.

QUARTERLY PERFORMANCE ANALYSIS OF COMPANIES (April-June 2008)
INDIAN TELECOM INDUSTRY

August 2008

Cygnus Business Consulting & Research Pvt. Ltd.
4th & 5th Floors, Astral Heights, Road No. 1, Banjara Hills, Hyderabad-500034, India Tel: +91-40-23430203-05, Fax: +91-40-23430201, E-mail: info@cygnusindia.com Website: www.cygnusindia.com
Disclaimer: All information contained in this report has been obtained from sources believed to be accurate by Cygnus Business Consulting & Research Pvt. LTd. (Cygnus). While reasonable care has been taken in its preparation, Cygnus makes no representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such information. The information contained herein may be changed without notice. All information should be considered solely as statements of opinion and Cygnus will not be liable for any loss incurred by users from any use of the 1 publication or contents

QPAC-Indian Telecom Industry- April-June 2008

CONTENTS
EXECUTIVE SUMMARY.........................................................................................................3 INDUSTRY ANALYSIS ............................................................................................................4 OUTLOOK FOR THE SECTOR .............................................................................................7 INTER-FIRM COMPARISON..................................................................................................9 STOCK SCAN .........................................................................................................................12 COMPANY ANALYSIS ..........................................................................................................14 1. Airtel .................................................................................................................................14 2. MTNL...............................................................................................................................15 3. Reliance.............................................................................................................................16 4. Tata Communications .......................................................................................................17 5. Tata Teleservices ...............................................................................................................18 6. Avaya Global Connect ......................................................................................................19 7. HFCL................................................................................................................................20 8. Sterlite ...............................................................................................................................21 SOURCES & METHODS FOR COMPANY PROJECTIONS...............................................22

© Cygnus Business Consulting & Research Pvt. Ltd. 2008

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QPAC-Indian Telecom Industry- April-June 2008

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 2007-08, as compared to 10.6% in 2006-07. India’s economic growth is expected to grow at 7.9% 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 Indian telecom industry continued its growth momentum for another consecutive quarter with the overall sector registering a modest revenue growth of 25% during AMJ08 compared with AMJ07. The total number of telecom subscribers in the country touched 300m at the end of March 2008, of which 261.07m were mobile subscribers and 39.42m were fixed/landline subscribers. The wire-line subscriber base has shown marginal improvement in JFM08 as compared to last four quarters, as subscriber base declined in each of theses quarters. There were 11.09m Internet subscribers approximately at the end of March 2008 as compared to 10.36 million at the end of December 2007 registering a growth of 7.08%. This growth rate is slightly less than the growth rate of 7.64% at the end of December 2007. The Average Revenue per User (ARPU) for the GSM, CDMA and broadband services segment were at Rs264, Rs159 and Rs220 respectively for the quarter AMJ08. Airtel remained the market leader with 32.16% GSM market share, adding 6.82m subscribers during JFM08. Vodafone, with 22.09% GSM market share, was the second runner up, adding 4.27m subscribers in JFM08. BSNL was at third place at 118.79% market share, Idea with 12.45% market share and Aircel at 5.51% market share. Meanwhile, in the CDMA 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%. BSNL, with a share of 50.82% was the leading ISP followed by MTNL at 17.12% in JFM08. For the purpose of inter-firm comparison, eight companies were taken across the industry for analysis. Airtel’s revenue is estimated to touch Rs77.6 billion in AMJ08 and may grow at 38% from AMJ07. Reliance is expected to ramp up a revenue to Rs36.5 billion. In terms of profits, Bharti Airtel is likely to be the leader with EBDITA and PAT at Rs32.59 billion and Rs17.23 billion in AMJ08. As per Cygnus estimates, the Indian telecom industry is expected to maintain the growth trajectory in the AMJ08 quarter as well, with top-line growth of 25%. Industry’s OPM and NPM are expected to be 35.68% and 20.48% respectively. With almost 5-6m subscribers added every month, the country is witnessing frenetic activity in the telecom industry. This growth has outpaced predictions of reaching 100m by 2007 and 200m by 2010. Now the estimate is 500m subscribers by 2010. The mobile population is expected to hover between 325m to 350m by end of 2008. 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.

© Cygnus Business Consulting & Research Pvt. Ltd. 2008

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QPAC-Indian Telecom Industry- April-June 2008

INDUSTRY ANALYSIS
Industry Analysis
Overview Telecom to register high growth in AMJ08 Indian Telecom industry is one of the fastest growing telecom markets in the world. In teccom 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 Sterlite are some of the companies that are expected to spur the growth in AMJ08, as compared to AMJ07. 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 AMJ08 (E) Net Sales 123436.52 Change 25% EBITDA 43737.79 Change 32% Depreciation 16530.13 Interest (811.27) Other Income 2123.46 PBT 30142.39 TAX 6293.93 Tax Rate 21% PAT 23848.46 Change 34%
Source: BSE India; Cygnus research

Note: The aggregate consists of eight companies for

150 Telecom Industry Revenue: AMJ08

50

Rs billion

industry aggregate calculation: Bharti Airtel, MTNL, TATA Teleservices, Reliance Communications, VSNL, Avaya Global Connect, HFCL and Sterlite Optical Technologies.

125

Sales Growth 25

100

75

50 AMJ07 AMJ08

55

Industry Operating Profit : AMJ08

50

30 25

Net Profit : AMJ08
PAT (LHS) NPM (RHS)

Rs billion

Rs billion

40

EBDITA (RHS) OPM (RHS)

40
%

20 15 10 5

25

30

16

10 AMJ07 AMJ08

20

0 AMJ07 AMJ08

10

Source: BSE India; Cygnus Research

© Cygnus Business Consulting & Research Pvt. Ltd. 2008

%

%
0
28 22

4

QPAC-Indian Telecom Industry- April-June 2008
Cost Structure
70 60
% of Net sales

Cost Structure-Equipment Manufacturers Qtr ended AMJ08 vs AMJ07
AMJ 2007 AMJ 2008

50 40 30 20 10 0 -10 Stoc k in trade Raw materials Traded items Staff c ost Other Deprec iation Interest expenditure Tax

% of Net sales

20 15 10 5 0

Cost Structure-Service providers
AMJ 2007 AMJ 2008

Administrative exp

Sales & Marketing exp

Network Opex

Depreciation

-5 License Fee Staff cost

Other exp

Interconnection Charges

Source: BSE India; Cygnus Research

For the quarter AMJ08, stock in trade for equipment manufacturers is expected to fall from 1.63% of sales in AMJ07 to -4.69% in AMJ08. Raw material cost is expected to rise to 60.58% of sales in AMJ08 from 55.17% in AMJ07. Other expenses, Interest and Tax are also likely to increase in AMJ08, as compared to AMJ07, for the equipment manufacturing companies. Service provider companies are expected to show improvements in staff costs, Network operations, Interconnect charges, and interests. Licence fee and sales and marketing expenses of service providers are likely to go up in AMJ08 as compared to AMJ07.

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 95.96m subscribers in FY08. Bharti Airtel added maximum number of subscribers - 24.84m followed by Reliance with 17.78m, Vodafone 17.69m, Idea 9.99m, BSNL 9.89, Tata Tele 8.31m and six other small players together added another 7.55m in FY08.

© Cygnus Business Consulting & Research Pvt. Ltd. 2008

Interest

Tax

5

QPAC-Indian Telecom Industry- April-June 2008
GSM The GSM subscriber base reached 192.70 million in the quarter ending March 2008, as against 172.23 million at the end of the previous quarter. The growth for this quarter is 11.89% as compared to previous OND07 quarter. Bharti, with 61.98 million subscriber base, remains the largest GSM mobile operator followed by Vodafone with 44.13m, BSNL with 36.21m and and Idea with 24.00m., CDMA The CDMA Subscriber Base reached 68.37 million during the quarter ending March 2008 as against 61.39 million at the end of December 2007. The quarterly growth in JFM08 is 11.37% as against 11.44% the previous quarter. 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. Wire Line The total subscriber base of Wireline services stood at 39.42 million as on 31st March 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. Wireline 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. On the other hand, BSNL, Shyam and Telelinks have lost marginal subscriber base in JFM08, as compared to the previous quarter. Other Telephone services Public Call Offices During the JFM08, 2,83,883 new PCOs have been added. Total number of PCOs in the country, as on 31st March 2008, is 61,85,904. The share of BSNL is 20,51,518 i.e. 33% of the total PCOs. The share of MTNL and other private operators combined are 2,39,335 (4%) and 38,95,051 (63%) respectively. 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 JFM08, the total number of VPTs reached to 5,59,503. Thus, 29,376 VPTs increased during the JFM08. BSNL reported increase of 1,547 VPTs during

300 250 200
In m

Wireless Subscriber growth

100 90 80 70 60 50 40
%

150 100 50 0 FY04 FY05 FY06 FY07 FY08
Subscribers (LHS)

Growth(RHS)

Market share of GSM players

BSNL 19% Vodafone 23% Bharti 31%

Idea 12%

Aircel 6% Reliance 4% Spice 2% MTNL 2% BPL 1%

Market share of CDMA players

Tata Tele 35.58%

HFC L 0.44%

BSNL 6.7%

MTNL 0.41% Shayam 0.16%

Reliance 56.7%

Source: TRAI; Cygnus Research

© Cygnus Business Consulting & Research Pvt. Ltd. 2008

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QPAC-Indian Telecom Industry- April-June 2008
the JFM08. All the five private operators together added of 27,829 VPTs during the JFM08. The total number of villages, left uncovered, are 33,982 as on 31st March 2008.
Market share of wireline players

MTNL 9% BSNL 80% Others 11%

Internet services
Wire line Internet subscriber The growth trend of Wireline 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.

Source: TRAI; Cygnus Research

Market Share of Top five ISP providers ISP Subs. base Bharat Sanchar Nigam Ltd 5640191 Mahanagar Telephone Nigam Ltd 1899747 Bharti Airtel Ltd (Bharti Televentures Ltd) 815360 Reliance Communications Infrastructure Ltd 696440 Sify Technologies Ltd 576047

Share in % 50.82 17.12 7.35 6.28 5.19

Leased Line Connectivity The number of Internet Leased Line connections is 22752 at the end of March 2008, as compared to 21858 at the end of December 2007, registering a growth of 4.09%. Broadband Connectivity (>=256 Kbps): The number of Broadband subscribers (with a download speed of 256 Kbps or more) is 3.87m at the end of March 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 36240 in March, 2008, registering a growth rate of 4.06%. VSAT Services: In JFM08, there was an addition of 13986 new subscribers. The total number of subscribers increased from 67409 in OND07 to 81395 in JFM08, registering a growth of 20.75% as against the growth rate of 3.15% for the quarter OND07.

OUTLOOK FOR THE SECTOR
Going by the number of mobile phone subscribers, India has become the world’s fastest growing region. With almost 5-6m subscribers added every month, the country is witnessing exciting times in the telecom industry. This growth has outpaced predictions of reaching 100m by 2007 and 200m by 2010. Now the estimate is 500m subscribers by 2010. The mobile population is expected to hover between 325m to 350m by end of 2008.

© Cygnus Business Consulting & Research Pvt. Ltd. 2008

7

QPAC-Indian Telecom Industry- April-June 2008

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 2% (16m) 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 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 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 endeavour to further improve their quality of service in order to retain existing customers and attain new subscribers.

© Cygnus Business Consulting & Research Pvt. Ltd. 2008

8

QPAC-Indian Telecom Industry- April-June 2008

INTER-FIRM COMPARISON
Telecom Equipment Manufacturers
Operational Performance Telecom equipment manufacturers have shown mixed results in AMJ08 compared with AMJ07. Avaya Global Connect and Sterlite have shown growth in sales, whereas HFCL sales declined by more than half in AMJ08 compared with AMJ07. Sterlite sales grew by 146.54% to Rs2,395.60m in AMJ08 compared with Rs971.70m in AMJ07. Avaya also saw jump in sales by 22.17% to Rs1,391.51m in AMJ08 compared with Rs1,139m in AMJ07. HFCL sales declined by 50.48% to Rs1,107.70m in AMJ08 compared with Rs2,236.80m in AMJ07 Financial Performance

3800 Operational Performance: Telecom200

Equipment Manufacturers
3300 2800 Rs in m 2300 1800 1300 800 Avaya Global C onnect HFC L Sterilite Optical AMJ 07(LHS) AMJ 08(LHS) % Growth(RHS) 150 100 50 0 -50 -100 %
30 25 20 15 10 0 -5 -10 -15 -20 % 5 AMJ08 HFC L AMJ07 AMJ08 Sterilite optical

Source: BSE India, Cygnus Research

Avaya and Sterlite gain; HFCL losses margins in AMJ08
3000 2500 Rs in m 2000 1500 1000 500 0 AMJ07 AMJ08 AMJ07 Avaya global connect
Source: BSE India, Cygnus Research

Financial performance: AMJ08 vs AMJ 07
Net sales(RHS) NPM(LHS) OPM(LHS)

In AMJ08, Avaya and Sterlite saw rise in profit margins against AMJ07. Avaya’s OPM and NPM jumped from 1.1% and -0.5% in AMJ07 to 11.9% and 6.7% in AMJ08. Similar trend was witnessed by Sterlite as its OPM and NPM jumped to 13% and 5.3% in AMJ08. HFCL’s margins declined to 5.5% and -14.3% in AMJ08 compared with 15.6% and 8.2% in AMJ07 amid sharp decline in its sales; expenses remained high.

Telecom Service Providers
Operational Performance Reliance is fast catching up with Airtel in terms of sales and subscriber base. Reliance is present in both GSM and CDMA platform, which is increasing its subscriber growth. Reliance saw its sales rise tremendously in AMJ08 compared with the marginal sales in AMJ07. In terms of sales value, Airtel topped the chart with Rs56.12 billion in AMJ08, with growth of 52.39% compared with AMJ07. MTNL is the only company, which saw decline in sales from Rs12.78 billion in AMJ07 to Rs11.96 billion in AMJ08. Tata group-owned Tata Teleservices and Tata Communications saw significant increase in their sales in AMJ08 by 21.47% and 9.10% compared with AMJ07.

© Cygnus Business Consulting & Research Pvt. Ltd. 2008

9

QPAC-Indian Telecom Industry- April-June 2008
Reliance catching up with Airtel
60 50 Rs in billion 40 30 20 10 0 -10 Bharti MTNL Reliance Tata Teleservices Tata C ommunications -6000 Operational Performance: Telecom Service Providers AMJ 07(LHS) AMJ 08(LHS) 12000 18000

6000 % 0

Source: BSE India, Cygnus Research

Financial Performance
60 50 Rs in bn 40 30 20 10 0

Financial performance AMJ08 vs AMJ 07
Net sales(RHS) NPM(LHS) OPM(LHS)

90 70 50 10 -10 -30 -50 % 30

AMJ07

AMJ08

AMJ07

AMJ08

AMJ07

AMJ08

AMJ07

AMJ08

AMJ07

Bharti

MTNL

Reliance

Tata Teleservices

Tata C ommunications

Source: BSE India, Cygnus Research

Margins improved slightly Bharti Airtel, Tata Teleservices and Tata Communications saw their margins improving slightly amid improvement in sales. Airtel saw its OPM and NPM improving to 41.3% and 25.2% in AMJ08 from 38.3% and 22.1% in AMJ07. Tata Teleservices saw its OPM improving to 21.6% in AMJ08 compared with 17.9% in AMJ07. Tata Communication’s NPM improved from 9.8% in AMJ07 to 10.3% in AMJ08.

Cost Structure
Telecom Services Providers The industry’s average of cost to sales percentage was 80.51% in AMJ08. Airtel and Reliance Communication performed much better than industry with cost to sales percentage of 76.24% and 74.09% in AMJ08. While Airtel’s cost percentage declined from 78.38% in AMJ07, Reliance saw increase in percentage from 63.09% in AMJ07. MTNL’s cost to sales percentage remained high at 97.78% in AMJ08 and 96.28% in AMJ07. Tata Teleservices’ cost percentage declined from 134.91% in AMJ07 to 111.10% in AMJ08 and still remained higher than industry average of 80.51% in AMJ08. Tata Communications saw marginal decrease in its cost from 86.69% in AMJ07 to 85.77% in AMJ08

© Cygnus Business Consulting & Research Pvt. Ltd. 2008

AMJ08

10

QPAC-Indian Telecom Industry- April-June 2008
Bharti Airtel AMJ AMJ 2008 2007 5.97 6.40 15.98 15.31 11.03 11.38 15.89 17.72 7.89 8.96 7.35 6.85 0.54 1.52 13.38 12.25 -4.63 1.78 8.81 2.60 76.24 78.38 MTNL AMJ AMJ 2008 2007 35.34 35.13 44.33 43.77 0.00 0.00 0.00 0.00 16.94 17.14 0.00 0.00 16.84 16.72 14.76 13.27 0.06 0.11 4.84 5.27 97.78 96.28 Reliance AMJ AMJ 2008 2007 5.65 1.00 33.59 1.00 7.68 0.00 0.00 0.00 8.20 22.23 10.19 0.00 0.00 9.00 12.87 8.92 0.34 0.00 1.23 22.75 74.09 63.90 Industry AMJ AMJ 2008 2007 9.00 12.15 13.74 7.04 13.05 16.20 8.70 11.92 9.64 9.61 7.12 5.06 2.03 6.22 13.46 13.67 -1.93 1.83 5.71 3.40 80.51 87.11

Staff cost License Fee Network Opex Interconnection Charges Administrative exp Sales & Marketing exp Other exp Depreciation Interest Tax Total

Source: BSE India, Cygnus Research

Staff cost License Fee Network Opex Interconnection Administrative exp Marketing exp Other exp Depreciation Interest Tax Total

Tata Teleservices AMJ 2008 AMJ 2007 5.78 4.15 5.78 4.15 15.28 16.69 26.39 27.93 12.30 13.78 18.60 19.55 0.00 0.00 26.34 38.37 6.36 14.35 0.05 0.09 111.10 134.91

Tata Communications AMJ 2008 AMJ 2007 6.61 6.39 0.00 0.00 56.03 58.01 0.00 0.00 14.28 0.00 0.00 0.00 0.00 12.55 9.21 11.36 0.19 0.11 6.05 4.65 85.77 86.69

Industry AMJ 2008 AMJ 2007 9.00 12.15 13.74 7.04 13.05 16.20 8.70 11.92 9.64 9.61 7.12 5.06 2.03 6.22 13.46 13.67 -1.93 1.83 5.71 3.40 80.51 87.11

Source: BSE India, Cygnus Research

Telecom Equipment Manufacturers Avaya HFCL Sterlite Industry AMJ AMJ AMJ AMJ AMJ AMJ AMJ AMJ 2008 2007 2008 2007 2008 2007 2008 2007 15.00 3.00 -6.00 0.00 -16.00 4.00 -4.69 1.63 3.72 10.54 87.03 77.57 81.37 55.95 60.58 55.17 41.06 51.62 0.00 0.00 0.00 0.00 11.67 13.53 12.39 15.72 5.15 2.59 4.03 5.56 6.66 6.69 15.63 18.17 7.83 4.16 17.59 26.00 14.82 12.71 1.79 2.19 5.84 3.15 3.47 6.39 3.53 3.62 -0.86 -0.70 14.05 4.36 3.69 2.05 4.74 2.52 4.73 0.09 0.04 0.09 1.54 0.06 2.11 0.08 89.04 89.73 88.14 98.95 94.48 84.42 87.05 91.17

Stock in trade Raw materials Traded items Staff cost Other expenditure Depreciation Interest Tax Total

Source: BSE India, Cygnus Research

© Cygnus Business Consulting & Research Pvt. Ltd. 2008

11

QPAC-Indian Telecom Industry- April-June 2008
Telecom Equipment Manufacturers cost to sales percentage remained high but reduced marginally from 89.73% in AMJ07 to 89.04% in AMJ08. Avaya’s cost percentage declined by 11% in AMJ08 compared with AMJ08 of 99%. Sterlite’s cost to sales percentage reduced from 91% in AMJ07 to 87% in AMJ08. HFCL, on the other hand, saw its cost to sales percentage climbing to 94% in AMJ08 compared with 84% in AMJ07 due to sharp fall in sales.

STOCK SCAN
120 115 110 105 100 95 90 85 80 Sensex Bharti Reliance MTNL

Relative Market Cap: AMJ 08

12-Jun

15-Jun

18-Jun

21-Jun

24-Jun

27-Jun

10-Apr

13-Apr

16-Apr

19-Apr

22-Apr

25-Apr

28-Apr

10-May

13-May

16-May

19-May

22-May

25-May

28-May

150 140 130 120 110 100 90 80 Sensex

Relative Market Cap: AMJ 08

Avaya

HFC L

Sterilite

31-May

12-Jun

15-Jun

18-Jun

21-Jun

24-Jun 24-Jun

27-Jun 27-Jun

10-Apr

13-Apr

16-Apr

19-Apr

22-Apr

25-Apr

28-Apr

10-May

13-May

16-May

19-May

22-May

25-May

28-May

140 130 120 110 100 90 80 70 60 Sensex

Relative Market Cap: AMJ 08

Tata tele

Tata C ommunications

31-May

12-Jun

15-Jun

18-Jun

21-Jun

10-Apr

13-Apr

16-Apr

19-Apr

22-Apr

25-Apr

28-Apr

10-May

13-May

16-May

19-May

22-May

25-May

28-May

Source: BSE India; Cygnus Research

© Cygnus Business Consulting & Research Pvt. Ltd. 2008

31-May

12

30-Jun

3-Jun

6-Jun

1-Apr

4-Apr

7-Apr

1-May

4-May

7-May

9-Jun

30-Jun

3-Jun

6-Jun

1-Apr

4-Apr

7-Apr

1-May

4-May

7-May

9-Jun

30-Jun

3-Jun

6-Jun

1-Apr

4-Apr

7-Apr

1-May

4-May

7-May

9-Jun

QPAC-Indian Telecom Industry- April-June 2008
BSE Sensex The 30-share BSE Sensex witnessed a drop of 13.85% during AMJ08. The Sensex lost around 2,165.02 points and fell from 15,626.62 points on April 01, 2008 to 13,461.60 points on June 30, 2008. Uncertainty in global markets, soaring crude oil prices and high inflation created negative sentiments in the market.

Telecom Service Providers

Despite good sales, service providers were net losers in AMJ08 All the service providers performed poorly in AMJ08 quarter in stock market, with decline in market cap. Most of theses companies moved along the BSE Sensex in AMJ08, but Tata Communications was the major loser with 30.16% loss in returns. In April and May, Bharti performed well but its share price declined in June, leading to lower relative market cap. MTNL stock moved along with BSE Sensex in AMJ08. Reliance and Tata Teleservices saw around 15% decline in their market cap in AMJ08.

Stock Performance in AMJ08 Return P/E high Bharti -10.32 46.13 Avaya -20.24 6.99 HFCL -24.69 9.69 MTNL -9.62 10.90 Reliance -15.06 53.00 Sterlite technologies 10.74 32.77 Tata Teleservices -15.11 0.00 Tata communication -30.16 38.05 Source: BSE India, Anandrathi; Cygnus Research

Telecom Equipment Manufacturers
Like service providers, telecom equipment manufacturers also remained losers at the stock market with erosion of market cap in AMJ08. Avaya and HFCL saw decline in relative market cap by 20.24% and 24.69% in AMJ08. Sterlite’s share prices saw surge in April and May but declined in June with positive return of 10.74% in AMJ08.

© Cygnus Business Consulting & Research Pvt. Ltd. 2008

13

QPAC-Indian Telecom Industry- April-June 2008

COMPANY ANALYSIS
1. Airtel
Year End March 08 (A) March 09 (E) March 10 (E) Net Sales (Rs m) 257035.10 369552.99 497168.83 PAT (Rs m) 62442.00 92062.30 123356.53 EPS (Rs) 32.92 48.53 65.03 P/E 25.10 17.02 17.02 ROE 31% 32% 43% ROCE 29% 32% 32% Rs m Quarter Y/E March Net Sales Change EBITDA Change Depreciation Interest Other Income PBT TAX Tax Rate PAT Change AMJ07 (A) 56116.20 52% 23188.80 65% 23188.80 16477.90 798.30 19075.10 4945.90 26% 14129.20 73% AMJ08 (E) 77606.12 38% 32594.57 47% 32594.57 23437.05 698.46 22040.14 4809.43 22% 17230.71 22% JAS08 (E) 88692.70 46% 37250.93 64% 37250.93 26785.20 798.2343 25188.73 2994.12 12% 22194.61 37% Industry Aggregate AMJ 08 (E)
123436.52 25% 43737.79 32% 16530.13 (811.27) 2123.46 30142.39 6293.93 21% 23848.46 34%

Full Year Ended March 08 (A) 257035.10 44% 105010.30 48% 32806.30 4837.10 2358.60 69725.50 7283.50 10% 62442.00 55% March 09 (E) 369552.99 44% 155212.26 48% 46933.23 6651.95 3325.98 104953.05 12890.75 12% 92062.30 47% March 10 (E) 497168.83 35% 208810.91 35% 63140.44 9446.21 4474.52 140698.78 17342.25 12% 123356.53 34%

Source: Cygnus Research Note: 1. All calculations are on the basis of trailing method 2. PBT and PAT are projected figures 3. EPS is projected on the basis of profit

In FY08, Bharti’s sales jumped by 44% compared with FY07 and are expected to grow strongly in coming years. Same trend can also be witnessed in PAT, which increased by 55% in FY08 compared with FY07. Sales in AMJ08 is expected to have increased by 38% to Rs77,606.12m from Rs56,116.20m in AMJ07. In the near future, Airtel is expected to add subscribers at the rate of more than 6m customers every quarter.

© Cygnus Business Consulting & Research Pvt. Ltd. 2008

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QPAC-Indian Telecom Industry- April-June 2008

2. MTNL
Year End March 08 (A) March 09 (E) March 10 (E) Net Sales (Rs m) 47287.51 46671.01 46436.43 PAT (Rs m) 5073.23 4720.42 4685.54 EPS (Rs) 8.05 7.49 7.44 P/E 11.99 12.89 12.89 ROE 4% 4% 4% ROCE 7% 7% 7% Rs m Quarter Y/E March Net Sales Change EBITDA Change Depreciation Interest Other Income PBT TAX Tax Rate PAT Change AMJ07 (A) AMJ08 (E) JAS08 (E) Industry Aggregate AMJ08 (E)
123436.52 25% 43737.79 32% 16530.13 (811.27) 2123.46 30142.39 6293.93 21% 23848.46 34%

Full Year Ended March 08 (A) 47287.51 -4% 8257.32 -7% 7071.82 29.61 6790.91 7946.80 2873.57 36% 5073.23 -4% March 09 (E) 46671.01 -1% 8245.42 0% 7497.25 28.00 6983.25 7703.42 2983.00 39% 4720.42 -7% March 10 (E) 46436.43 -1% 8203.98 -1% 8203.98 28.40 7874.57 7846.17 3160.63 40% 4685.54 -1%

11956.87 11771.65 11799.59 -6% -2% -2% 2617.09 2549.51 1732.09 -6% -4% -9% 1765.08 1890.00 1943.81 7.29 6.00 3.00 843.49 907.82 1536.315 1688.21 1561.33 1321.59 579.17 162.00 932.00 34% 10% 71% 1109.04 1399.33 389.59 -16% 26% -59%

Source: Cygnus Research Note: 1. All calculations are on the basis of trailing method 2. PBT and PAT are projected figures 3. EPS is projected on the basis of profit

In FY08, MTNL’s sales declined by 4% compared with FY07 and is expected to remain stagnant or decline marginally because private players are giving stiff competition to MTNL, which is a state-owned company. Same trend can be witnessed in PAT, with a decline of 4% in FY08 compared with FY07. Sales in AMJ08 is expected to have fallen by 2% to Rs11,771.65m from Rs11,956.87m in AMJ07.

© Cygnus Business Consulting & Research Pvt. Ltd. 2008

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QPAC-Indian Telecom Industry- April-June 2008

3. Reliance
Year End March 08 (A) March 09 (E) March 10 (E) Net Sales (Rs m) 134161.90 158292.73 196096.93 PAT (Rs m) 25864.50 34962.03 43512.52 EPS (Rs) 12.53 16.94 21.08 P/E 40.56 30.00 30.00 ROE 253% 342% 426% ROCE 7% 10% 12% Rs m Quarter Y/E March Net Sales Change EBITDA Change Depreciation Interest Other Income PBT TAX Tax Rate PAT Change AMJ07 (A) AMJ08 (E) JAS08 (E) Industry Aggregate AMJ08 (E)
123436.52 25% 43737.79 32% 16530.13 (811.27) 2123.46 30142.39 6293.93 21% 23848.46 34%

Full Year Ended March 08 (A) 134161.90 49% 48824.60 36% 18436.60 4451.70 104.60 26040.90 176.40 1% 25864.50 30% March 09 (E) 158292.73 18% 63734.16 31% 22944.30 5730.46 142.00 35201.40 239.37 1% 34962.03 35% March 10 (E) 196096.93 24% 78438.77 23% 28237.96 6546.39 156.00 43810.43 297.91 1% 43512.52 24%

32289.30 36453.94 38458.91 13945% 13% 16% 13026.50 14217.04 14998.97 8261% 9% 21% 4155.30 4265.11 5399.63 109.50 1396.49 1349.09 7.60 23.00 37.00 8769.30 8578.44 8287.26 396.30 58.33 56.35 5% 1% 1% 8373.00 8520.10 8230.90 9809% 2% 3%

Source: Cygnus Research Note: 1. All calculations are on the basis of trailing method 2. PBT and PAT are projected figures 3. EPS is projected on the basis of profit

In FY08, Reliance’s sales jumped by 49% compared with FY07 and is expected to grow strongly in the coming years. Same trend can be witnessed in PAT, with a rise of 30% in FY08 compared with FY07. Sales in AMJ08 is expected to jump by 13% to Rs36,453.94m from Rs32,289.30m in AMJ07. In the coming quarters, Reliance is expected to add subscribers at the rate of more than 4m customers every quarter. 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.

© Cygnus Business Consulting & Research Pvt. Ltd. 2008

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QPAC-Indian Telecom Industry- April-June 2008

4. Tata Communications
Year End March 08 (A) March 09 (E) March 10 (E) Net Sales (Rs m) 38468.50 41612.23 42512.23 PAT (Rs m) 8632.30 8916.04 12025.84 EPS (Rs) 30.29 31.28 42.20 P/E 16.96 16.42 16.42 ROE 14% 14% 18% ROCE 14% 13% 16% Rs m Quarter Y/E March Net Sales Change EBITDA Change Depreciation Interest Other Income PBT TAX Tax Rate PAT Change AMJ07 (A) AMJ08 (E) JAS08 (E) Industry Aggregate AMJ08 (E)
123436.52 25% 43737.79 32% 16530.13 (811.27) 2123.46 30142.39 6293.93 21% 23848.46 34%

Full Year Ended March 08 (A) 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% March 09 (E) 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% March 10 (E) 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%

10081.30 10689.18 9% 6% 2327.00 2463.72 9% 6% 928.90 987.00 19.40 20.00 273.20 489.00 1651.90 1945.72 610.30 567.00 37% 29% 1041.60 1378.72 14% 32%

9955.81 5% 1479.21 5% 911.00 10.00 456 1014.21 234.00 23% 780.21 27%

Source: Cygnus Research Note: 1. All calculations are on the basis of trailing method 2. PBT and PAT are projected figures 3. EPS is projected on the basis of profit

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 sales is expected to increase steadily as it reaches out to new customers in the rural areas. In AMJ08, the company’s sales is expected to have grown to Rs10n689.18m, increasing by 6%.

© Cygnus Business Consulting & Research Pvt. Ltd. 2008

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QPAC-Indian Telecom Industry- April-June 2008

5. Tata Teleservices
Year End March 08 (A) March 09 (E) March 10 (E) Net Sales (Rs m) 17071.90 20144.84 23368.02 PAT (Rs m) -1257.40 587.87 2585.40 EPS (Rs) -0.69 0.32 1.43 P/E -40.45 86.52 86.52 ROE -3% 3% 12% ROCE 1% 6% 10% Rs m Quarter Y/E March Net Sales Change EBITDA Change Depreciation Interest Other Income PBT TAX Tax Rate PAT Change AMJ07 (A) AMJ08 (E) JAS08 (E) Industry Aggregate AMJ08 (E)
123436.52 25% 43737.79 32% 16530.13 (811.27) 2123.46 30142.39 6293.93 21% 23848.46 34%

Full Year Ended March 08 (A) 17071.90 21% 4031.40 40% 4393.50 1710.10 824.10 -1248.10 9.30 -1% -1257.40 NA March March 10 09 (E) (E) 20144.84 23368.02 18% 5753.58 43% 4250.00 1712.31 805.79 597.07 9.20 2% 587.87 NA 16% 7608.88 32% 7608.88 4353.60 934.72 2601.00 15.60 1% 2585.40 340%

3933.40 21% 851.50 47% 1036.00 250.00 152.20 -282.30 2.00 -1% -284.30 NA

4641.41 4936.77 18% 18% 1253.18 1382.29 47% 43% 1002.16 1008.16 394.52 419.63 185.66 197.47064 42.16 151.98 2.00 2.00 5% 1% 40.16 149.98 NA NA

Source: Cygnus Research Note: 1. All calculations are on the basis of trailing method 2. PBT and PAT are projected figures 3. EPS is projected on the basis of profit

Tata Teleservices is running into losses since last few years but is expected to show profit in FY09 onwards. In FY08, the company’s sales jumped by 21% to Rs17,071.90m compared with FY07. The PAT of the company remained in loss at Rs1,257m in FY08. In the AMJ08 quarter, the company’s sales is expected to have jumped by 18% to Rs4,641m compared to AMJ07.

© Cygnus Business Consulting & Research Pvt. Ltd. 2008

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QPAC-Indian Telecom Industry- April-June 2008

6. Avaya Global Connect
Year End March 08 (A) March 09 (E) March 10 (E) Net Sales (Rs m) 5520.67 5765.00 5909.00 PAT (Rs m) 280.05 396.62 501.58 EPS (Rs) 19.72 27.93 35.32 P/E 8.39 5.92 5.92 ROE 197% 279% 352% ROCE 21% 24% 25% Rs m Quarter Y/E March Net Sales Change EBITDA Change Depreciation Interest Other Income PBT TAX Tax Rate PAT Change AMJ07 (A) 1391.51 22% 24.92 0% 146.81 158.74 6.77 59.00 99.74 169% -40.74 NA AMJ08 (E) 1453.09 4% 25.00 0% 203.91 208.91 0.00 32.00 176.91 553% -144.91 NA JAS08 (E) 1393.10 4% 0.00 8% 224.98 231.98 0.00 62.00 169.98 274% -107.98 NA Industry Aggregate AMJ08 (E)
123436.52 25% 43737.79 32% 16530.13 (811.27) 2123.46 30142.39 6293.93 21% 23848.46 34%

Full Year Ended March 08 (A) 5520.67 -2% 462.54 -44% 105.47 -42.64 60.77 460.48 180.44 39% 280.05 -56% March 09 (E) 5765.00 4% 630.12 36% 108.00 -35.00 0.00 557.12 160.50 29% 396.62 42% March 10 (E) 5909.00 2% 709.08 13% 108.00 -44.00 0.00 645.08 143.50 22% 501.58 26%

Source: Cygnus Research Note: 1. All calculations are on the basis of trailing method 2. PBT and PAT are projected figures 3. EPS is projected on the basis of profit

Avaya Global connect has shown marginal decline in its sales in FY08 by 2% to Rs5,520.67m compared with FY07. In AMJ08, the company’s sales is expected to have increased to Rs1,453.09m compared with Rs1,391.51m of AMJ07 at the growth of 4%. The 3G technology and the arrival of foreign players like Vodafone are likely to spur the growth of telecom equipment in the country.

© Cygnus Business Consulting & Research Pvt. Ltd. 2008

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QPAC-Indian Telecom Industry- April-June 2008

7. HFCL
Year End March 08 (A) March 09 (E) March 10 (E) Net Sales (Rs m) 3495.92 3677.00 3924.00 PAT (Rs m) -1505.50 -1118.27 -869.38 EPS (Rs) -3.40 -2.53 -1.96 P/E -5.57 -7.50 -7.50 ROE -38% -28% -22% ROCE -1% -1% -1% Rs m Quarter Y/E March Net Sales Change EBITDA Change Depreciation Interest Other Income PBT TAX Tax Rate PAT Change AMJ07 (A) 1107.70 -50% 61.10 -8% 64.70 155.60 1.60 -157.60 0.40 0% -158.00 NA AMJ08 (E) 1095.00 -1% 56.40 0% 65.00 123.00 3.00 -128.60 2.00 -2% -130.60 NA JAS08 (E) 900.00 -1% 47.00 4% 68.00 154.00 5.00 -170.00 1.00 -1% -171.00 NA Industry Aggregate AMJ08 (E)
123436.52 25% 43737.79 32% 16530.13 (811.27) 2123.46 30142.39 6293.93 21% 23848.46 34%

Full Year Ended March 08 (A) 3495.92 -69% -552.16 -127% 271.62 693.73 16.46 -1501.05 4.45 0% -1505.50 NA March 09 (E) 3677.00 5% -342.27 NA 272.00 518.00 19.00 -1113.27 5.00 0% -1118.27 NA March 10 (E) 3924.00 7% -110.88 NA 286.00 485.00 22.00 -859.88 9.50 -1% -869.38 NA

Source: Cygnus Research Note: 1. All calculations are on the basis of trailing method 2. PBT and PAT are projected figures 3. EPS is projected on the basis of profit

HFCL’s sales have declined tremendously by 69% in FY08 to Rs3,498.92m compared with FY07. In AMJ08, the company’s sales is expected to have declined by 1% to Rs1,095m compared with AMJ07. But in the coming years, the company’s sales is expected to increase steadily with the growth in domestic requirement of telecom equipment by service providers.

© Cygnus Business Consulting & Research Pvt. Ltd. 2008

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QPAC-Indian Telecom Industry- April-June 2008

8. Sterlite
Year End March 08 (A) March 09 (E) March 10 (E) Net Sales (Rs m) 16857.90 20854.00 24375.00 PAT (Rs m) 1007.20 1639.63 1980.13 EPS (Rs) 16.35 26.62 32.15 P/E 9.96 6.12 6.12 ROE 19% 25% 25% ROCE 14% 17% 20% Rs m Quarter Y/E March Net Sales Change EBITDA Change Depreciation Interest Other Income PBT TAX Tax Rate PAT Change AMJ07 (A) 2395.60 147% 83.20 34% 252.00 163.50 24.90 163.50 161.90 99% 1.60 281% AMJ08 (E) 2963.47 24% 97.00 17% 315.07 219.07 12.00 219.07 196.07 90% 23.00 46% JAS08 (E) 4955.36 24% 0.34 19% 565.31 476.31 0.34 476.31 444.31 93% 32.00 30% Industry Aggregate AMJ08 (E)
123436.52 25% 43737.79 32% 16530.13 (811.27) 2123.46 30142.39 6293.93 21% 23848.46 34%

Full Year Ended March 08 (A) 16857.90 43% 2043.40 84% 371.70 408.40 41.10 1304.40 297.20 23% 1007.20 82% March 09 (E) 20854.00 24% 2815.29 38% 414.00 449.00 44.34 1996.63 357.00 18% 1639.63 63% March 10 (E) 24375.00 17% 3290.63 17% 427.00 482.00 45.50 2427.13 447.00 18% 1980.13 21%

Source: Cygnus Research Note: 1. All calculations are on the basis of trailing method 2. PBT and PAT are projected figures 3. EPS is projected on the basis of profit

Sterlite is the only company among the equipment manufacturers under review to show strong growth in FY08 compared with FY07. The company’s sales jumped by 43% to Rs16,857.90m in FY08 compared with FY07. In AMJ08, sales of the company is expected to have increased by 24% compared with AMJ07 to reach Rs2,963.47m. In the coming years, the company is expected to achieve high sales targets.

© Cygnus Business Consulting & Research Pvt. Ltd. 2008

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QPAC-Indian Telecom Industry- April-June 2008

SOURCES & METHODS FOR COMPANY PROJECTIONS
Sources Company annual reports Press releases BSE India Research reports related to Economy, Industry and Company Methods Understanding companies’ product services Understanding industry and economic indicators and general economic scenario Understanding the dynamics between the companies and the industry in relation to demand and supply, technology, regulation, inflation, etc Understanding recent strategies and initiatives taken by companies such as product launches, capacity additions and M&As Making revenue projections based on the expected business strategies and financial analysis Validating the financial projections of the company with the overall business strategy Calculating the cost structure on the basis of sales and past and present trends in the industry Analysing quarterly growth rates and growth rates of last 8 quarters

The cut-off date for AMJ quarter results is June 20, 2008. Quarterly performance analysis of companies announcing their results after this date is based on Cygnus estimates.

© Cygnus Business Consulting & Research Pvt. Ltd. 2008

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