Case 086Sector valuationWarm up
A tower company owns 20,000 telecom towers with 1.6 tenants each, paying Rs 5 lakh a year per tenant, and each tower costs Rs 3 lakh a year to run. What is EBITDA today, and what is it if tenancy rises to 1.9 with no new towers?
1The situation
Stambh Towers owns 20,000 telecom towers and rents space on them to mobile operators. On average each tower hosts 1.6 operators, its tenancy ratio. Each tenant pays Rs 5 lakh a year, and each tower costs Rs 3 lakh a year to run: land lease, security, maintenance and site staff, mostly fixed whatever the number of tenants.
A new operator is rolling out its network and wants space, which the company believes will lift tenancy to 1.9 without building any new towers.
2Your task
Work out revenue, EBITDA and margin today and at 1.9 tenants, and explain why investors in towers watch the tenancy ratio more than the tower count.
Quick check
If tenancy rises from 1.6 to 1.9, a 19% rise in revenue, by 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
EBITDA is Rs 1,000 crore today and Rs 1,300 crore at 1.9 tenants, up 30% on 19% more revenue. Revenue is 20,000 towers times 1.6 tenants times Rs 5 lakh, Rs 1,600 crore, and costs are Rs 600 crore. The extra tenants add Rs 300 crore of rent and no tower cost, so the margin rises from 62.5% to 68.4%.
Step 1How do you build EBITDA from towers and tenants?
Build it per tower, then multiply. Each tower earns 1.6 times Rs 5 lakh, Rs 8 lakh, and costs Rs 3 lakh, so it makes Rs 5 lakh of EBITDA a year. Across 20,000 towers that is revenue of Rs 1,600 crore, costs of Rs 600 crore and EBITDA of Rs 1,000 crore, a 62.5% margin. Remember that 100 lakh is one crore: 20,000 towers times Rs 8 lakh is 1,60,000 lakh, or Rs 1,600 crore. Unit slips here are the most common way to lose a sizing question.
Step 2Why does an extra tenant add so much?
Because the tower is already built and already paid for. A second or third tenant uses the same steel, land and security, so almost all of its rent is margin. It is like a landlord who rents a spare room in a flat whose rent, society charges and electricity are already covered: the new lodger's payment is nearly all profit. Each tower's EBITDA rises from Rs 5.0 lakh to Rs 6.5 lakh, and the company's from Rs 1,000 crore to Rs 1,300 crore. A tower breaks even at 0.6 tenants; everything above that is operating leverageWhen most costs are fixed, so a change in revenue produces a larger percentage change in profit. at work.
| Rs crore | Tenancy 1.6 | Tenancy 1.9 | Change |
|---|---|---|---|
| Revenue (towers x tenants x Rs 5 lakh) | 1,600 | 1,900 | +18.8% |
| Tower running costs | 600 | 600 | 0% |
| EBITDA | 1,000 | 1,300 | +30% |
| EBITDA margin | 62.5% | 68.4% | +5.9 pts |
Step 3What does this mean for value, and what is the catch?
At any fixed EV/EBITDA multiple, a move from 1.6 to 1.9 tenants adds 30% to enterprise value without a rupee of new capex, which is why tower buyers pay for tenancy upside and sellers argue about it in every deal. The catch is that the extra cost per tenant is not exactly zero. If each new tenant adds Rs 0.5 lakh a year of power and maintenance, EBITDA at 1.9 is Rs 1,270 crore, still up 27%. The bigger catch runs the other way: if two operators merge and drop duplicate sites, tenancy can fall, and the same leverage works in reverse.
Where candidates lose it
The usual slip is the units: multiplying 20,000 by 1.6 by 5 and calling it Rs 1,60,000 crore. Rents are in lakh, and 100 lakh make a crore.
The second is scaling EBITDA with revenue, saying 19% more, because the costs feel like they should grow. Tower costs are fixed per tower, and that fixed base is the whole point of the question.
What the interviewer asks next
- An operator merger removes 0.2 tenants per tower. What happens to EBITDA?
- Stambh can build 2,000 new towers at Rs 40 lakh each for one tenant apiece. What return does that earn?
- Why do tower contracts often include annual rent escalators, and how do they change this picture?
Company names and figures are illustrative.