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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!!!