Telecom Compendium

Telecom Compendium

Financial Snapshots of consolidated Q2 FY09 Results Rs crore

Bharti Airtel

RCom

Idea Cellular

Revenue

8,924

5,645

2,304

41.1%

23.3%

47.3%

3,685

2,302

607

35.9%

17.3%

18.3%

YoY change EBIDTA YoY change EBIDTA Margin

41.3%

40.8%

26.3%

-159 bps

-208 bps

-644 bps

Net Profit

1,715

-125

144

YoY change

3.1%

-109.4%

-34.6%

Foreign Exchange loss

-586

-1,736

-18.7

Subscriber base

8 crore

5.6 crore

3.04 crore

Mobile market share

24.6%

18.1%

15.5%

YoY Change

Non-financials

ARPU

Rs 331

Rs 271

Rs 261

MOUs

526 minutes

423 minutes

417 minutes

59,966

40,000

33,377

 81% revenues come from mobile services followed by 24% from enterprise services and 13% from passive infrastructure services. These segments contributed 59%, 25% and 11% in EBIDTA. Of total capex of Rs. 31.9 billion, 50% was committed to mobile and 24% to passive infra segments.

 EBIDTA and Net Profit Margins declined qoq by 150 and 130 bps to 40.8% and 27.1% respectively. Margins will continue to be under pressure.

 The company has capex plans of Rs 75-80 billion.

 15.1% of total revenues come from non voice services.

 63% of total revenues came from wireless business, 25% from global segment and 9% from broadband space. Wireless business contributed 73% in EBIDTA while global and broadband segments contributed 15% and 13% respectively.

Towers owned Review and comments on Results

 Forex loss of Rs. 586 crore and high tax expense of Rs 292 crore hit the bottom line badly. EBIDTA Margin tanked by 159 bps at 41.3%.  Finance cost surged to Rs 1100 crore during the quarter against Rs net interest income of Rs 7.8 crore which dragged the profitability.

Deepak Tiwari Research Analyst

 Capex guidance of Rs 30,000 Cr for FY09. Invested more than $ 1 billion during the quarter.

 Launched services in Mumbai and Bihar circles. It also acquired Spice Comm which is operated in Punjab and Karnataka circles.  On Mumbai launch Rs 33 crore was incurred as loss.  Increased its capacity by 35% adding 8,600 sites.  EBIDTA margins drastically tanked by 644 bps to 26.3%. Increased cost of finance and depreciation & amortization hit the bottom line.

 Company incurred huge forex loss of Rs 1736.08 crore against Rs 230.44 crore gains during the [email protected] T: +the 91 H2 22 4063  The capex plan for FY093032 is corresponding quarter in the of Rs 5,000 crore. previous year.

Telecom Update

 Launched DTH services.

 Launched DTH services. Has 40% share in additions.

News and Analysis

Like Hindi films, telecom sector is full of drama and twists. Recommendation

Accumulate

Buy

Buy

Deepak Tiwari, Research Analyst, [email protected] 022-4063 3000

Nov 19, 2008

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1

Recent developments in telecom sector Like typical Hindi films developments in telecom space are brimful of dramas and twists. Indian telecom sector is one of the fastest growing sectors which is plagued with uncertainties vis-à-vis policies which are tweaked every now and then by the Department of Telecommunications (DoT). This sector has also witnessed numerous tussles amongst various Government and nodal agencies such as DoT, TRAI, Telecom Commission and Ministries of Finance and defence as well as telecom operators and their bodies etc. It is obvious when huge interests are at the stake. Further, the CAG is reportedly auditing 2G and 3G telecom policies while the Delhi High Court has issued notice to the central government on a petition challenging its first come-first serve procedure adopted in spectrum allocation. A bench comprising Chief Justice Ajit Prakash Shah and Justice S Muralidhar asked the government to file its response within three weeks and posted the matter to Dec 10, the next date of hearing. Thus, show is going on. Of late we witnessed many developments which we have analysed in following paragraphs. 3G Spectrum Policies: In the first week of August, the DoT announced 3G policies enabling faster rollouts. It reversed many of TRAI’s recommendations made in September 2006. Even thereafter DoT continues to alter the some of the policies. DoT wants and has many a times vowed that it would complete 3G spectrum auctions by January end. This process was earlier supposed to be completed by November end but has been postponed till January. The clouds of uncertainties are still hovering and we are afraid the DoT may not meet its January deadline. Meanwhile Rothschild won technical bid to become spectrum auction agency. They are several issues that need to be resolved for the earliest rollout of 3G services. Some of them are as below:  Inadequate spectrum  First and foremost, to expedite the 3G auction process the DoT must have spectrums. Out of 23 circles, in 9 circles including Delhi it does not have sufficient spectrum to be auctioned. To make spectrum available in these circles, defence must vacate them; which is why auction is getting delayed. DoT had earlier planned to conduct 3G spectrum auctions in only 13 of the 22 zones where spectrum is available but the Ministry of Finance wants to go ahead with the auction of 3G airwaves even in those zones where radio frequencies are not available.  To vacate unused spectrum, defence will have to set up an alternate optic fibre communications network for the defence forces. The cost of doing so was initially estimated at Rs. 1200 crore that was subsequently revised two years ago to Rs 5,000 crore. Now the Defence Ministry is asking for Rs. 14,000 crore for the said purpose which both DoT and Ministry of Finance are resisting. The question is who will foot the bill? We don’t expect this imbroglio to be solved easily.  Revenue segregation  There is great difficulty in splitting revenues from 3G and 2G services but the Ministry of Finance was adamant that they be bifurcated. The Government even set up a panel to look into the matter and held many round of meetings but nothing came out. So the government came up with a unilateral decision and imposed a uniform rate of annual licence fee of 3% of total revenues on operators who offer 3G services on standalone basis. It will hit existing companies providing 2G services the most because they will have to share 3% of their entire revenues with the government including that from 2G even if the revenue from 3G is meagre. In another development, the Telecom Commission is learnt to have approved the DoT proposal to slap 1% additional spectrum usage charges for spectrum below 8 MHz and 2% above 8 MHz. With effect from January 1, 2009. Thus, the operators who presently pay 2-6% of spectrum usage charges will have to pay 3-8% from January 2009.  Financing 3G auction  Considering the current scenario of liquidity crunch across the globe, it will be very difficult for telecom operators to raise funds for their 3G bidding. Taking this into account the DoT has been mulling over to relax payment norms for 3G winners. Successful bidders may only have to pay the reserve price upfront and pay the rest in equal instalments. The base price for pan-India spectrum has been set at about Rs 2,020 crore. Moreover the ECB cap has also been raised to facilitate operators to raise required funds.

Nov 19, 2008

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2G Spectrum Policies:  Hike in the spectrum usage charge The most important development in this space is the DoT hiked the spectrum usage charge up to 2% of the gross revenue of telecom operators for holding 8 MHz of radio frequency for 2G services, a move which would make extra spectrum costlier. In addition to this, the telecos will have to cough up one-time fee on spectrum beyond 6.2 Mhz which could be Rs 4,000 crore.  Spectrum transfer fee The DoT minister has been lambasted for not allowing auction for 2G spectrum last year. Rather he stuck to first come, first served policy. He claims he just followed TRAI’s recommendations which the latter vehemently denies. TRAI and DoT spar over several other contentious matters as well. DoT awarded pan-India mobile telecom license for Rs1,651 crore to several new players, a price discovered thru auction in 2001. This way the exchequer incurred of revenue loss of Rs. 51,000 crore due to under-pricing of the licence. Now the Finance Ministry has asked DoT to levy spectrum transfer fee something like a stamp duty on transfer of properties.  No to spectrum trading amongst operators The DoT is unlikely to allow spectrum trading among licensees as it would defy the current practice of subscriber-linked allocation. With the issue of spectrum trading back on the regulator's radar and TRAI seeking opinion on the issue from global consultancy firms, highly placed DoT sources said spectrum can be allocated only on the basis of subscriber numbers. Spectrum trading would allow a new entrant to use spectrum of an existing operator provided it is able to compensate the operator.  Relaxing the rollout norms for new licensees DoT has now mooted a proposal to relax the rollout norms for new licensees, thereby saving fledgling players like Swan, Unitech and Datacom from paying hefty penalties. The DoTis likely to link the time frame by which these telcos have to launch services in pre-determined geographical areas to the "date of allocation of spectrum' and not the 'date of issue of licence".  Promoters of new telcos face 3-year lock-in The DoT is likely to impose a 3-year lock-in period on sale of promoters’ equity. The lock-in will apply only in case of sale of promoter equity and not when investment is brought into the company by a strategic investor by subscribing to fresh equity.  2G licence fee cut up to 33%, biggies to benefit The DoT has slashed licence fees by 20-33% with effect from April 2009 for players whose services cover over 95% of the residential areas in a state. However, the licence fee cuts will not be applicable in the four metros-Delhi, Mumbai, Chennai and Kolkata. This means all operators will continue to pay 10% of their gross revenues to the government irrespective of the areas they cover within these metros. Thus, if their services cover over 95% of the residential areas, the licence fee will be down to 8%, 6% and 4% for category A, B and C circles, respectively. This move will collectively help big players save between Rs 1,000 crore and Rs 2,000 crore annually from 2009-10 onwards. New telecom operators: The Indian telecom sector which is one of the fastest growing sectors in the world has witnessed many mergers and acquisitions in the last few months. Unitech sold 60% telecom stake to Telenor for Rs 6,120 crore. NTT DoCoMo picked 26% in Tata Tele for $2.7 billion (around Rs 12,770 crore).This marks the Japanese giant's entry into the Indian markets. Turkcell is in talks to buy 51% stake in Datacom. Etisalat acquired a 45% stake in Swan Telecom for $900 million, valuing the company at $2 billion. Russia's Sistema bought 51% stake in Shyam Telelink and Idea Cellular acquired Spice Communications which operates in Karnataka and Punjab.

Nov 19, 2008

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New rollouts:  Tata Tele launched service in Assam and to launch services in J&K, North East.  Idea enters Bihar, Jharkhand with mobile telephony business Mobile Number Portability (MNP): Despite hue and cry made by GSM players, the DoT has decided to stick to its earlier policy of allowing customers to shift between GSM and CDMA services of the same operator, with an introduction of some additional safeguards. It also inserted an additional clause which said that if a subscriber is shifting from GSM to CDMA or vice-versa within the same service provider, then the process need not be routed through a centralised agency. GSM players body COAI opposed it alleging the move is to favour certain CDMA players who might manipulate it to show their subscribers both as GSM and CDMA platforms. DoT allowed this despite the fact that the sub-committee set up to examine the government decision to allow customers to shift between GSM and CDMA services of the same operator has said that the move would result in revenue losses to the exchequer. Mobile Termination Charges (MTC): In a move that could result in lower mobile tariffs, the Department of Telecom has asked the telecom regulator to review termination rates. Termination charges are the one paid by an operator, from whose network call originates, to a service provider on whose network the call is terminated. Currently, the charges have been fixed at Rs 0.30 a minute and are considered too high. Moreover, the charges were fixed in 2003 and since then the cost of network and services have come down by more than 50%. It is interesting because telecom operators in the country are divided over the issue of MTC — with existing operators seeking a hike and the new licensees demanding a reduction in the fee. The COAI supports a costing formula for MTC that will benefit "efficient operators" rather than existing operators or the new licensees. The AUSPI too has sought reduction of termination charges, stating that it has drastically plunged due to exponential increase in the minutes owing to manifold rise in subscriber base. Termination charge above the actual cost leads to market distortion. Licence fee on tower infrastructure: The DoT has rejected TRAI's proposal that stand-alone tower companies be made to share a certain per cent of their revenues with it. All major telcos like Bharti, RCom, Vodafone Essar, Idea Cellular and Tata Teleservices have hived off their entire physical infrastructure (including towers) into separate companies. Even BSNL is planning to hive off its tower business into a separate entity.

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Some news headlines:                                

    

Nod for 100% FDI in GPS units soon (ET) DoT allows resale of IPLC service: BS India will have 200 mn rural telecom connections by 2012: Raja: ET DoT may slap curbs on mobile cos' merger with virtual network operators (HBL) Bharti Telesoft, MTN form JV (BS) Bharti Teletech enters into distribution pact with Transcend (MinG t) Tata Communications to expand its global Multi Protocol Label Switching (MPLS) service (BS) Pvt telecos not liable to pay I-T on transit charges: HC (BS) Airtel breaks into list of world's top 25 telcos (Mint) RBI norms hit Bharti-WU mobile money transfer bid (ET) Mobile banking norms draw Net, VAS cos' ire (ET) Enjoy Low Rates On ISD: Courtesy Aircel (EFYTimes) BSNL pays Rs 1,200 cr dividend (HBL) Phone firms fail to meet subscriber verification norms (DNA) Idea lines up Rs 8,000-cr capex for FY09 (ET) Idea Cellular mulls a new co to own Karnataka and Punjab licenses (BS) Telcos may have to pay Rs 6k-cr penalty (ET) Aircel signs $400mn deal with Chinese infrastructure vendor (ET) Airtel IPTV to be launched soon (Mint) Bharti eyes MTN-like buy to become a global brand (BS) Idea's proposal to bring in FDI of Rs 2704 cr approved (FE) TTSL plans Rs 5k-cr write-off (BS) Fixed line user base down 12 lakh/year (ET) India adds 7.32 mn GSM mobile users in Sept (ET) Bharti signs outsourcing contracts with IBM, Infosys (Mint) Tata Comm: No plan to sell stake in broadband unit (ET) RComm offers STD at Re 1, and local call at 50 paisa (ET) NTT DoCoMo eyes $2.5 billion stake in Tata Teleservices (Mint) BPL Mobile rings in Rs 100-crore expansion plan (ET) Cisco's billion dollar Indian bet (TA) Tata Comm, ISC To Provide DNS Hosting Services (EFYTimes) Verizon starts ILD, NLD services (DNA) Tata-Virgin Mobile lowers STD, local rates (Mint) 10,151 telephones disconnected for violating NDNC norms: TRAI (ET) RCom may bid for $1bn Iran telecom licence (Mint) Guidelines for MVNOs to be unveiled soon (ET) AT&T, DLF, Moser Baer, Ispat, Sterlite won't get 2G licence (ET)

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Nov 19, 2008

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