial services companies as anindependent and professional InvestmentInformation and Credit Rating Agency.

The international Credit Rating Agency MoodysInvestors Service is ICRAs largest shareholder.

Today, ICRA and its subsidiaries together formthe ICRA Group of Companies (Group ICRA).ICRA is a Public Limited Company, with its

shares listed on the Bombay Stock Exchangeand the National Stock Exchange.


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Sustainable cash flows and the maximization ofreturns on the capital invested are exposed to the

following risk factors:

Sponsor Risks Ownership Structure Operating Risks a. Occupancy/Tenancy Level b. Cost Competitiveness Execution Risks Market Risks Contractual Risks

Counterparty Risks Funding Risks Financial Risks Regulatory Risks


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Need for studyOwnership Structure

Tower infrastructure subsidiaries, which arethe spun-off tower divisions of the

telecom-operator companies

Independent tower infrastructure companies(ITICs).


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Operating Risks

Occupancy/ Tenancy Level Contract or Anticipatory Approach Emphasis on Client Servicing Quality of Services

Quality of Clients

Cost Competitiveness

Optimization of Capital Costs


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Capital Cost of Establishing aTelecom Tower

teel Tower %6

,Foundation Works Civil Works %32

Erection and Project ManagementServices

05%

/Electrical Appliances Equipment 36%

Approvals 01%

TOTAL 100%


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Optimization of operating costs Non-reimbursable expenses- site (land) rentals,

security expenses, expenses on repairs and maintenance(of the tower),

Reimbursable expenses- electricity & fuel expenses,

expenses on maintenance of air-conditioning and diesel

generating sets, etc.


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Contractual Risks

Tenure of agreementPenalty clauses for

premature exit from theagreementRe-negotiation of rentals

Coverage of space/groundrentals


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Funding Risks

The capital structure of thecompany

The composition of debt

The nature of interest rate onthe debt.

The average cost of debt.


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Financial Risks

Capital cost per tower & average occupancyEarning before interest, taxes, depreciation

and amortization (EBITDA) margin.Earnings before Interest and Tax

(EBIT)/InterestTotal Debt/EBITDADebt/Tangible Net WorthRetained Cash Flow (Net Cash

Accruals)/DebtFree Cash Flows/DebtDebt Service Coverage RatioRetained Cash Flow/Capital Expenditure


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Regulatory Risks

The domestic telecom industry is a highlyregulated one.

The telecom infrastructure sector being aderivative of the telecom industry is

sensitive to regulatory changes that have abearing both on the telecom industry ingeneral and on tower infrastructurecompanies in particular.

Regulatory changes that have the potentialto influence the intensity of competition inthe industry are a key determinant of atower infrastructure companys

competitive positioning in the market.


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SWOT Analysis of ICRAStrengths- ICRA is one of the leading Credit Rating agencies in India, and an

Associate of Moodys Investors Service

ICRA offers Consulting services, IT-based services, Information

services, and Outsourcing services.

Strong brand and competitive strengths

Proven ability to make product and service innovations

Track record of Ratings

Experienced Management team and rich talent pool


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Weakness

Business impacted by global credit marketconditions

Approximately 50% of the business is linkedto the structured finance market, which

has been significantly impactedPipeline pertaining to new services and new

client has been significantly impacted assome firms with whom pilot projects had

been done in the previous fiscal haveeither gone out of business or have scaleddown operations

Clients unwilling to discuss price escalations

in the current business environment


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Opportunities- 1)Basel- II rollout. 2)Acquisition of new clients 3)Significant increase in volume of rated debt

and bank lines of credit

Threats- 1)Economic slowdown, especially

investment demand 2) Adverse debt and capital market

conditions 3)Stagnation in financial sector volumes

and contraction in structured finance volumes

during Q2.


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SWOT Analysis of TowercompaniesStrengths-Tower infrastructure is increasingly becoming

independent of telecom operators in India.

Tower infrastructure subsidiaries have anadvantage in terms of assured occupancy fromtheir parents, which in turn may serve toattract other tenants.

ITICs differentiate themselves by offeringattractive payment terms (for instance, back-ended payment structure) to telecomoperators, which enables the telecomoperators to reduce their costs in their initial

years of operation.


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Weakness

Ownership Structure In India still there are very few

Independent tower infrastructure companies(ITICs).

Operating Risks a. Occupancy/Tenancy

Level Occupancy level of towers is notmore than 1.7 which is required by acompany to earn reasonable returns.

b. Cost Competitiveness Tower companies havent reached costcompetitiveness levels.


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Opportunities

The telecom towers business in India islucrative with long-term growth prospects

Growth in telecom subscribers, fallingaverage revenue per user (ARPU) and

increasing Tele-density are driving growthof telecom towers in India.

The market is expected to witness 17% p.a.growth from 2008-2015 with the estimated

requirement of 554,000 towers by 2015.


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Threats

Execution Risks & Regulatory Risks-Theseare always a threat to the towercompanies.

Funding Risks & Financial Risks-sincegestation period is quiet large in case oftower companies so these pose anexistential threat.

Counterparty Risks this include the riskassociated with clients with not financiallysound.

Market Risks & Contractual Risks


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Porter's Analysis


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conclusionICRA information products, Ratings,

and solutions reflect independent,professional and impartial

opinions,It assist businesses enhance the

quality of their decisions and helpissuers access a broader investorbase

Even lesser known business entitiesapproach the money and capital

markets.


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conclusion

ICRAs rating decision on a towerinfrastructure company is influenced, invarying degrees, by several factors, thekey among which are being discussed .

ICRA remains open to incorporating changesin its rating methodology for ratingtelecom infrastructure companies either inresponse to or in anticipation of changes

impacting the dynamics of the Indiantelecom services.

Changes could be prompted by the evolvingregulatory framework or change in

competitive matrix among other factors.


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Recommendations

It should provide information and guidanceto institutional and individualinvestors/creditors.

It should enhance the ability of

borrowers/issuers to access the moneymarket and the capital market for tappinga larger volume of resources from a widerrange of the investing public .

It should assist the regulators in promotingtransparency in the financial markets .

It should provide intermediaries with a toolto improve efficiency in the funds raising

process.


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Any Questions


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us!!!

case study on icraÆs approach

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