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Idea Cellular Limited Fundamental Analysis

Idea Cellular Limited Fundamental Analysis

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Homework Title / No.

: 1 Course Instructor : Miss Ashu Kakkar

Course Code : MGT 521 Course Tutor (if applicable) : ____________

Date of Allotment : _____________________ Date of submission :4 Sep 2010 Student’s Roll No. B25 Section No. : RS1904

Declaration: I declare that this assignment is my individual work. I have not copied from any other student’s work or from any other source except where due acknowledgment is made explicitly in the text, nor has any part been written for me by another person. Student’s Signature: Sheikh Talha (10906035) Evaluator’s comments: _____________________________________________________________________ Marks obtained : ___________ out of ______________________ Content of Homework should start from this page only:

IDEA CELLULAR LIMITED
ENVIRONMENTAL ANALYSIS:
From a holistic point of view telecom industry can be divided into four segments. · · · · Network Infrastructure companies: Alcatel-Lucent, Cisco and Ericsson Telecom service providers: Bharti-Airtel, Vodafone, Idea, Reliance Telecom Equipment Manufacturers: Nokia, Motorola, Samsung Telecom solution providers: Tech-Mahindra, IBM The major forces in Indian telecom industry are Service providers. All major telecom equipment suppliers have their R&D centres in India. In last 5 years, global giants in mobile devices have set up their manufacturing facilities in India. The discussions in this document are restricted to only Telecom Service Providers.

Composition of the Industry: Growth Trends
• According to a Frost & Sullivan industry analyst, by 2012, fixed line revenues are expected to touch US$ 12.2 billion while mobile revenues will reach US$ 39.8 billion in India. • Contribution to GDP1.6% • Total Telephone subscriber base reaches 494.07 Million As on August 2009. Teledensity reaches 42.27.

Key Players and Market Share (as on August 2010)
The Telecom Subscriber base in India is 494 million (August 2010) and the Major players can be segmented into the below three categories: · State owned companies - BSNL and MTNL · · · Foreign invested companies - Vodafone-Essar, Bharti Tele-Ventures, Idea Cellular, Loop Mobile, Spice Communications Private Indian owned companies - Reliance, Tata Teleservices

Government Regulations and Initiatives
The government has taken many proactive initiatives to facilitate the rapid growth of the Indian telecom industry. 1. FDI in telecom services has been raised to 74% 2. Introduction of unified access licensing for telecom services on a pan-India basis

3. The government is implementing a program of connecting 66,822 uncovered villages under the Bharat Nirman programme. The government will invest US$ 2 billion to set up 112,000 community service centres in rural India to provide broadband connectivity in 2008-09 4. The Department of Telecommunications (DoT) has stated that foreign telecom companies can bid for 3G spectrum without partnering with Indian companies. Only after winning a bid, would they need to apply for unified access service licence (UASL) and partner with an Indian company in accordance with the FDI regulations. 5. TRAI’s role is to monitor the telecom sector providers, to check if they are following the policies and regulations issued by DoT.

Foreign Direct Investments
The cumulative FDI inflow from August 1991 to March 2007 in the telecommunication sector amounted to US$ 7,513.22 million. This makes telecommunication the third-largest sector to attract FDI in India in the post liberalization era. The investment was majorly in handset manufacturing and telecom service providers. India has 100% FDI allowed in the networking components and 74% FDI in telecom services. Examples of some recent FDI are given below: a) Japanese telecom major NTT DoCoMo acquired a 27.31 per cent equity capital of Tata Teleservices for about US$ 2.6 billion in November 2008. b) Vodafone Essar will invest US$ 6 billion over the next three years in a bid to increase its mobile subscriber base from 40 million at present to over 100 million.

SWOT analysis
Strengths
1. Enormous customer base in the wireless segment: The Telecom subscription data as on

31st August 2009 is as follows:

· The number of telephone subscribers in India increased to 494.07 Million at the end of August 2009 from 479.07 Million in July 2009 · 15.08 Million new additions in the wireless segment · Growth rate of 3.13% 2. Decline in Tariffs: There has been a substantial decline in tariffs over the years.
 

Local call tariff for mobile @ Rs 15.00 is now less than Re 1.00 One minute STD call between Delhi and Mumbai at the rate of Rs.37.00 now cost Re 1.00 i.e. at the rate of local call ISD call to American continent @ Rs. 75.00 now costs less than Rs 7.00

3. The adoption of new technology has been a major factor that has helped service providers reduce the tariffs considerably.
4. Rural Public Telephony: Rural India had 76.65 million fixed and Wireless in Local Loop

(WLL) connections and 551,064 Village Public Telephones (VPT) as on September 2008. Therefore, 92 per cent of the villages in India have been covered by the VPTs. Universal Service Obligation (USO) subsidy support scheme is also being used for sharing wireless infrastructure in rural areas with around 18,000 towers by 2010. It is believed that of the next 250 million people expected to go mobile; at least 100 million will come from rural areas. 5. India is the fastest growing free market democracy in the world. India’s emergence as a leading destination for foreign investment is a result of: · Stable Economic Outlook · Large Market Potential · Large talent pool · Low Labour Cost

Weaknesses 1. Weak Infrastructure - Huge initial fixed cost for service providers
2. Limited spectrum availability: With private initiatives increasing in telecom and

broadcast service provision, demand for spectrum has increased. Digital technology has increased the scope of applications and created new areas of service provision. Cellular telephony and wireless Internet are examples of such services. Despite technological changes that reduce the demand for spectrum, availability of spectrum continues to be a constraint. In order to allocate spectrum amongst competing service providers, regulatory agencies often use auctions. From the regulatory and policy perspective, spectrum auctions ensure efficient usage by allocating it to those entities that value it most, while also generating revenues for governments. But auctions may lead to unexpected outcomes as, for example, when regulatory agencies have inadequate market information, there may be a mismatch between expected and actual bidder behaviour, or auctions may be poorly designed. The key challenge before regulatory agencies is to design auctions in such a way as to meet the objective of fostering competition while at the same time ensuring that bidders can effectively use the spectrum for their business. 3. Huge costs for advanced technologies like Mobile Number Portability (MNP) 4. Indian companies do not have the expertise in running multi-country operations Opportunities 1. Emerging Technologies: 3G,WiMax
2. Rural telephony: It is believed that of the next 250 million people expected to go mobile;

at least 100 million will come from rural areas. The rural mobile penetration is highest in Punjab (20.69 per cent), followed by Himachal Pradesh (17.09 per cent), Kerala (10.63 per cent) and Haryana (10.20 per cent). 3. World’s largest untapped mobile market: Although the telecom sector in India is growing strong as compared to other sectors, on a worldwide perspective India seems to be the largest untapped mobile market as can be seen below.

4. Enormous potential in VAS: There is enormous growth potential in the value added services (VAS) as can be seen below in the case of penetration of GPRS (General Packet Radio Service). The penetration of GPRS enabled handsets are close to 26% in India as against 99% in South Korea and 76% in Japan. Consumers today engage more in text based services than the web based applications. Therefore for MVAS to grow to its full potential the handset manufacturers will have to look at ways to manufacture GPRS enabled phones which are affordable and user friendly. They also need to increase its awareness and educate the consumers on how to use GPRS. 5. New players and services bring in huge investments 6. Tier-2, tier-3 cities can accommodate more players Threats 1. Conflict between DoT and TRAI: The absence of clear separations in DoT’s responsibilities for policy, regulation and operations led to several delays and lowered the credibility of the government. TRAI had earlier told DoT that 3G auction should be restricted to existing operators on the grounds that new players would find it difficult to roll out services quickly. TRAI had argued that the existing players were best placed to roll out 3G services at affordable rates given that they already had a full fledged operations running.
2. Wire line subscriber base declined (37.41 m in July2009 - 37.33 m August2009)

3. Integration during Mergers is challenging 4. Unhealthy Competition: MTNL had refused to allow its spectrum to be used by other service providers for about 2-3 years and finally came to a compromise in 2001.

INDUSTRY ANALYSIS:
Life Cycle Analysis
The Indian telecom industry is in Maturity stage at present. It is going to witness an unprecedented market condition in the next five years. There are alarm bells ringing loud in the

wake of stiff competition between the new operators and existing players over a possible tariff war. Factors such as the possible sharp decline in the number of additional users, that will be shared among possibly fifteen operators (from the present five pan-India players); dwindling ARPU; and non-voice revenue streams will decide the future. If we top this up with government policies; regulatory hurdles; and weak economic conditions the picture could become even more grim. During the last fifteen years of the telecom liberation, ever since the launch of the revolutionary NTP 1994 in India, the industry has identified the strengths and shortcomings that it has to work to keep the success story alive. With A circles across the country seeing mobile penetration touching the 100% mark, a larger share of growth is coming from the rural markets. The present is perfect for the industry. Undeterred by the chill in the global market, the Indian telecom industry continues to tread strongly-through FY 2009 to the current fiscal. The telecom subscriber base has grown in the last three years at a CAGR of 44% to reach 415.2 mn at the end of May 2009, supported by a progressive regulatory regime, falling tariffs and the increasing disposable income of Indian consumers The future of the telecom industry in India seems bright, but small hurdles could blur the picture that appears perfect at the moment. The players believe that the next five years are going to play a crucial role in deciding the growth chart of the industry. The country's telecom industry has reached a stage of transition from a developing market heading towards maturity. Thus, all the stakeholders must act towards eliminating the roadblocks that are likely to slow the growth rate..

Porter's 5 Forces Analysis
1. Threat of New Entrants. It comes as no surprise that in the capital-intensive telecom industry the biggest barrier to entry is access to finance. To cover high fixed costs, serious contenders typically require a lot of cash. When capital markets are generous, the threat of competitive entrants escalates. When financing opportunities are less readily available, the pace of entry slows. Meanwhile, ownership of a telecom license can represent a huge barrier to entryThere is also a finite amount of "good" radio spectrum that lends itself to mobile voice and data applications. In addition, it is important to remember that solid operating skills and management

experience is fairly scarce, making entry even more difficult. 2. Power of Suppliers. At first glance, it might look like telecom equipment suppliers have considerable bargaining power over telecom operators. Indeed, without high-tech broadband switching equipment, fiber-optic cables, mobile handsets and billing software, telecom operators would not be able to do the job of transmitting voice and data from place to place. But there are actually a number of large equipment makers around. There are enough vendors, arguably, to dilute bargaining power. The limited pool of talented managers and engineers, especially those well versed in the latest technologies, places companies in a weak position in terms of hiring and salaries. 3. Power of Buyers. With increased choice of telecom products and services, the bargaining power of buyers is rising. Let's face it; telephone and data services do not vary much, regardless of which companies are selling them. For the most part, basic services are treated as a commodity. This translates into customers seeking low prices from companies that offer reliable service. At the same time, buyer power can vary somewhat between market segments. While switching costs are relatively low for residential telecom customers, they can get higher for larger business customers, especially those that rely more on customized products and services. 4. Availability of Substitutes. Products and services from non-traditional telecom industries pose serious substitution threats. Cable TV and satellite operators now compete for buyers. The cable guys, with their own direct lines into homes, offer broadband internet services, and satellite links can substitute for high-speed business networking needs. Railways and energy utility companies are laying miles of high-capacity telecom network alongside their own track and pipeline assets. Just as worrying for telecom operators is the internet: it is becoming a viable vehicle for cut-rate voice calls. Delivered by ISPs - not telecom operators - "internet telephony" could take a big bite out of telecom companies' core voice revenues. 5. Competitive Rivalry. Competition is "cut throat". The wave of industry deregulation together with the receptive capital markets of the late 1990s paved the way for a rush of new entrants. New technology is prompting a raft of substitute services. Nearly everybody already pays for phone services, so all competitors now must lure customers with lower prices and more exciting services. This tends to drive industry profitability down. In addition to low profits, the telecom industry suffers from high exit barriers, mainly due to its specialized equipment. Networks and

billing systems cannot really be used for much else, and their swift obsolescence makes liquidation pretty difficult.

FINANCIAL ANALYSIS:
Earnings per Share
2010 Adjusted EPS (`) 3.10 2009 2.65 2008 3.55

The earnings per was high during 2008 due to huge profits however in 2009 it took a substantial dip at ` 2.65. Slowdown had an impact on the earnings in 2009 but the company made recovery in 2010 and the earnings stood at ` 3.10

Dividend payout ratio
The company has not paid any during the past five year. The dividend payout ratio thereby stands at 0.

Debt Equity Ratio
2010 Debt-Equity 0.57 2009 0.67 2008 1.84

This ratio indicates the margin of safety to long term creditors. A low debt to equity ratio here in this case implies the use of more equity than debt which means larger safety of margin to the

creditors. In the current year the company has the lowest debt –equity ratio this is due to the fact that less amount of debt is used compared to the last time, this resulted in decrease of interest on long term debts from ` 1206 cr. to ` 206 cr.

Net profit ratio
2010 Net Profit 35.91 2009 31.80 2008 25.50

This ratio indicates the net margin earned on a sale of ` 100. Higher ratio as in this case depicts the capacity of the firm to withstand adverse economic conditions. The ratio is continuously increasing from 2008 which clearly shows a healthy sign.

P/E Ratio
Investors often refer to the P / E Ratio as a rough indicator of value for a company. The P / E Ratio is calculated as follows: Price of Stock / Earnings per Share Here, price of the share as on 31 Aug 2010 was ` 71.20 and the earning per share for this year was ` 3.10 so P/E ratio for this year stands at 22.96. This means that the company is selling for 23 times its earnings.

Calculation of intrinsic value of the stock
This is calculated by dividing the earnings per share on the stock you are considering by the annual earnings on another investment, such as bonds or real estate. In this case I have taken mutual funds as an alternate investment giving a return of 10% therefore Intrinsic value of idea cellular limited is:

EPS/.10=31 Hence the intrinsic value of Idea Cellular Limited stock is `.31if mutual funds are considered as an alternate investment.

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