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Sectoral Analysis (Telecom Industry) 12 March 2009

A PROJECT REPORT ON

Sectoral Analysis (Telecom Industry) Submitted by

Submitted to

Nishant Bali

In fulfillment for the project given to us in

IBS – Ahmedabad ICFAI University 12 March 2009

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Sectoral Analysis (Telecom Industry) 12 March 2009

Contents

EXECUTIVE SUMMARY………………………………………………………………………………….. 2

ECONOMY ANALYSIS……………………………………………………………………………………..

INDUSTRY ANALYSIS……………………………………………………………………………………… 4

OUTLOOK FOR THE SECTOR…………………………………………………………………………. 15

RURAL INDIAN- THE NEXT FRONTIER………………………………………………………….. 18

COMPANY ANALYSIS……………………………………………………………………………………. 26 1. 2. 3. 4. 5.

Airtel………………………………………………………………………………………………….. 26 MTNL…………………………………………………………………………………………………. 27 Reliance……………………………………………………………………………………………… 28 Tata Communication………………………………………………………………………….. 29 HFCL…………………………………………………………………………………………………… 30

THIRD GENERATION (3G) TECHNOLOGY………………………………………………………. 32

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Sectoral Analysis (Telecom Industry) 12 March 2009

Executive summary: India’s economic growth has slipped to around 9% in 2007-08, from 9.6% in 2006-07. The dip in growth has further deepened the fears of a possible global recession and rising inflation, and its overall impact on the Indian economy. According to the official figures, industrial output growth has slipped to 8.6% in 2007-08, as compared with 11.6% in 2006-07. The agriculture and allied sector has grown a tad faster at 4.5% during 2007-08. The services sector is marginally upped, registering a growth of 10.7% in 200708, as compared to 10.6% in 2006-07. India’s economic growth is expected to grow at 7.2% in 2008-09. Service sector is one of the most significant sectors of the Indian economy, contributing nearly 55% to the GDP in 2007–08. The total number of telephone lines was over 410 m mark at the end of Feb 2009 second only to China (in Jan 09 new mobile phone subscribers to reach 463.9 million subscribers).India’s number of cellular (GSM, CDMA and WLL-Fixed) subscribers: 362 m (as on 31.1.09 and 39.42m were fixed/landline subscribers. Number of broadband subscribers: 5.65 m (as on 31.1.09) Number of GSM cellular subscribers: 277.2 m (as on 28.2.09) Number of CDMA cellular subscribers: 80.6 m (as on 30.11.08) Overall teledensity: ca 345/1000 inhabitants (as on 31.1.09). The Indian mobile market which is thriving even under these harsh economic conditions adds an approximate 10 million subscribers per month, as against China’s addition of 8 million subscribers monthly. The latest report by the Telecom Regulatory Authority of India states that India has a teledensity of 34.5% as of January 2009, up from 33.2% in December last year. According to research, estimates the Indian mobile market will expand to 637 million subscribers by 2012. In terms of projected revenues, such a huge subscriber base is expected to generate more than $37 billion by 2012 growing at a CAGR (compounded annual growth rate) of 18%. This growth potential offers enough incentive to overseas telecom companies to vie for their share of the pie. Investor-friendly regulations by the government, allowing up to 74% holding in a domestic entity by a foreign company, is an icing on the cake.

The global economic recession and slowdown seems to have no effect on the mobile usage in India as the country adds 9.18 million GSM (The Global System for Mobile) 3

Sectoral Analysis (Telecom Industry) 12 March 2009

Communications) subscribers in the month of February to its subscriber base, taking the total to 277.1 million subscribers at the end of February09. Airtel remained the market leader with 31.3% (as on Jan 09) of market share, net addition of 2.73 million subscribers in February 09 and ending the month with 91 million subscribers in total. Vodafone Essar, 22.09% GSM market share, net addition of 2.5 million subscriber taking total to 75 millions. BSNL came third with as it gained 1.5 million subscribers in February taking the total subscriber base to 44 million. Following came Idea Cellular with 12.45% market share which added 1.5 subscribers and present holds a subscriber base of 41 million. Meanwhile, in the CDMA (Code Division Multiple Access) segment, Reliance Communications is still the undisputed leader with 56.71% market share followed by TTSL at 35.58%. The wire-line segment is still led by PSUs. BSNL dominance in the fixed line remained intact with a market share of 82%, followed by MTNL at 9%. With over 15 million 3G handsets, and 30 per cent of all future handsets sale expected to be 3G enabled, India is set to roll out 3G to provide an effective communication environment. The 3G policy has gained importance because it is expected to earn the government revenues $10 billion to $12 billion (Rs 43,000 crore to Rs 52,000 crore), For the purpose of inter-firm comparison, six companies were taken across the industry for analysis. Airtel’s revenue is estimated to touch Rs 96.33 billion in January 09 and may grow at 35% from Jan 08. Reliance is expected to ramp up revenue to Rs 58.53 billion. In terms of profits, Bharti Airtel is likely to be the leader with EBDITA and PAT at Rs 39.45 billion and Rs 21.59 billion in January 09. With an average 7-8m subscribers added every month, the country is witnessing frenetic activity in the telecom industry. Now the estimate is 500m subscribers by 2010. The mobile population is expected to hover between 400m to 484m by end of 2009. With an estimated population of 1.136 billion, only 2% (16m) of the rural population have access to mobile phones; the next growth segment is the rural areas. So still a high untapped sector for the telecom companies.

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Sectoral Analysis (Telecom Industry) 12 March 2009

Economy ANALYSIS: This is the first and most important part in any analysis. Because the word ECONOMY is itself such a big word that, the entire thing gets covered. Why India became such a hot and favorite destination in the eyes of foreigners? Because of 3 reasons: Growth Rate, Increase in living of standard and Efficient Govt. So for the telecom giants also Indian market is highly attractive. Companies, who want to set up their business in some other countries, study the following things: Growth Rate, Inflation, Employment etc. now we will Analysis each and every part separately: 1. Growth Rate: This is the first and important element to notice. Indian economy is growing at a very good rate compare to other developing countries. Graph below makes us understand more clear.

GROWTH RATE (% YoU)

9.40% 9.60% 7.30% 7.30% 5.30%

8.50%

7.80%

7.50% 6.50%

5.90%

5.10%

9.00%

4.80%

6.00%

5.80% 4.40%

3.80%

1.30%

FY 91 FY 92 FY 93 FY 94 FY 95 FY 96 FY 97 FY 98 FY 99 FY 00 FY 01 FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08

Sources: www.rbi.com

From the above chart we can notice that, from last five years Indian Economy is growing at an average of 9% p.a. This has attracted many foreign players and Indian companies also swelled during this tenure. 5

Sectoral Analysis (Telecom Industry) 12 March 2009

2. Inflation: Inflation is another one of the important factor, because as inflation raises and breaches the limit then it creates havoc in the economy and it reduces the purchasing power of the citizens, and this lead to led demand.

Inflation Inflation 5.04

5.1

2.6

2.79

3.95

5.7 3.56

6.94

5.77

5.6 3.23

Sources: www.inflation.com

From the above chart we can conclude that Indian Inflation Rate was under control from last 10 years. This is also one important reason which entice the companies to enter and for local players this is like a boon. 3. Employment: This is another important aspect, because if the countries unemployment rate increases faster than the usual rate, then it mean there is no demand in that country, this creates a negative image in the eyes of other countries. Recently U.S rate of unemployment has touched 8.5% of its population, which is very high. And the reason we all know that the lack of demand. So the good employment rate is also gives invitation to the countries in the economy. 4. Budget Deficit: It means when the Govt. expense >than income. Now how this will be beneficial for any country to enter or for the existing firms? Let’s see from the economic angle, if the expense >income then the Govt. will abridge this expense by increasing the tax rates and interest rates. So this will decrease the spending power of the people and this leads to decrease the demand. 5. Sentiments: Sentiment means, the attitude of the people in that country. SO this again important for the companies because if the attitude of the people is negative then this would create loss for the companies

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Sectoral Analysis (Telecom Industry) 12 March 2009

Industry Analysis: Indian Telecom industry is one of the fastest growing telecom markets in the world. In telecom industry, service providers are the main drivers; whereas equipment manufacturers are witnessing growth and decline in successive quarters as sales is dependent on order undertaken by the companies. Airtel, Reliance, Tata and Vodafone are some of the companies that are expected to spur the growth in 09, as compared to 08. According to Cygnus estimates, telecom industry is expected to grow by 25% in AMJ08 as compared to AMJ07, in terms of sales. EBDITA and PAT are expected to grow by 32% and 34% respectively in AMJ08 as cost expenses are being control by major companies like Airtel and Reliance. The major booster is the wireless mobile subscriber base; crossing over 261m in March 2008. Other services like Internet subscriber base has also provided significant impetus with its subscriber base reaching over 11m in March 2008.

Industry Aggregate (Rs in m) Particulars

March (o8)

Net sales Change EBITDA Change Depreciation Interest Other Income PBT TAX Tax Rate PAT Change Source : BSE India

Note: The aggregate consists o f six companies for industry aggregate calculation: Bharti Airtel, MTNL, TATA Teleservices, Reliance Communications, Vodafone, and Idea

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Sectoral Analysis (Telecom Industry) 12 March 2009

Cost Structure-Equipment Manufacturers from 31/3/08 To 28/2/09 31st March 2008

28th Feb 2009

60.58 50.97

15

12

9

9

11

15 2

1.63 Stock in-4.69 trade Raw meterial Traded item

Staff cost

Other expenditure

2

2

Depriciation

4

3

1

Interest

Tax

Cost Structure-Service providers % of Net Sales 31st march 2008 14

13

15

15 15 13

12 10

9

% of Net Sales 31st dec 2009

10 10 8

6

5

9 7 5.00

5

4 1

Source: BSE India

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Sectoral Analysis (Telecom Industry) 12 March 2009

For the month Feb 09, stock in trade for equipment manufacturers is expected to fall from 1.63% of sales in March08 to -4.69% in Feb 09. Raw material cost is expected to rise to 60.58% of sales in Feb 09.from 55.17% in March08. Other expenses, Interest and Tax are also likely to increase in Feb 09, as compared to March08, for the equipment manufacturing companies. Service provider companies are expected to show improvements in staff costs, Network operations, Interconnect charges, and interests. License fee and sales and marketing expenses of service providers are likely to go up in Feb 09 as compared to March08.

Segmental performance: Telephone segment Mobile Services Wireless subscriber base in the country is witnessing strong growth and it is one of the major driving forces in telecom industry. Wireless segment has added total 109.96m (95.96+14) subscribers in FY08 and 14m till Feb 09. Bharti Airtel added maximum number of subscribers - 27.84m followed by Reliance with 19.78m, Vodafone 19.19m, Idea 10.99m, BSNL 9.89, Tata Tele 8.31m and six other small players together added another 7.55m in FY08 ,till Feb 09.

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Sectoral Analysis (Telecom Industry) 12 March 2009

Subscriber In Millions (FROM 04-Feb 09) Subscriber In millions 360 255 151 100 48

50

FY 04

FY 05

FY 06

FY 07

FY 08

FY 09 (Feb)

Sources: www.Trai.com

GSM (The Global System for Mobile)

The total GSM subscriber base reached 277.70 million in the month of Feb 09, as against 192.23 million at the end of the previous quarter March 08. The growth of 50.70% from March 08 to Feb 09. Bharti, with 91 million subscriber base, remains the largest GSM mobile operator followed by Vodafone with 74.13m, BSNL with 44.21m and Idea with 40.00m.

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Sectoral Analysis (Telecom Industry) 12 March 2009

% Market share of GSM players Bharti

Vodafone

BSNL

Idea

Aircel

Reliance

MTNL

BPL

2% 1% 4% 6% 32% 12%

19% 24%

Sources: www.Trai.com

CDMA (Code Division Multiple Access) The total CDMA Subscriber Base reached 73.37 million during in the month of Feb09 as against 67.39 million at the end of March 2008. The yearly growth of8.39% during the period March o8 to Feb 09. Reliance remains the largest CDMA mobile operator followed by Tata Teleservices and BSNL with subscriber base of 38.78m, 24.33m and 4.58m respectively. BSNL in Kolkata & Punjab reported negative growth.

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Sectoral Analysis (Telecom Industry) 12 March 2009

% Market share of CDMA players Reliance

Tata Tele

BSNL

HFCL

MTNL

Shayam

2% 1% 1%

6%

33% 57%

Sources: www.Trai.com

Wire Line The total subscriber base of Wire line services stood at 39.42 million as on 31st December 2008. The incumbents BSNL and MTNL have 80.05% and 9.33% market share respectively in the subscriber base, while all the five private operators together have 10.62% share. Wire line subscriber base has been declining in the last few years. Subscriber base for some of the companies like Bharti, Tata (Tele & Communications), MTNL and Reliance increased marginally.

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Sectoral Analysis (Telecom Industry) 12 March 2009

% Market share of wireline players BSNL

MTNL

Others

11%

9%

80%

Sources: www.Trai.com

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Sectoral Analysis (Telecom Industry) 12 March 2009

India Telecoms: Changes in2009(E) Industry Assumptions 2010 (E) 2011(E)

TOTAL SUBS(MILLION) NEW

408

520

621.6

OLD

408

511.5

599.1

CHANGE

0%

1.8%

3.7%

NEW

39.8

40.1

40.3

OLD

39.8

40.1

40.3

0%

0%

0%

Wire line Subs (Million)

CHANGE

Wireless Subs (Million) NEW

368.2

480.5

581.2

OLD

368.2

471.4

558.2

CHANGE

0%

1.4%

4%

Wireless Subs Net Add (Million) NEW

8.9

9.4

8.4

OLD

8.9

8.6

7.3

CHANGE

0%

8.8%

15.2%

NEW

276.2

380

475

OLD

276.2

361.5

438.5

CHANGE

0%

5.1%

9.5%

NEW

92

100.5

106.1

OLD

92

109.9

125.0

CHANGE

0%

-8.6%

-15.1%

GSM Subs (Million)

CDMA Subs (Million)

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Sectoral Analysis (Telecom Industry) 12 March 2009

GSM Net Add P/m (Million) NEW

6.96

8.66

7.92

OLD

6.96

7.11

6.02

CHANGE

0%

21.7%

31.4%

NEW

1.97

0.71

0.47

OLD

1.97

1.49

1.26%

CDMA Net Add P/M (Million)

CHANGE

0%

-52.5%

-62.6%

Industry Average ARPU NEW

278

228

200

OLD

281

255

241

CHANGE

-1%

-10.7%

-16.87%

Sources: Morgan Stanley research

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Sectoral Analysis (Telecom Industry) 12 March 2009

Indian Telecoms: New Weight age Average Cost of Capital Bharti

R Comm.

Idea

Risk free assets (Rf)

6.0%

6.0%

6.0%

Market Premium (Rm)

6.0%

6.0%

6.0%

Assumed Beta

1.00

1.80

1.30

Cost of Equity (Ke)

6.0%

16.8%

13.8%

Equity %

95.0%

70.0%

85.0%

Cost of Debt (Kd)

10.0%

15.0%

11.0%

Tax Rate

22.5%

22.5%

22.5%

After Tax (Kd) Kd(1-t )

7.8%

11.6%

8.5%

Debt%

5.0%

30.0%

15.0%

WACC

11.8%

15.2%

13.0%

Sources: Morgan Stanley research Sources: Morgan Stanley research

Other Telephone services Public Call Offices During the MAP08, 2,83,883 new PCOs have been added. Total number of PCOs in the country, as on 31st October 2008, is 63,85,904. The share of BSNL is 22,51,518 i.e. 34% of the total PCOs. The share of MTNL and other private operators combined are 2,43,335 (6%) and 38,99,051 (60%) respectively.

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Sectoral Analysis (Telecom Industry) 12 March 2009

Village Public Telephones There are 5,93,485 villages in India, as per census 2001 reported by BSNL. During the OND07, there were 5,30,127 VPTs in the country whereas by the end of OND08, the total number of VPTs reached to 5,89,503. Thus, 59,376 VPTs increased during the OND08. BSNL reported increase of 2,547 VPTs during the OND08. All the five private operators together added of 32,829 VPTs during the JFM08. The total number of villages, left uncovered, are 33,982 as on 31st March 2008. Internet services Wire line Internet subscriber The growth trend of Wire line Internet Subscriber indicates a slight increase in the market share of operators owned by PSU. During the AMJ08, private ISPs captured only 32.06% market share as against 33.96% in the preceding JFM07. ISP market share, owned by PSU, increased from 66.04% to 67.94% at the end of March 2008. Leased Line Connectivity The number of Internet Leased Line connections is 24752 at the end of November 2008, as compared to 21858 at the end of December 2007, registering a growth of 13.09%. Broadband Connectivity (>=256 Kbps): The number of Broadband subscribers (with a download speed of 256 Kbps or more) is 3.90m at the end of September 2008. Out of these, 3281012 are DSL based; 376200 Cable Modem; 107128 Ethernet LAN; 50739 Fibre; 39051 Radio customers; Leased Line 16494 and 3555 Others. Value Added Services Public Mobile Radio Trunk Service (PMRTS): The subscriber base of PMRTS increased from 34825 in December, 2007 to 39240 in September, 2008, registering a growth rate of 12.06%. VSAT Services: In JAS08, there was an addition of 14900 new subscribers. The total number of subscribers increased from 67409 in OND07 to 82390 in JAS08, registering a growth of 22.75%. *JAS=July, August, September 17

Sectoral Analysis (Telecom Industry) 12 March 2009

Outlook for the Sector: Going by the number of mobile phone subscribers, India has become the world’s fastest growing region. With almost 7-8m subscribers added every month, the country is witnessing exciting times in the telecom industry. This growth has outpaced predictions of reaching 400m by 2009. Now the estimate is 520m subscribers by 2010. The mobile population is expected to hover between 325m to 350m by end of 2008. And an Indian telecom companies have the capacity to make total 620m-650m subscribers by 2012. Additional spectrum to service providers India is on the brink of full-fledged rollout of 3G and WiMAX services across the country. The regulators and the government are in deep discussions on spectrum allocations. It’s decided to have Additional spectrum to be allocated to service providers, based on their existing subscriber base. This will provide the foundation for next generation mobile services in the country. However, as TRAI proposing to hike spectrum charges from 4% to 5% of the revenues generated by the service providers, mobile operators may have to shell out a higher percentage of their annual revenues towards spectrum charges. Service providers need to improve rural penetration Out of the total population of about 1.136 billion in India, only about 28% live in urban areas and the rest 72% live in rural areas. But however, only about 3% (17m) of the rural population has access to mobile phones. It is a high time for the companies to invest in these rural areas, too. Driven by a significant addition in rural telephony, overall population coverage in the country is expected to increase from 65% to 80%. Low ARPU: cause for concern Despite the high penetration in urban areas, the ARPU (Average Rate Per Unit) is quite low, one of the lowest in the world and continues to fall steadily. For operators, this is offset by increased subscription. However, profit margins are decreasing and to stay in good shape operators will have to leverage on larger economies of scale. One trend seen in this direction is the sharing of towers and base station location sites among operators.

Mobile commerce to become the next big thing 18

Sectoral Analysis (Telecom Industry) 12 March 2009

Mobile commerce is expected to penetrate further. The urban customers will of course be introduced to new services in this area. But its impact will be felt most distinctly in the rural areas, where it will help strengthen the rural microfinance projects. Money transfer over the mobile and m-commerce are tipped to be the next best thing to happen after SMS and Hello Tunes. This would enable millions of Indians working abroad to easily transfer money to their families back in India via their mobile phones. Mobile number portability to become a reality soon Indian mobile users will soon have the option to switch their service providers without changing their mobile numbers. Number portability is a very important and effective tool for ensuring competition in the telecom services market. Implementation of mobile number portability would motivate and stimulate the service providers to constantly endeavor to further improve their quality of service in order to retain existing customers and attain new subscribers.

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Sectoral Analysis (Telecom Industry) 12 March 2009

Rural India – the next frontier: While rural consumption spend per capita is around half that of urban spend, it is growing faster, especially with respect to spending on consumer services. In fact, rural India already accounts for a sizeable portion of demand for many consumer goods and services companies, and nearly half of the country’s GDP. It is thus natural that rural India offers large potential for telecom services as well. However, mobile penetration into rural India has lagged urban India with current rural penetration at the same level as urban penetration in 2002. However, as urban penetration saturates, the mantle of growth could now shift to rural India. In recent quarters, the rural contribution to wireless net additions is almost one third. A large population in rural India ensures that the market size remains formidable. Indeed, rural GDP accounts for over 48% of India’s US$1 tn economy. While spending per subscriber could be low, the relative size of rural GDP implies that rural telecoms spending potential could be similar to urban. A look across operators shows that some like Bharti, Vodafone and BSNL have already displayed a strong focus on the rural markets. In particular, Bharti accounted for a third of all rural customers added between October 2007 and October 2008. Rural demand potential cannot be ignored: Rural India accounts for 70% of India’s population. Further, the population in rural areas is younger than that of urban areas. Age wise split on India’s population

Age group (years)

Rural

Urban

0-15

38.3

34.1

15-35

32.4

36.8

35+

28.8

28.2

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Sectoral Analysis (Telecom Industry) 12 March 2009

So from the above table we can notice that, there is not much age difference between Urban and Rural. We also note that a significant portion of the rural population migrates to urban areas every year. For instance, 7.5% of India’s urban population as of 2001 had migrated from rural areas during the preceding decade (Census 2001). Thus, targeting the rural population is important not only for spending in rural areas but also to capture spending by these migrants.

Focus charts: % of Population Use Following Items 79%

75% 60%

56%

51%

51%

40%

33%

25%

22%

10%

Source: NCAER

Mobile spend constitutes ~7% of family income <3%

3-6%

6-9%

9-12%

12%+

12% 8%

33%

12%

35%

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Sectoral Analysis (Telecom Industry) 12 March 2009 Source: Credit Suisse estimates

From the above chart, we can notice that Rural population spends 7% of their family income on telecommunication. So there has been a still large untapped market (Rural) for the telecom companies. And this spending will reach to 12% in the year 2009, according to TRAI

Network coverage is the biggest factor in rural subscribers choosing an operator % of total 46.50%

20.90% 9.30%

Signal/Lower Coverage Good

Lower call rates

Famous among friends

9.30%

The only available operator

2%

2.30%

2.30%

Gifted

Feels good

No particular reason

Source: National Sample Survey

From the research it came out that rural subs are more sensitive to network quality than prices. This has led to: 1) a monopoly/duopoly in most villages with the better network taking most subs and 2) a low churn rate for customers.

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Sectoral Analysis (Telecom Industry) 12 March 2009

Rural India – Six-year CAGR of per-capita consumption spending (FY02-08)

10.30% 9.10%

8.70%

7.80% 6.70%

6.20% 4.60%

4.50% 3.40%

2.40%

2.10%

Urban India – Six-year CAGR of per-capita consumption spending(FY02-08) 9.40%

9.40% 7.20%

5.70%

5.40%

5.20%

4.90%

4.40%

3.80% 2.90% 1.60%

Source: National Sample Survey

From the above two charts we can make conclusion that, on the basis of Compounded Annual Growth Rate (CAGR) of per capital consumption, of both Urban and Rural there

23

Sectoral Analysis (Telecom Industry) 12 March 2009

is not any much difference, both are going hand in hand. So Rural sector would create a huge opportunity for the telecom companies. Rural India – the next frontier for wireless growth: Wireless penetration has already crossed 63% in urban India. This could imply that further growth potential for urban India could be limited. In addition, the issuance of more mobile licenses by the Indian government implies higher competition, and most of that could be limited to urban India in the beginning.

Rural as % of total subscriber base

20%

20%

21%

22%

Mar o7

Jun o7

Sept o7

Dece o7

24%

25%

26%

Mar o8

Jun o8

Sept o8

Source: TRAI

From this we can observe that the % of Rural wireless subscriber is increasing quarter by quarter. From March 07 to September 08 it increased by whopping 30%. Rural customers now comprise around 26% of the country’s mobile subscriber base. We can say that the, Rural India is still a large untapped and opportunity for the telecom giants.

Teledensity in India The tele-density in India means— “the number of telephone lines for every 100 people”. Graph below shows the total tele- density of Rural, Urban. 24

Sectoral Analysis (Telecom Industry) 12 March 2009

Urban and rural teledensity in India (%) 80% 70% 60%

%

50% Urban

40%

Rural 30%

Total

20%

10% 0% Mar oo Mar o1 Mar o2 Mar o3 Mar o4 Mar o5 Mar o6 Mar o7 Mar o8 Feb o9 Source: TRAI

This figure shows the teledensity of Urban is keep on increasing year on year (Y.O.Y). Urban teledensity low at the initial years but, later it also picked up the pace. So this also shows a good signal the telecom companies to grab this untapped market.

Not everyone is focusing on rural India Among operators, government-owned BSNL, with its larger social objectives, already has over a third of its customers from rural India. Bharti, Vodafone and Aircel (not listed) remain the other three operators with a significant proportion of their subscriber base coming from rural India. Table below shows the prominent telecom companies and their % of their Total and Rural Market Share.

25

Sectoral Analysis (Telecom Industry) 12 March 2009

Subscriber market share of operators Overall Mkt Share

Rural Mkt Share

27% 24% 21% 18%

17% 14%

20% 15%

11% 10%

9% 2%

Bharti

Relaince

Vodafone

BSNL

Idea

Tata

4% 5%

Aircel

Source: TRAI

From the above table we can notice that, Bharti, Vodafone, and BSNL are trying to grab the Rural market. Their Rural Market share is higher than their overall Market share.

Significant proportion of income spent on mobile: On the basis of research found out that, a median monthly mobile expense of Rural India population is of Rs200, which compares with a national ARPU of Rs270-330 for the listed telecom operators.. However, with these data points one should not be misled into believing that rural capacity to spend on mobile phones is low. In fact, wefound an average of 7% of monthly family income going on mobile services alone. The chart below, shows the median ARPU of the Rural population

26

Sectoral Analysis (Telecom Industry) 12 March 2009

Monthly spending on mobile phones (Rs/month, % of total population 0-100

101-200

201-400

401-600

600+

13% 25% 11%

24%

27%

Source: Credit Suisse estimates

From this chart we can came up that majority of the Rural population spends between 0 -400 i.e. 75%. And this figure is above the National APRU.

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Sectoral Analysis (Telecom Industry) 12 March 2009

COMPANY ANALYSIS: 1. Airtel

Year End

Net Sales (Rs m)

March 08(A) March 09(E) March 10(E)

PAT (Rs m)

EPS (Rs)

P/E

ROE

ROCE

2,57,035.10 62,442.00

32.92

25.10

31%

29%

3,69,552.99 92,062.30

48.53

17.02

32%

32%

4,97,168.83 1,23,356.53 65.03

17.02

43%

32%

From the above table we can notice that the, Airtel’s PAT was, Rs 62,442.00m in March 08 and after that it expected to increase by approx by 35% Y.O.Y by 2010. It’s EPS (PAT/No. of Eq shares) was Rs 32.9m in March 08, it’s also expected to increase in the same pace. From the above position we can say that that Airtel is having a good earning and bright future ahead.

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Sectoral Analysis (Telecom Industry) 12 March 2009

Net Sales Change EBITDA Change Depreciation Interest Other Income PBT TAX Tax Rate PAT Change

March 08 (A)

March 09 (E)

( Rs million) March 10 (E)

2,57,035.10 44% 1,05,010.30 48% 32,806.30 4,837.10 2,358.60 69,725.50 7,283.50 10% 62,442.00 55%

3,69,552.99 44% 1,55,212.26 48% 46,933.23 6,651.95 3,325.98 1,04,953.05 12,890.75 12% 92,062.30 47%

4,97,168.83 35% 2,08,810.91 35% 63,140.44 9,446.21 4,474.52 1,40,698.78 17,342.25 12% 1,23,356.53 34%

In FY08, Bharti’s sales jumped by 44% compared with FY07 and are expected to grow strongly in coming years. As we can see that the PAT in year 08 was Rs 62,442.00m and the expected PAT Rs 92,062.30m, the change of 47% and this further reduced to 34% in the year 10, it might be because of the slow in demand and the stagnant growth in the urban area. But Airtel is expected to add subscribers at the rate of more than 6m customers every quarter. So the further years would be beneficial for Airtel and its investors.

2. MTNL Year End Net Sales (Rs m)

PAT (Rs m)

EPS (Rs)

P/E

ROE

ROCE

March 08(A) March 09(E) March 10(E)

47,287.51

5,073.23

8.05

11.99

4%

7%

46,671.01

4,720.42

8.05

12.89

4%

7%

46,436.43

4,685.54

7.44

12.89

4%

7%

29

Sectoral Analysis (Telecom Industry) 12 March 2009

Net Sales Change EBITDA Change Depreciation Interest Other Income PBT TAX Tax Rate PAT Change

March 08 (A)

March 09 (E)

( Rs million) March 10 (E)

47,287.51 -4% 8,257.32 -7% 7,071.82 29.61 6,790.91 7,946.80 2,873.57 36% 5,073.23 -4%

46,671.01 -1% 8,245.42 0% 7,497.25 28.00 6,983.25 7,703.42 2,983.00 39% 4,720.42 -7%

46,436.43 -1% 8,203.98 -1% 8,203.98 28.40 7,874.57 7,846.17 3,160.63 40% 4,685.54 -1%

From the above chart we came up a conclusion that, MTNL was decreased by -4% during the period between 07 to 08. And it’s expected to decrease further also but at less pace. This fall might be because of the high competition from the private players and high technology. We can notice that change in PAT is much higher in the year 09, because of the slowdown and less demand.

3. Reliance Communication Year End Net Sales (Rs m)

PAT (Rs m)

EPS (Rs)

P/E

ROE

ROCE

March 08(A) March 09(E) March 10(E)

134161.90

25864.50

12.53

40.56

253%

7%

158292.73

34962.03

16.94

30.00

342%

10%

196096.93

43512.52

21.08

30.00

426%

12%

30

Sectoral Analysis (Telecom Industry) 12 March 2009

Net Sales Change EBITDA Change Depreciation Interest Other Income PBT TAX Tax Rate PAT Change

March 08 (A)

March 09 (E)

( Rs million) March 10 (E)

1,34,161.90 49% 48,824.60 36% 18,436.60 4,451.70 104.60 26,040.90 176.40 1% 25,864.50 30%

1,58,292.73 18% 63,734.16 31% 22,944.30 5,730.46 142.00 35,201.40 239.37 1% 34,962.03 35%

1,96,096.93 24% 78,438.77 23% 28,237.96 6,546.39 156.00 43,810.43 297.91 1% 43,512.52 24%

From the above chart we can notice that, Reliance EPS increase Y.O.Y, this is because of the high PAT and one more thing that P/E ratio (MPS/EPS) is also decreasing, I was because of the high denominator so this also shows the robust position of the company. One interesting fact to notice that its high ROE (Return on Equity) PAT/Eq share capital, this again because of the high PAT and high borrowing, this decreases the base and thus it increases the ROE. Since Reliance is present in both CDMA and GSM technology, it is fast catching up with Airtel and is second largest company after Airtel in terms of subscriber base.

4. Tata Communication Year End Net Sales (Rs m)

PAT (Rs m)

EPS (Rs)

P/E

ROE

ROCE

March 08(A) March 09(E) March 10(E)

38,468.50

8,632.30

30.29

16.96

14%

14%

41,612.23

8,916.04

31.28

16.42

14%

13%

42,512.23

12,025.84

42.20

16.42

18%

16%

31

Sectoral Analysis (Telecom Industry) 12 March 2009

Net Sales Change EBITDA Change Depreciation Interest Other Income PBT TAX Tax Rate PAT Change

March 08 (A)

March 09 (E)

( Rs million) March 10 (E)

32,883.00 -19% 5,996.10 -35% 3,013.10 236.10 1,755.10 4,502.00 1,455.20 32% 3,046.80 -39%

41,612.23 27% 12,207.04 104% 3,395.00 243.00 1,860.00 10,429.04 1,513.00 15% 8,916.04 193%

42,512.23 2% 14,834.84 22% 5,861.67 3,236.00 1,921.00 13,519.84 1,256.00 9% 12,025.84 35%

Like MTNL, Tata Communications is another company, which is facing stiff competition from likes of Reliance in CDMA platform. In FY08, the company’s sales declined by 19% to Rs32,883m compared with FY07. But in the coming years, the company’s sale is expected to increase steadily as it reaches out to new customers in the rural areas. Year 2010, would be tough for the Tata Comm, because of the tough competition by the other foreign players and their high technology.

5. HFCL Year End Net Sales (Rs m)

PAT (Rs m)

EPS (Rs)

P/E

ROE

ROCE

March 08(A) March 09(E) March 10(E)

3495.92

-1505.50

-3.40

-5.57

-38%

-1%

3677.00

-1118.27

-2.53

-7.50

-28%

-1%

3924.00

-869.38

-1.96

-7.50

-22%

-1%

32

Sectoral Analysis (Telecom Industry) 12 March 2009

Net Sales Change EBITDA Change Depreciation Interest Other Income PBT TAX Tax Rate PAT Change

March 08 (A)

March 09 (E)

( Rs million) March 10 (E)

3,495.92 -69% -552.16 -127% 271.62 693.73 16.46 -1501.05 4.45 0% -1505.50 NA

3,677.00 5% -342.27 NA 272.00 518.00 19.00 -1113.27 5.00 0% -1118.27 NA

3,924.00 7% -110.88 NA 286.00 485.00 22.00 -859.88 9.50 -1% -869.38 NA

33

Sectoral Analysis (Telecom Industry) 12 March 2009

Third generation (3G) TECHNOLOGY: Third Generation or 3G is a generic term used for the next generation of mobile communication systems 3G is that technology which helps users quickly accesses a range of multimedia services, including video telephony, e-commerce and television, on mobile devices like handsets, smart phones and palm-tops. Networks supporting 3G would have the potential to support data transfer speeds of up to 3 Mbps while the average 2G networks allow for 144 Kbps. Simply put, it means that a song in MP3 format of 3 minutes’ duration would take 15 seconds to download over a 3G network but would take 8 minutes over existing networks. In the near future, mobility will become a fundamental aspect of many services. We would expect high-speed access to the internet, entertainment, information and electronic commerce services wherever we are — not just at our desktop computers. Analysts estimate that by 2010, the two dominant 3G technologies, CDMA2000 and Wideband CDMA (WCDMA), will account for 1.2 billion subscribers, representing 41 per cent of the global subscriber base. In urban India, there is a spectrum crunch and 3G can treble voice capacity and can solve the spectrum issue. For rural India, 3G will be a boon for e-governance and specific applications for farmers, fishermen and small traders.

How 3G WILL BE BENIFITED? With over 15 million 3G handsets, and 30 per cent of all future handsets sale expected to be 3G enabled, India is set to roll out 3G to provide an effective communication environment. It will bridge the difference between urban and rural and enable the rural Indian to avail of facilities such as telemedicine, e-education and e-governance will substantially improve their quality of life.

34

Sectoral Analysis (Telecom Industry) 12 March 2009

The other advantage of 3G policy is that, it expected to earn the government revenues $10 billion to $12 billion (Rs 43,000 crore to Rs 52,000 crore), which would help balance expenditure on welfare programmes like the Rs 71,600 crore farm loan waiver scheme. 3G policy will help the customers most, because many telecom companies are going to bid for the spectrum, each one will try to entice the customers in their own style. At last the customers would be get benefitted.

Rules of 3G spectrum (Future) However, winning foreign bidders will have to set up a joint venture with an Indian partner to start operations, the country's Department of Telecommunications (DOT). The foreign bidder can hold up to 74 percent of the equity in the company providing the 3G (third-generation) service. If the foreign equity in the joint venture is more than 49 percent, the joint venture will also require clearance from the country's Foreign Investment Promotion Board (FIPB). Besides spectrum for 3G, the government also plans to auction spectrum for broadband wireless access (BWA) two days after the completion of the 3G auction. Although foreign bidders are allowed to bid for BWA spectrum, they will have to set up joint ventures to offer services, in which foreign equity will be limited to 74 percent, the DOT said.

The government is auctioning blocks of spectrum in the 2.1 GHz band for 3G services, and in the 2.3 GHz and 2.5 GHz bands for BWA, in a number of service areas across the country. However one block of spectrum in each of the service areas has already been reserved for use by two government controlled telecommunications companies -- Bharat Sanchar Nigam (BSNL) and Mahanagar Telephone Nigam (MTNL). The government said that these companies would, however, have to pay a license fee for the spectrum at the highest bid in each service area. 35

Sectoral Analysis (Telecom Industry) 12 March 2009

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