Case 009Investment evaluation and pitchesCore
Pitch a telecom tower company on the thesis that 5G lifts tenancy from 1.6 to 2.0 per tower. Quantify the upside and the risks.
1The situation
Nabhoyan Towers owns 20,000 telecom towers. On average each tower hosts 1.6 tenants, mobile operators who each pay Rs 35,000 a month to put their equipment on it. Running a tower, ground rent, power, security and maintenance, costs about Rs 25,000 a month whatever the number of tenants. The company trades at 8x EV to EBITDA.
Your thesis: 5G needs far denser networks, so operators add equipment to existing towers and average tenancy rises to 2.0 within three years.
2Your task
Quantify the EBITDA upside, show what today's price implies, and name the risks with numbers.
Quick check
If tenancy rises from 1.6 to 2.0 with running cost unchanged, roughly how much does EBITDA rise?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
If tenancy reaches 2.0, EBITDA rises from Rs 744 crore to Rs 1,080 crore a year, up 45%, because almost every extra rupee of rent is profit. At today's 8x on current EBITDA, the stock costs only 5.5x the year 3 figure if the thesis plays out. The risks are concrete: each 0.1 of tenancy is worth Rs 84 crore of EBITDA, operator consolidation could take tenancy down instead, and rent resets on renewal could give back much of the gain.
Step 1Why does an extra tenant matter so much to a tower company?
A tower is a fixed-cost asset: the ground rent, guard and diesel are paid whether one operator or three hang equipment on it. Think of a wedding hall that costs the same to run whether it hosts one function a week or two; the second booking is almost pure profit. At 1.6 tenants a tower earns Rs 56,000 a month against Rs 25,000 of cost; at 2.0 tenants it earns Rs 70,000 against the same cost, so EBITDA per tower rises from Rs 31,000 to Rs 45,000. That is operating leverageWhen most costs are fixed, a small rise in revenue produces a much larger rise in profit, and a small fall a much larger fall., and it is the whole thesis.
Step 2What does today's price already assume?
Enterprise value at 8x Rs 744 crore is about Rs 5,952 crore. If tenancy reaches 2.0, that same enterprise value is only 5.5x year 3 EBITDA, so the pitch is that the market is pricing the towers as if tenancy stays flat. The analyst's job is to show why it will not, with evidence an investor can check: operators' announced 5G rollout plans, new tenancy agreements signed each quarter, and the share of towers already hosting a second 5G radio.
Step 3What could make the pitch wrong, and by how much?
Put a number on each risk. Every 0.1 of tenancy is worth Rs 84 crore of EBITDA, so the thesis is sensitive in both directions. If two operators merge and remove duplicate equipment, tenancy can fall to 1.5, cutting EBITDA to Rs 660 crore. If operators win a 10% rent cut on renewal, 2.0 tenancy delivers only Rs 912 crore. Power cost is the third risk: if diesel and grid tariffs rise faster than the pass-through clauses in the contracts, the Rs 25,000 cost is not fixed after all.
| Average tenancy | EBITDA, rent cut 10% | EBITDA, rent Rs 35,000 |
|---|---|---|
| 1.5 | 534 | 660 |
| 1.6 | 610 | 744 |
| 1.8 | 761 | 912 |
| 2.0 | 912 | 1,080 |
Close the pitch the way a portfolio manager wants it: the thesis, the number, the evidence, and the signal that would make you change your mind. Here the signal is quarterly tenancy additions; if two quarters pass without the ratio moving, the 5G story is not reaching the towers. Say also what is not in the numbers: 5G equipment is heavier and may need tower strengthening capex, and that cost belongs in the free cash flow view even if EBITDA ignores it.
Where candidates lose it
Candidates say tenancy rises 25%, so EBITDA rises 25%. The point of a tower business is that cost does not rise with tenants, so EBITDA moves almost twice as fast, and so does the downside.
The other miss is pitching only the upside. A pitch without a quantified risk and a signal to exit sounds like a sales note, not an investment view.
What the interviewer asks next
- How would you value the towers on free cash flow rather than EBITDA?
- Two of the three operators announce a merger. Walk me through what you would do with the position.
- Why do tower companies sign long contracts with annual escalators, and who bears inflation risk?
Asked at Millennium Management, Technology, Media and Telecom (TMT), New York, 2023 (Wall Street Oasis): na, standard questions around stock pitch and how I think about stocks.
Company names and figures are illustrative.