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The fast track growth of the Indian telecom industry has made it a key contributor to
Indias progress.
India adopted a phased approach for reforming the telecom sector right from the
beginning. Privatization was gradually introduced, first in value-added services, followed
by cellular and basic services. An independent regulatory body, Telecom Regulatory
Authority of India (TRAI), was established to deal with competition in a balanced
manner. This gradual and thoughtful reform process in India has favored industry growth.
Today, there are more than 225 million telecom subscribers in India. Every month, 6-7
million new subscribers are added. Upcoming services such as 3G and WiMax will help
to further augment the growth rate.
Furthermore, the Indian economy is slated to sustain its 7-9 per cent growth rate in the
near future. This is supported by the political stability that the country is experiencing
currently. Indias demographic outlook makes it one of the largest markets in the world. A
conducive business environment is also created by a favorable regulatory regime. There
exists enormous business potential for telecom companies on account of the countrys
low teledensity, which is close to 19 per cent presently. The Indian telecom industry is
growing at the fastest pace in the world and India is projected to be the second largest
telecom market globally by 2010.
INTRODUCTION
1. EQUITY RESEARCH AND VALUATION
Equity Research is nothing but research of equities. Use of equity research depends on
the maturity of financial markets in an economy and the extent of market depth and
breadth.
As our markets grow in terms of depth and breadth, we are seeing an increased demand
for information, research and analysis of Indian companies since such data is necessary
for taking informed investment decisions. With this growth in capital markets, brokerage
firms and investment bankers have started churning out more and more research on
Indian companies. This research is targeted toward large institutional investors who use
these reports in their investment decision-making process.
FREQUENTLY USED BY
The primary use of equity research is for making investment decisions whether they are
large institutions, foreign investors, private equity, venture capital, high net worth or
retail investors.
In addition to investment decisions, equity research is utilized by a variety of other users:
investment bankers use it to determine pricing for an IPO they want to bring to the
market; they use it to figure out valuations in merger and acquisition deals and to outline
key areas of pricing negotiations.
This kind of deep equity research is required to forecast revenues, earning, and other
financial parameters of the business for the next few years.
However, equity research is fundamental to the investment process as it helps in
identifying attractive businesses as investment opportunities. The future belongs to those
who possess a clear understanding of what is expected from their research and how they
should go about conducting it.
EQUTIY VALUATION
Equity valuation is aimed at valuing a company or its stock. An equity analysts job is to
find out how much a company makes and is likely to make leading to determination of
the worth of the companies and hence its stock.
A business value is based on its future prospects so it is understandable that valuation
models that involve forecasts have considerable importance. A valuation model is usually
expressed as a formula but in reality is a methodical approach to tackle the task of
valuation. Any valuation model as at least two features-it specifies what is to be forecast
to capture future prospects of a business and secondly, a method to convert these
forecasts to a stock valuation.
Valuation is the essence of asset management. Simplistically speaking, valuation experts
and asset manager globally try to gauge the appropriate value of assets and businesses
and seek to buy for less that that value or sell for more than that value.
LITERATURE SURVEY
2. ECONOMIC ANALYSIS
Equity Valuation focuses on analyzing businesses from Valuation Forecasting
perspectives. It begins with analysis of economy, industry and company (E-I-C). In
economic analysis, the performance of the economy at both macro and micro level is
analyzed to understand the businesses for forecasting and valuation of businesses.
Analysis of business requires thorough understanding of the economy of the country and
its various sectors. Changes in economy have their implications on all business firms
either directly or indirectly. Macroeconomics deal with aggregate variables of an
economy like the output, its composition and rate of growth, level and growth rates of
money supply, employment, investment, exports, imports, variation in interest rate,
government finances, public borrowing etc.
John Manyard Keyens, during 1930s, through his book The General Theory of
Employmant, Interest and Money, turned the attention of policy makers towards
macroeconomic management of economies, particularly free market economies. The
present as well as expected performance of the domestic and global economies play a
vital role in setting the overall movement of stock market indices all over the world.
Policy makers worldwide make use of macroeconomic principles to give proper direction
to their respective national economies. Macroeconomic analysis tries to analyze the
process of economic growth, unemployment and inflation. It also examines the concept
of business cycles, reasons for and recovery measures.
Why do countries differ in their growth performance? What are the determinants
of growth?
What are the inter-linkages between inflation, interest rates and inflation and how
are they determined?
How the countrys monetary, fiscal and exchange rates policies impact the
economic growth?
What are the global spillover effects of crude oil, gold prices on domestic capital
inflows and exchange rates?
Microeconomic analysis tries to analyze the issues relating to product, labour and
financial markets behaviour. It analyses the
Pricing strategies
MICRO VIEW
Markets have undergone substantial changes in terms of major transformations of their
business models. Micro level analysis helps us to anticipate future developments. Supply
and demand dynamics will help us to evaluate the business model in terms of likely risks
to the firm. Market structure analysis would enable to get insights into the extent of
competition, pressure on margins and sustainability of the profit.
MACRO VIEW
Analysts need to understand the dynamics of market in order to read the expectations
given by various players in the markets. For instance the economic growth forecasts,
economy getting into recession, business confidence indices, and concepts of soft
landing/hard landing we come across in the media and markets have underlying
economic analysis
The interaction of real and financial sector in an economy how and why only some
economies are able to succeed and others fail to sustain the economic growth. The extent
of financial deepening and openness will enable the economy to progress on a rapid pace.
The countrys financial sector reforms will throw opportunities to global investors a wide
choice of instruments and investment avenues.
INDICATORS
An indicator, as the name suggests, is a statistic that is used to predict future trends about
the economy. For example, the economic survey released by Reserve Bank of India,
publications of Centre for Monitoring Indian economy (CMIE) and other such
publications by other accredited sources Popular indicators include GDP growth rates,
inflationary indices, Index of Industrial Production (IIP), etc.
Leading indicators help us predict the likely performance of the economy in the near
future. Examples of leading indicators are rainfall, unemployment, credit off-take,
corporate profit, money supply, stock market indices, etc.
Coincidental indicators indicate the current position of the economy or a sector.
Examples include GDP/GNP or sectoral output, Index of Industrial Production, etc.
Lagging indicators highlight what has already taken place and the outcome of such past
development. Examples include piled up inventories (unsold stock during recession),
large scale unemployment, outstanding debt, interest rates on commercial loans, etc.
INFLATION
Inflation has an enormous effect in the economy. Within the country it erodes purchasing
power. As a consequence, demand falls. If the rate of inflation in the country from which
a company imports is high then the cost of production in that country will automatically
go up. This might reduce the cost competitiveness of the product finally manufactured.
Conversely, if the rate of inflation in the country to which one exports is high, the
products become more attractive resulting in increased sales. Low inflation within a
country indicates stability and domestic companies and industries prosper at such times.
INTEREST RATES
Interest rates decide the level of investment activity in the country. Nominal Interest rate
is the contractual rate of interest when a business firm/individual borrows money from a
bank or financial institution. Real interest rate is the inflation adjusted interest rate (Real
interest rate=nominal interest rate minus inflation rate).
A low interest rate stimulates investment and industry. Conversely, high interest rates
result in higher cost of production and lower consumption. When the cost of money is
high, a company's competitiveness decreases
GOVERNMENT POLICY
Government policy has a direct impact on the economy. The liberalization policies of the
Narsimha Rao government excited the developed world and foreign companies grew
keen to invest in India and increase their existing stakes in their Indian ventures. The
initiative of the former BJP government in improving the infrastructure grabbed the
attention of foreign investors. The present government continues to focus on
infrastructure as it is realized progress at a decent rate would not be possible without
infrastructure.
NTP 1999 signaled the migration from high-cost fixed license fee to a low-cost revenue
sharing regime
DoT was transformed into a state-owned company, Bharat Sanchar Nigam Limited
(BSNL) in 2000
TRAI amendment act was unleashed to streamline its intervention
2001
Additional licences in basic and cellular services
2002
ILD services unlocked to competition
2003
Calling Party Pays (CPP) implemented
Unified Access Licensing (UAL) regime established
Reference interconnect order issued
2004
Intra-circle merger guidelines were
established
Broadband Policy 2004 was formulated to
target 20 million internet users by 2010
2005
An attempt to boost rural telephony was made
FDI limit was raised from 49 to 74 per cent
Independent Regulations
Time and again, the Indian government has devised various regulations aimed at
augmenting the industry competitiveness. While some of these regulations have been
instrumental in ending the licence regime, others have paved the way for industry growth.
Unified Access Licensing Regime (UALR)
Unified licensing marked the end of the license regime in Indian telecom industry. It
helped in aligning convergent technologies and services.
The establishment of the UALR (2003) eliminated the need for separate licences for
different services. Players are now allowed to offer both mobile and fixed-line services
under a single license after paying an additional entry fee. This does not take into account
the national and international long-distance services and internet access services.
Access Deficit Charge (ADC)Subsidizing the Infrastructure Cost
ADC makes it essential for the service provider at the callers end to share a certain
percentage of the revenue earned with the service provider at the receivers end in long
distance telephony. This actually subsidises the infrastructure costs of a service provider
enabling access at receivers end, especially because rental for fixed-line services is low.
Revision in the ADC regime is expected to be followed by further tariff reduction in
telecom services. TRAI has revised the ADC regime, so that the benefit can be passed on
to the consumers. ADC has now been reduced to 0.75 per cent from 1.50 per cent of
AGR for all service providers. Per minute ADC on incoming international calls has
also been reduced.
Foreign direct investment (FDI) is one of the important sources to meet the huge funds
that are required for rapid network expansion. The FDI policy provides an investorfriendly environment for the growth of the telecom sector. The policy of the Government
of India is to strive to maximize the developmental impact and spin-offs of FDI. At
present, 74% to 100% FDI is permitted for various telecom services. The total FDI
equity inflows in telecom sector have been 1261 million USD during 2007-08.
The government is now looking forward to achieve the target of 600 million telephone
subscribers by the end of Eleventh Plan and to achieve rural teledensity of 25% by means
of 200 million rural connections at the end of 11th Plan. It is also envisaged that internet
and broad-band subscribers will increase to 40 million and 20 million, respectively, by
2010.
Deregulation in the telecom sector facilitated growth in the telecom sector. Let us
have a look at some facts and figures showing the same
India is among the fastest growing mobile markets in the world: India, the second
largest mobile market in the world, is also among the fastest growing mobile markets
globally. The total number of mobile subscribers in India (i.e., the subscriber base) has
increased from 6.4 million in March 2002 to around 350 million in December 2008, at a
compounded annual growth rate (CAGR) of 81%, aided by a significant increase in
network coverage and a continual decline in tariffs and handset prices.
The Indian telecom industry witnessed a CAGR of approximately 22 per cent from
2002 03 to 2006-07. The CAGR from 2006-07 to 2009-10 is expected to stabilise at 21
per cent. The Indian telecom market generated revenues of approximately US$ 20 billion
in 2006-07. The market witnessed a growth rate of 33 per cent over the last year and
recorded a CAGR of 22 per cent for the period 2002-03 to 2006-07. This growth has
resulted in doubling the revenues of the telecom segment in the past three years. Further,
it is expected that the industry will generate revenues worth US$ 43 billion by 2009-10.
Depression
Recovery
Boom
Recession
Depression
At the time of depression, demand is low and falling. Inflation is high and so are interest
rates. Companies, crippled by high borrowing and falling sales, are forced to curtail
production, close down plants built at times of higher demand, and let workers go.
.
Recovery
During this phase, the economy begins to recover. Investment begins anew and the
demand grows. Companies begin to post profits. Conspicuous spending begins once
again. Once the recovery stage sets in fully, profits begin to grow at a higher
proportionate rate. More and more new companies are floated to meet the increasing
demand in the economy. In India 2003 could be seen as a year of recovery. All the
attributes of a recovery are evident in the economy.
Boom
In the boom phase, demand reaches an all time high. Investment is also high. Interest
rates are low. Gradually as time goes on, supply begins to exceed the demand. Prices that
had been rising begin to stabilize and even fall. There is an increase in demand. Then as
the boom period matures prices begin to rise again.
Recession
The economy slowly begins to downturn. Demand starts falling. Interest rates and
inflation Demand starts falling. Interest rates and inflation are high. Companies start
finding it difficult to sell their goods. The economy slowly begins to downturn. Demand
starts falling. Interest rates and inflation begin to increase. Companies start finding it
difficult to sell their goods.
3. INDUSTRY ANALYSIS
Every company operates within a certain industry. At times, a company may have
businesses that are diversified and hence dependent on more than one industry. It is an
integral part of the valuation process to understand industry dynamics to ensure that the
valuation exercise yields meaningful results.
The Firm: identifying, developing and leveraging key resources and capabilities
to create cost-based advantages or product differentiation advantages which
cannot be easily imitated
CYCLE
The first step in industry is to determine the cycle it is in, or the stage of maturity of the
industry. All industries evolve through the following stages:
1. Entrepreneurial, sunrise or nascent stage
2. Expansion or growth stage
3. Stabilization, stagnation or maturity stage, and
4. Decline or sunset stage
many companies in the industry. It must be noted that the first 5 to 10 years are the most
critical period. At this time, companies have the greatest chance of failing. It takes time to
establish companies and new products. There may be losses and the need for large
injections of capital. If a company or an industry is not nurtured or husbanded at this
stage, it can collapse.
negative. The various stages can be likened to the four stages in the life cycle of a human
being - childhood, adulthood, middle age and old age. Investors should begin to
purchase shares when an industry is at the end of the entrepreneurial or nascent
stage and during its growth stage, and should begin to disinvest when at its mature
stage.
2. Then there are the volatile cyclical industries which do extremely well when the
economy is doing well and do badly when depression sets in. The prime examples are
durable goods, consumer goods such as textiles and shipping. During hard times
individuals postpone the purchase of consumer goods until better days.
3. Interest sensitive industries are those that are affected by interest rates. When interest
rates are high, industries such as real estate and banking fare poorly.
4. Growth industries are those whose growth is higher than other industries and growth
occurs even though the economy may be suffering a setback.
Demand Analysis
Indian telecom continues to register a significant growth in the current fiscal year. This
has been due to the impact of economic reforms and pro-active policies of the
government. Today, Indian telecom network with about 364 million connections in
October 2008 is the third largest in the world .Indian telecom has achieved another
milestone as it has become the second largest wireless network in the world by
surpassing USA. With the current pace, where about nine million telephones are being
added every month, the target of 500 million connections by 2010 is well within our
reach.
The total number of telephones has increased from 76.53 million on March 31, 2004 to
363.95 million on October 31 2008. While 94.63 million telephones were added during
the twelve months of 2007-08, about more than nine million subscribers are being added
every month during the current fiscal year.
Tele- density has also increased from 12.7 per cent in March 2006 to 31.50 per cent in
October 2008. Rural teledensity increased to 13.4 per cent in October 2008 with 109.05
million rural telephone connections. Urban teledensity on the other hand has been 74.61
per cent in October 2008.
The growth of wireless services has been phenomenal, with wireless subscribers growing
at a compound annual growth rate (CAGR) of 87.7 per cent per annum since 2003. The
share of private sector in total telephone connections is now 77.44 per cent as per the
latest statistics available for October 2008 as against a meager 5% in 1999.
Rural telephones have gone up from 12.3 million in March 2004 to 109.05 million in
October 2008 with a teledensity of 13.04%. The target of 100 million rural telephones by
2010 has been achieved well in advance.
It is also envisaged that internet and broad-band subscribers will increase to 40 million
and 20 million, respectively, by 2010. As per the latest available statistics for September
2008, about 5.7% villages have broadband coverage and the number of rural broadband
connections is 1.55 lakh.
Supply Analysis
Degree of Concentration
Ease of entry
Friction does exist between existing players and the newer entrants, as also
between the providers of
services based on different technologies (CDMA Vs Cellular). The same needs to
be resolved with government intervention through the regulator in order to further
improve the services. The telecom sector today is not a small one and covers
various services and many players within each service. One of the most vibrant
developments in telecommunications has been Cellular telephony a technology
that gives us the power to communicate anytime and anywhere. This segment, a
part of the broader telecommunications industry, has today spawned an entire
industry in mobile telecommunication. Mobile phones today are an integral part
of growth, success and economic efficiency of businesses. The government in
India has today recognized, providing world-class telecommunications
infrastructure as the key to rapid economic and social development of the country.
Industry capacity
Conservative estimates put a tag of a 3% increase in the growth of GDP for every
1% rise in the tele-density in the nation. Accordingly, this sector has received a
great thrust from the government for investments and development.
Profitability
Employment Generation
As the number of licensees goes up and they start their operations with 77
networks on air, the employment opportunities in this sector will be huge.
Demographics
population of India. Also, the demand for telecom service in rural people is increasing
day by day. This further ensures growth in the industry.
Any other aspect of ones business that adds value to your product or service.
A weakness could be:
Damaged reputation.
In SWOT, opportunities and threats are external factors.
For example: An opportunity could be:
Being realistic about the strengths and weaknesses of ones organization when
conducting SWOT analysis.
Always apply SWOT in relation to ones competition i.e. better than or worse than
ones competition.
SWOT must be kept short and simple. Complexity and over analysis must be
avoided.
SWOT is subjective.
Weaknesses
Mobile sector is highly dependent on prepaid services; this appears to have led to
declining mobile ARPU levels
Opportunities
The weak state of the countrys wireline infrastructure has provided investment
opportunities in broadband wireless networks
Government has recently reversed an earlier decision and declared that operators
will be permitted to use WiMAX networks to offer voice services
The government will cut licence fees by up to 33% for those operators whose
services cover over 95% of the residential areas in a circle
Threats
Disappointing broadband growth may result in the government failing to meet its
broadband development target of 20mn broadband lines in operation by the end of
2010
Government plans to increase spectrum usage charges for telcos planning to offer
3G services could negatively affect the 3G licensing process
(i)
(ii)
Profitable markets that yield high returns will draw firms. This results in many new
entrants, which will effectively decrease profitability. Unless the entry of new firms
can be blocked by incumbents, the profit rate will fall towards a competitive level.
New entrants increase the capacity in an industry and the inflow of funds. The
question that arises is how easy is it to enter an industry? There are some barriers to
entry:
a) Economies of scale: In some industries it may not be economical to set up small
capacities. This is especially true if comparatively large units are already in existence
producing a vast quantity. The products produced by such established giants will be
markedly cheaper.
b) Product differentiation: A company whose products have product differentiation
has greater staying power. The product differentiation may be because of its name or
because of the quality of its products - Mercedes Benz cars; National VCRs or
Reebok shoes. People are prepared to pay more for the product and consequently the
products are at a premium . It is safe usually to invest in such companies as there will
always be a demand.
c) Capital requirement: Easy entry industries require little capital and technological
expertise. As a consequence, there are a multitude of competitors, intense
competition, low margins and high costs. On the other hand, capital intensive
industries with a large capital base and high fixed cost structure have few competitors
as entry is difficult. The automobile industry is a prime example of such an industry.
Its high fixed costs have to be serviced and a fall in sales can result in a more than
proportionate fall in profits. Large investments and a big capital base will be barriers
to entry.
d) Switching costs: Another barrier to entry could be the cost of switching from one
supplier's product to another. This may include employee restraining costs, cost of
equipment and the likes. If the switching costs are high, new entrants have to offer a
tremendous improvement for the buyer to switch. A prime example is computers. A
company may be using a Honeywell computer. If it wishes to change to an IBM
computer, all the terminals, the unit and even the software would have to be changed.
e) Access to distribution channels: Difficulty in securing access to distribution
channels can be a barrier to entry, especially if existing firms already have strong and
established channels.
f) Cost disadvantages independent of scale: This barrier occurs when established
firms have advantages new entrants cannot replicate.
These include:
Government subsidies
A prime example is Coca Cola. The company has proprietary product technology.
Similar cold drinks are available but it is not easy for a competition to compete with
it.
(iii)
For most industries, this is the major determinant of the competitiveness of the
industry. Sometimes rivals compete aggressively and sometimes rivals compete in
non-price dimensions such as innovation, marketing, etc. Rivalry among competitors
can cause an industry great harm. This occurs mainly by price cuts, heavy advertising,
additional high cost services or offers, and the like. This rivalry occurs mainly when:
a) There are many competitors and supply exceeds demand. Companies resort to price
cuts and advertise heavily in order to attract customers for their goods.
b) The industry growth is slow and companies are competing with each other for a
greater market share.
c) The economy is in a recession and companies cut the price of their products and
offer better service to stimulate demand.
d) There is lack of differentiation between the product of one company and that of
another. In such cases, the buyer makes his choice on the basis of price or service.
e) In some industries economies of scale will necessitate large additions to existing
capacities in a company. The increase in production could result in over capacity &
price cutting.
f) Competitors may have very different strategies in selling their goods and in
competing they may be continuously trying to stay ahead of the other by price cuts or
improved service.
g) Rivalry increases if the stakes (profits) are high.
h) Firms will compete with one another intensely if the costs of exit are great, i.e. the
payment of gratuity, unfunded provident fund, pension liabilities, and such like. In
such a situation, companies would prefer remaining in business even if margins are
low and little or no profits are being made. Companies also tend to remain in business
at low margins if there are strategic interrelationships between the company and
others in the group; due to government restrictions (the government may not allow a
company to close down); or in case the management does not wish to close down the
company out of pride or employee commitment. If exit barriers are high, excess
capacity can not be shut down and companies lose their competitive edges;
profitability is eroded. If exit barriers are high the return is low but risky. If exit
barriers are low the return is low but stable. On the other hand, if entry barriers are
low the returns are high but stable. High entry barriers have high, risky returns.
(iv)
In an industry where buyers have control, i.e. in a buyer's market, buyers are
constantly forcing prices down, demanding better services or higher quality and this
often erodes profitability. The factors one should check are whether:
a) A particular buyer buys most of the products (large purchase volumes). If such
buyers withdraw their patronage, they can destroy an industry. They can also force
prices down.
b) Buyers can play one company against another to bring prices down.
One should also be aware that:
If sellers face large switching costs, the buyer's power is enhanced. This is
especially true if the switching costs for buyers are low.
If buyers have achieved partial backward integration, sellers face a threat as
they may become fully integrated.
If buyers are well informed about trends and details they are in a better
position vis--vis sellers as they can ensure they do not pay more than they
need to.
If a product represents a significant portion of the buyers' cost, buyers would
strongly attempt to reduce prices.
If the buyer's profits are low, the buyer will try to reduce prices as much as
possible.
In short, an industry that is dictated by buyers is usually weak and its profitability
is under constant threat.
(v)
declining ARPU
Brand pull exists to some extent for brands like airtel /idea/
Vodafone
d) Capital Requirement
e) Incumbent Advantages
Established brand image
Reliability of network
d) Uneven access to Distribution Channels
Not a factor
Physical Infra
Supplier
Network Infrastructure
-Ericsson
-Siemens Networks
-Cisco
-Huawei
5. Threat of Substitutes
Some Substitutes:
a. VOIP (Skype, Messenger etc.)
b. Online Chat
c. Email
d. Satellite phones
e. None of the above a major threat in current scenario
f. Price-Performance trade-off very high
g. Issues of mobility and penetration with the substitutes
Factor Conditions
The situation in a country regarding production factors, like skilled labor,
infrastructure, etc., which are relevant for competition in particular industries
These factors can be grouped into human resources (qualification level, cost of labor,
commitment etc.), material resources (natural resources, vegetation, space etc.),
knowledge resources, capital resources, and infrastructure. They also include factors like
quality of research on universities, deregulation of labor markets, or liquidity of national
stock markets. These national factors often provide initial advantages, which are
subsequently built upon. Each country has its own particular set of factor conditions;
hence, in each country will develop those industries for which the particular set of factor
conditions is optimal. This explains the existence of so-called lowcost- countries (low
costs of labor), agricultural countries (large countries with fertile soil), or the start-up
culture in the United States (well developed venture capital market). Porter points out that
these factors are not necessarily nature-made or inherited. They may develop and change.
Political initiatives, technological progress or socio-cultural changes, for instance, may
shape national factor conditions.
Home Demand Conditions
Describes the state of home demand for products and services produced in a
country
Home demand conditions influence the shaping of particular factor conditions. They have
impact on the pace and direction of innovation and product development. According to
Porter, home demand is determined by three major characteristics: their mixture (the mix
of customers needs and wants), their scope and growth rate, and the mechanisms that
transmit domestic preferences to foreign markets. Porter states that a country can achieve
national advantages in an industry or market segment, if home demand provides clearer
and earlier signals of demand trends to domestic suppliers than to foreign competitors.
Normally, home markets have a much higher influence on an organization's ability to
recognize customers needs than foreign markets do.
Related and Supporting Industries
The existence or non-existence of internationally competitive supplying industries
and supporting industries.
One internationally successful industry may lead to advantages in other related or
supporting industries. Competitive supplying industries will reinforce innovation and
internationalization in industries at later stages in the value system. Besides suppliers,
related industries are of importance. These are industries that can use and coordinate
particular activities in the value chain together, or that are concerned with complementary
products (e.g. hardware and software). A typical example is the shoe and leather industry
in Italy. Italy is not only successful with shoes and leather, but with related products and
services such as leather working machinery, design, etc.
Domestic rivalry for final goods stimulates the emergence of an industry that
provides specialized intermediate goods. Keen domestic competition leads to
more sophisticated consumers who come to expect upgrading and innovation. The
diamond promotes clustering.
Porter emphasizes the role of chance in the model. Random events can either
benefit or harm a firms competitive position. These can be anything like major
technological breakthroughs or inventions, acts of war and destruction, or
dramatic shifts in exchange rates.
1. When there is a large industry presence in an area, it will increase the supply of
specific factors (i.e: workers with industry-specific training) since they will tend
to get higher returns and less risk of losing employment.
2. At the same time, upstream firms (ie: those who supply intermediate inputs) will
invest in the area. They will also wish to save on transport costs, tariffs, inter-firm
communication costs, inventories, etc.
3. At the same time, downstream firms (ie: those use the industrys product as an
input) will also invest in the area. This causes additional savings of the type listed
before.
4. Finally, attracted by the good set of specific factors, upstream and downstream
firms, producers in related industries (ie: those who use similar inputs or whose
goods are purchased by the same set of customers) will also invest. This will
trigger subsequent rounds of investment.
"Governments proper role is as a catalyst and challenger; it is to encourage or even push - companies to raise their aspirations and move to higher levels
of competitive performance."
processes
providers, as well
as those of consumers
2. Firm, Structure and Rivalry
Intensive competition in the country has made it possible for service providers to
offer the services with lowest fare in the world, profitably
3. Demand Conditions
Growing affordability and lifetime free schemes have created a market at the
bottom of the pyramid
Competent handset manufacturers have produced the lowest priced handsets for
the Indian market
Handset players are setting up manufacturing bases in India for better operation
management
Various value added service providers and content developers are present in India
5. Factor Conditions
Increasing demand due to changing lifestyles and growing attraction for mobiles
with new features
India is the fastest growing free market democracy in the world. It has a mature and
dynamic private sector, which accounts for 75 per cent of Indias GDP, and a market with
enormous potential due to its large size and diversity. It is also expected to achieve the
highest growth rate among the BRIC countries (Brazil, Russia, India and China). India
offers significant business opportunities to the services, as well as the manufacturing
sectors. This is because India offers benefits such as cost advantage in product
development and back-office processing and the large-scale availability of skilled
English-speaking professionals. The middle class population is also a significant market
for any business entity.
A decade of reforms has opened the country to greater competition and spurred
industries to become more efficient.
India is currently the fourth-largest economy on PPP basis and is well positioned on a
continuously increasing growth curve. Goldman Sachs had earlier predicted that India wil
become the third-largest economy in the world. However, it has now revised its previous
estimates and claims that by 2050, India will even surpass the US and become the
second-largest economy after China. The countrys economic growth has become more
attractive due to the rising share of the services sector in the GDP.
According to the 2001 census, about 54 per cent of the countrys total population was
below 25 years of age. By 2013, another 200 million people will be joining the league,
representing an exponential growth in the consuming class. India will become a large
consumer of world resources - be it natural or man-made, thereby offering numerous
opportunities to marketers around the globe.
Approximately 33 per cent of Indias population will be residing in urban areas by 2026,
as against 28 per cent in 2001.
Large Talent Pool
The working age population is expected to rise by 83 per cent by 2026.
India has over 380 universities and about 1,500 research institutes, which churn out
approximately 200,000 engineers, 300,000 post graduates, 2,100,000 other graduates and
around 9,000 PhDs. This large base of skilled manpower offers unparalleled advantages
to the companies operating in India. As a result, many multinational companies have
either established operation hubs in India to leverage this sizeable talent pool, or they
have outsourced their work to a third party in India. The numerous BPOs and KPOs
flourishing in India are a direct consequence of companies choosing the latter option.
COMPANY ANALYSIS
It is expected the tariff wars will lead to lower than expected Average Revenues per
Minute (ARPM). A fall of a further 31% in tariffs to Rs0.45 by F2011 is expected even
though it is among the lowest in the world. Minutes of usage (MOU) in India are among
the highest in the world and so demand elasticity to lower tariffs may be low. Penetration
levels in India are at 30%, with Metros at over 95%. A forecast of 31% CAGR for
subscriber growth over F2008-F2011 has been made, almost half the growth rate of the
past three years, bringing ARPU 40% lower. Two regulatory risks exist overbidding
for 3G license fee and possible cut in termination rates.
Key Points
Tariffs to fall a further 31% by F2011E to Rs0.45 even though they are among the
lowest in the world.
Overbidding for a 3G license fee and a possible cut in termination rates as key
regulatory risks in the next six months.
Maintain Overweight on Bharti, downgrade RCOM and Idea to Underweight largely
because of pressure in wireless business.
BHARATI AIRTEL
Bharti Airtel, a part of Bharti Enterprise, is Indias first and largest private service
provider with a nation-wide operational presence. While it was founded in 1995 as Bharti
Televenture Ltd. (BTVL), in April 2006, the company changed its name to Bharti Airtel.
Today, it is one of the fastest growing telecom companies in the world with more than 40
million subscribers. The company has structured its business in three segments mobile
services, broadband and telephone services, and enterprise services.
Performance at a Glance
Income
Statement
Rs. mn (Year ending March, 31)
Revenues
License Fees
Network Charges
Employee Costs
Other Operating Expenses
Total Operating Costs
EBITDA
FY2007
185,916
(16,953)
(12,494)
(81,960)
111,407
74,509
FY2008
270,250
(27,303)
(25,056)
(17,428)
(86,749)
156,536
113,715
Depreciation
Non Operating Income
Interest
Expenses
Profit Before
tax
Income Tax
Profit after Tax
(25,209)
2,604
(37,260)
2,423
(3,044)
(2,341)
48,860
(5,822)
43,038
76,537
(8,378)
68,159
Balance Sheet
Rs mn (Year ending March 31)
FY2007
SOURCES
Share Capital
18,959
Share Premium
29,707
Reserves &
Surplus
86,889
Shareholders' Funds
135,555
Deferred Tax Liability
Loan Funds
52,461
Other Non-Current
Liabilities
14,130
TOTAL LIABILITIES
202,146
APPLICATIONS
Net Block
210,604
Capital Work in Progress
Net Fixed Assets
210,604
Goodwill
37,800
License Fee
Other Intangibles, Non-Current Assets
6,627
Current Assets
42,826
Current Liabilities
(95,711)
Net Current Assets
(52,885)
TOTAL ASSETS
202,146
FY2008
18,981
77,745
125,861
222,587
2,531
97,063
12,907
335,088
275,951
37,456
313,407
27,043
7,197
11,048
111,180
(134,787)
(23,607)
335,088
RATIO ANALYSIS-BHARATI
1. EBITDA%
EBITDA *100
Revenue
2007
2008
185,916
270,250
2. NET PROFIT%
Net Profit *100
Revenue
2007
43,038 *100 = 23.15%
2008
68,159 *100 = 25.22%
185,916
270,250
3. EPS
Profit after Tax
No. of equity shares
2007
2008
43,038 =
22.70
68,159 =
1896
35.91
1898.1
4. BOOK VALUE
Shareholders funds (net worth)
No. of equity shares
2007
135,555 =
2008
71.5
222,587 = 117.3
1896
1898.1
*100
6.
2007
2008
135,555
222,587
DEBT/EQUITY RATIO
2007
2008
52,461 = 0.4
135,555
97,063 = 0.4
222,587
6. CURRENT RATIO
Current Assets
Current Liabilities
2007
42,826
2008
=
0.4
95,711
111,180
0.8
134,787
* 100
2007
2008
188,016
319,650
Source: BMI
Overweight rating on Bharti, but net profit estimates are lowered for F2010/11 by 8%
and 13%, respectively. Bhartis strong balance sheet, integrated strategy, size and free
cash flow status give it an edge over peers. Key concern for Bharti is that it seems overowned and growth is slowing. A 14-15% growth in F2009-11E EPS is expected.
Cash flow analysis shown in Exhibit 4 suggests RCOM and Idea will have peak debt in
F2011 and F2012 whereas Bhartis debt should peak in F2009E. In addition, RCOM and
Idea are likely to take a further 4-6 years to lower their debt levels to reach Bhartis
current. Debt level this is the basis on which there is more positive view on Bharti over
RCOM and Idea despite valuations.
Bharati
RCOM
BSNL
Vodafone
Idea
Tata
Aircel
Spice
25%
18%
13%
18%
10%
9%
5%
1%
31%
17%
10%
19%
9%
8%
3%
1%
MTNL
BPL
HFCL
Shyam
TOTAL
4,188
1,948
382
366
346,894
1%
0%
0%
0%
100%
1%
1%
0%
0%
100%
Source: BMI
Source: BMI
Investment Thesis
India is the worlds fastest-growing telecom market.
Bharti is Indias leading wireless operator and has increased market share by 108 bps in
the past 12 months.
Continued acceleration in net additions is leading to strong quarterly performances.
Key Value Drivers
Bharti should turn FCF positive in F2010.
Improvement in EBITDA margins, driven by economies of scale and improvement in
wireless business margins.
Strong net adds market share.
Tower business could increase earnings 5-10% in the medium term on consolidation.
Potential Catalysts
% change over
Sensex
Close Price
826.1
721.65
785.05
715.1
674.2
-23%
-17%
-34%
-27%
-37%
-21%
-52%
-28%
-53%
-32%
From the above price movements we can see that over the period, when sensex has fallen
by 30% Bharati Airtels share price has fallen by 16%. Thus, it has outperformed the
market.
RELIANCE TELECOM
Reliance Communications, previously known as Reliance Infocom, brought about a
digital revolution in the Indian telecom industry by providing Indias vast population with
affordable means of information and communication. Reliance Infocom, with the aim of
making mobile calls cheaper than postcards, built a 60,000-kilometre-long fibre optic
backbone, crisscrossing the entire country.
Reliance currently offers its services in 340 towns with its eight circle footprints; it also
initiated mobile data services through its R world mobile portal. This portal leverages the
data capability of the CDMA 1X network.
Performance at a Glance
Income
Statement
Rs. mn (Year ending March 31)
Net Revenues
Total Operating Costs
EBITDA
Depreciation
Non Operating Income
Interest Expenses
Profit before Tax
Income Tax
Profit after Tax
Minority Interest
Consolidated
PAT
Extraordinary
Items
PAT
FY2007
1,44,683
(87,472)
57,211
(24,653)
32,558
(7)
32,551
(610)
31,941
FY2008
188,712
(108,687)
80,025
(28,053)
5,962
57,935
(2,836)
55,099
(1,088)
31,941
54,011
31,941
12,828
66,839
Balance Sheet
Rs. mn (Year ending March 31
SOURCES
Share Capital
FY2007
10,223
FY2008
10,320
Reserves &
Surplus
Shareholders' Funds
Loan Funds
Minority Interest
TOTAL LIABILITIES
APPLICATIONS
Net Block
Capital Work in Progress
Net Fixed Assets
Investments
Current Assets
Cash
Current Liabilities
Net Current Assets
TOTAL ASSETS
219,165
229,388
174,384
13,884
45,240
149,120
403772
279,943
290,263
258,217
25,337
573,817
320,104
36,907
357,011
409,481
149,299
558,780
109,996
97,035
8,782
208,244
(161,483)
RATIO ANALYSIS-RCOM
215,813
(200,776)
46,761
403772
15,037
573,817
1. EBITDA%
EBITDA *100
Revenue
2007
57,211
2008
*100 = 39.5%
1, 44,683
80,025
*100 = 42.4%
188,712
2. NET PROFIT%
Net Profit *100
Revenue
2007
2008
31,941
*100 = 22.1%
1, 44,683
3. EPS
Profit after Tax
4.
2007
2008
31,941 = 15.61
2045
66,839 = 32.4
2063
BOOK VALUE
Shareholders funds (net worth)
No. of equity shares
2007
229,388
2008
= 112
290,263 = 140.6
2045
5.
2063
*100
2008
*100 = 13.92%
229,388
6.
DEBT/EQUITY RATIO
66,839
290,263
*100 = 23.02%
7.
2007
2008
174,384 = 0.8
258,217
229,388
290,263
= 0.8
CURRENT RATIO
Current Assets
Current Liabilities
2007
2008
208,244 = 1.3
215,813
161,483
200,776
1.07
* 100
2007
31,941
403772
2008
* 100 = 8%
66,839
548480
* 100 = 12.1%
Source: BMI
Reducing RCOM to Underweight There has been a cut in F2010/11 profit estimates
by 20-30% largely due to pressure in its wireless and global business. RCOM has a
huge depreciation and interest burden, which it would have to incur through the income
statement post its GSM launch; so far it is being capitalized. This would lead to a cut in
profit in F2010E. The price target has been reduced to Rs132. Net debt stands at
US$3.8bn, the highest in the industry.
Source: BMI
Source: BMI
Investment Thesis
Net additions for RCOM remain at highest ever, but should peak in F2010E
Near-term execution risk due to GSM launch/aggressive pricing
Huge interest and depreciation burden
Key Value Drivers
Improvement in EBITDA margins by F2011, driven by economies of scale and stability
of operations in newly launched areas.
Strong net adds through pan-India presence in both CDMA and GSM.
Market share in long-distance and enterprise businesses.
Potential Catalysts
Strong net adds post All-India GSM launch.
It is estimated that there would be a 100bps EBITDA margin improvement for RCOM
due to lower license fees once it meets the governments 95% coverage criteria.
Higher Network and rollout costs lead to EBITDA Margin contraction
Risks
Increased competition.
Rollover of dual services, GSM and CDMA
Balance sheet risk due to high debt and hence high interest costs
Lesser than expected increase in network costs could surprise on EBITDA margins
% change over
Sensex
Close Price
508.3
442.4
333.9
227.25
181.65
-23%
-32%
-34%
-41%
-37%
-55%
-52%
-70%
-53%
-76%
From the above price movements we can see that over the period, when sensex has fallen
by 30% RCOMs share price has fallen by 44%. Thus, it has underperformed the market.
CONCLUSION
The India Growth Story to Continue
It is expected Indian wireless subscribers to grow 26% p.a. for the next two years to
reach a wireless subscriber base of 581 million by F2011E. More players, increased
spectrum, higher capex spend by operators, and an increase in active and passive sharing
should all lead to high subscriber growth. Early last year, the Indian government provided
all-India licenses to five new players as well as start-up licenses to existing operators
wanting a pan-India presence because they aimed to provide services under dual
technology. These licenses have so far released over 450 MHZ of pair band spectrum
(4.4MHz per operator per circle). The Department of Telecommunications (DoT) as well
as THE Telecom Regulatory Authority (TRAI) of India suggest 3G spectrum is on the
way. Higher spectrum for the operators means strong subscriber growth is likely ahead.
Increased capex spend by virtually every player should result in a peak in capex spend by
the industry in F2009E at US$15bn. With the industry nearly tripling its towers in the
next three years and tower sharing on the rise, it is believed telecom coverage for the
country could reach 90% by F2011, from about 55% currently.
generate lower EBITDA and ROCE. Based on our revised earnings estimates, it is
believed that the days of all-time high returns for the Indian telecom sector, including
Bharti, is now part of history. However, it is still expected that Bharti will earn much
higher returns than its cost of capital and other players in the industry.
BIBLIOGRAPHY
Equity Research and Valuation- Dun & Bradstreet
WEBLIOGRAPHY
http://www.moneycontrol.com/stocks/company_info/competition.php?sc_did=BA08
www.trai.gov.in
www.dot.gov.in
www.airtel.in
www.rcom.co.in