fyp equity analysis telecom sector anand rathi

7/28/2019 Fyp Equity Analysis Telecom Sector Anand Rathi

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A PROJECT REPORT

ON "EQUITY ANALYSIS OF TELECOM SECTOR

FOR "ANAND RATHI SECURITIES LTD.

BY

"SHILPA MANDHAN"

UNDER THE GUIDANCE OF

"PROF. MAHESH HALALE"

SUBMITTED TO

"UNIVERSITY OF PUNE"

IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE

AWARD OF THE DEGREE OF MASTER OF BUSINESS

ADMINISTRATION (MBA)

VISHWAKARMA INSTITUTE OF MANAGEMENT

PUNE-411048

www.final-yearproject.com | www.troubleshoot4free.com/fyp/


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TO WHOMSOEVER IT MAY CONCERN

This is to certify that Ms. Shilpa Mandhan is a bonafide student of

Vishwakarma Institute Of Management, Pune. She has successfully

carried out his Summer Projecttitled , Equity Research of Telecom sector.

This is the original study of Ms. Shilpa Mandhan and important

sources used by her have been acknowledged in his report. This report is

submitted in the fulfillment of two-year full time course of MBA (2006-

2008) as per the rules of the Pune University. She has worked under our

guidance and direction.

Dr. Sharad Joshi Prof. Mahesh Halale.

(Director VIM) (Project guide)



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ACKNOWLEDGEMENT

Talent and capabilities are of course necessary but opportunities and good

guidance are two very important things without which no person can climb those

infant ladders towards progress.

I am really thankful to ANAND RATHI SECURITIES PVT LTD.,

PUNE for giving me the permission to carry out my summer internship in their

esteemed organization.I want to express my deep sense of gratitude to the management and staff of

ANAND RATHI SECURITIES, for the support, cooperation and briefings they

provided during the internship to make it a success.

I express my sincere thanks to Prof. Mahesh Halale and Dr. Sharad L.

Joshi, Director, Vishwakarma Institute of Management, Pune for their valuable

advice and guidance. They are always a source of inspiration for me.

My thanks are also due to the faculty and non-faculty member of

Vishwakarma Institute of Management, Pune for their cooperation and support in

completion of my project.

Last but not least, I thank my parents, friends for their wholehearted

support in this effort of mine.

Shilpa Mandhan



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CONTENTS

Sr.

No.

TOPIC Page

No.

1 Executive summary 1

2 Objective and scope of the study 3

3 Company Profile 4

4 About Equity Analysis 11

5 Research methodology 15

6 Theoretical Framework 17

7 Analysis and Interpretation of data 39

8 Findings 65

9 Recommendation 67

10 Limitation 68

11 Assumptions 69

12 Conclusion 70

13 Bibliography 71



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CHAPTER I

EXECUTIVE SUMMARY

The field of equity research is very vast and one has to look into various aspects

of the functioning of the company to get to any conclusion about the possible

performance of the company in the market. Investors like warren buffet made a fortune

out of investments in the stock market, which is quiet impossible without proper research

about the companies. The field of equity research is full of challenges. It is your door to

fame, fortune and, above all, professional challenge. In a world that is shrinking in size

due to information technology and blurring boundaries between nations, the stock market

(or the equities market), which is considered to be in its infant stage, is all set to grow insize.

The project on Equity Analysis of Telecom Sector was carried out in Anand

Rathi Securities Pvt Ltd., Pune, a very well known company in the field of stock broking

and capital market services sector.. The duration of the project was two months i.e from

1st

June 2007 to 31st

July 2007. These two months were not only limited to learning and

devoting time towards equity research but it also provided an insight on what various

services such broking houses provide and what efforts are required to manage such

organizations.

The reason behind choosing this project is that it provides hands on experience

with what goes on in the stock market on a day-to-day basis. Some value investors only

look at present assets/earnings and don't place any value on future growth. Other value

investors base strategies completely around the estimation of future growth and cash

flows. Despite the different methodologies, it all comes back to trying to buy something

for less than its worth.

The project initiated with understanding the mannerisms of the stock market

trading followed by the dynamics of the telecom sector. Some of the major players in

Telecom sector were then chosen for further analysis. These companies were further



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studied in detail with respect to their financials and the managements future plans

regarding the functioning of the company, their expansion plans, and various news about

these companies and their global forays.

Based on the complete study of the companies, Bharti Airtel Limited Looked

promising and with a view to derive maximum value from the investment Bharti Airtel

Limited, the company with strong financials, competent management personnel,

promising global forays was recommended as a Buy or Hold share. VSNL, a company

with not so strong financials was seen to be too risky and was recommended as a Sell

share.



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CHAPTER II

OBJECTIVE OF THE STUDY

To analyze the telecom industry and find the future growth opportunities.

To carry out the company analysis of the selected companies and to suggest

whether they are a viable investment option.

Also to look at the historical performance data of the company and estimate the

future performance of stocks. Looking at this information to gain an insight on the

company s future performance. It is a method of evaluating a security by attempting

to measure its future performance by examining related economic, financial and other

qualitative and quantitative factors. To estimate a value that an investor can compare

with the security's current price and figure out what sort of position to take with that

security.

SCOPE OF THE STUDY

The scope of this project is limited to only one sector i.e. telecom (service

provider) sector. This project is concerned with only one sector of companies in

the stock market. The project does not extend its scope to any other sector of

companies.

Also, the project is concerned with only two companies from among the major

players in the Telecom sector i.e. Bharti Airtel Limited and Videsh Sanchar

Nigam Limited (VSNL).



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CHAPTER III

COMPANY PROFILE

ANAND RATHI SECURITIES PVT LTD.

Anand Rathi (AR) is a leading full service securities firm providing the entire

gamut of financial services. The firm, founded in 1994 by Mr. Anand Rathi, today has a

pan India presence as well as an international presence through offices in Dubai and

Bangkok. AR provides a breadth of financial and advisory services including wealth

management, investment banking, corporate advisory, brokerage & distribution of

equities, commodities, mutual funds and insurance, structured products - all of which are

supported by powerful research teams. The entire firm activities are divided across

distinct client groups: Individuals, Private Clients, Corporates and Institutions and was

recently ranked by Asia Money 2006 poll amongst South Asia's top 5 wealth managers

for the ultra-rich. In year 2007 Citigroup Venture Capital International joined the group

as a financial partner.

PHILOSOPHY:

AnandRathi tries and understands the financial needs; to offer personal advice

and expert analysis that one one needs for assets to go Xtra mile. The ability to think far

ahead and formulate long-term strategy coupled with long hours of practice and research

are the key drivers which make wealth work harder for you.



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The company believes that the key to build wealth lies in allocating assets across

various markets, financial instruments and industry sectors. Keeping this in mind it

leverages its expertise in scientific asset allocation, to help you maximize returns and

minimize risks.

SLOGAN:

behind every successful Investor

The firm's philosophy is entirely client centric, with a clear focus on providing

long term value addition to clients, while maintaining the highest standards of excellence,

ethics and professionalism.

PRODUCT AND SERVICES:

Wealth Management.

Equities

Stocks, PMS, Derivatives, Mutual Funds

Fixed Income

Bonds, Mutual Funds Commodities & Precious Metals

Life & General Insurance

Real Estate Private Equity Fund

Currencies

Structured Products & Capital-Guaranteed Notes

Alternative & Non-correlated investments

Investment Banking and Corporate Finance.

Equity Capital Market

IPO/Rights/Secondary issues

Delisting & Open Offers

Block Deals & Private Equity



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Management Buy-outs

Advisory

Business Sale/Disposal

M&A / JVs / Strategic alliances

Valuations

Debt Advisory

Rupee & Foreign Currency

Debt Raising / Negotiation

Debt Restructuring

Creditor Settlement / OTS

Distribution and Brokerage:

Equities

Derivatives

Commodities

IPOs

Mutual Funds

Life & Non-Life Insurance

Depository Services

Bonds

Value-add services

backed by independent research teams

real-time support to clients

MILESTONES:

1994:

Started activities with consulting and institutional equity sales with staff of 15.



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1995:

Set up a research desk and empanelled with major institutional investors

1997:

Introduced investment banking businesses

Retail brokerage services launched

1999:

Lead managed first IPO and executed first M & A deal

2001:

Initiated Wealth Management Services

2002:

Retail business expansion recommences with ownership model

2003:

Wealth Management assets cross Rs1500 crores

Insurance broking launched

Launch of Wealth Management services in Dubai

Retail Branch network exceeds 50

2004:

Commodities brokerage and real estate services introduced

Wealth Management assets cross Rs3000crores

Institutional equities business relaunched and senior research team put in place

Retail Branch network expands across 100 locations within India

2005:

Real Estate Private Equity Fund Launched

Retail Branch network expands across 200 locations within India

2006:

AR Middle East, WOS acquires membership of Dubai Gold & Commodity

Exchange (DGCX)



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Ranked amongst South Asia's top 5 wealth managers for the ultra-rich by Asia

Money 2006 poll

Ranked 6th in FY2006 for All India Broker Performance in equity distribution in

the High Networth Individuals (HNI) Category

Ranked 9th in the Retail Category having more than 5% market share

Completes its presence in all States across the country with offices at 300+

locations within India

2007:

Citigroup Venture Capital International picks up 19.9% equity stake

Retail customer base crosses 100 thousand

Establishes presence in over 350 locations

CLIENTELE

Industrial groups:

Birlas - Birla Sunlife, Grasim, Hindalco, Indal, Indian Rayon, Indo Gulf,

Transworks;Vedanta- Balco, Hindustan Zinc, Sterlite, Vedanta; Tatas- Tata

Investments, TISCO, Tata Motors, Trent, VSNL

Multinationals:

Bayer, Clariant, Color Chem, Datacraft, Godfrey Philips, Goodlass Nerolac,

Nestle,Grindwell Norton, HLL, Kuoni Travel, Quest International, Syngenta, Thomas

Cook, Wartsila

Banks / FIs:

Andhra Bank, BoI, BOB, BoM, Canara Bank, HDFC Ltd, IDFC, GIC, LIC, PNB, United

Bank



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Corporates :

ACC, Berger, Boots Piramal, Century Textiles, Cosmo Films, CRISIL, Crompton

Greaves, Dabur, Datamatics, DCM, Deepak Fertilizers, DSL Software, East India Hotels,

Emami, GE Shipping, Globus, Godrej, Gokuldas Exports, Gujarat Ambuja, Gujarat

Pipavav, HCL group, Himat Singka Siede, ICICI Ventures, Infosys PF, ITC, Jet Airways,

Jindal Group, L&T, Mastek, M&M, NCDEX, Radico Khaitan, Raymonds, Sonata

Software, Varun Shipping, West Coast Paper, Wipro

Private Clients:

Individuals / Families across India, Middle East and SE Asia (with minimum relationship

size of USD 1 million+ / Rs 5 crores each)

Priority Clients:

Individuals / Families with minimum relationship size of Rs 50 lacs

Competitors:

In this field of financial services there are a whole lot of companies and a fewkeep adding every year. To remain at the top of this sector is no mean task and there are a

lot of big companies which provide stiff competition to Anand Rathi Securities in this

regard. The list of competitors would include:

Motilal Oswal

India Infoline

Indiabulls

Geojit

Sharekhan



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Branches and Offices:

Corporate Office:

JK Somani Bldg,

British Hotel Lane,

Bombay Samachar Marg,

Mumbai 400 023

Tel: +91 22 663 77000 Fax: +91 22 663 77070

Brokerage and Retail Head Office:

B-2, Shubham Centre,

5th Floor, Cardinal Gracious Road,

Chakala, Andheri (E),

Mumbai 400 099

Tel: +91 22 4001 3700 Fax: +91 22 4001 3770

Key Locations:

New Delhi

Ahmedabad

Chennai

Kolkata

Bangalore

Hyderabad

Pune

Dubai

Bangkok



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CHAPTER IV

EQUITY ANALYSIS

Professional investor will make more money & less loss than, who let their heartrule. Their head eliminate all emotions for decision making. Be ruthless & calculating,

you are out to make money. Decision should be based on actual movement of share price

measured both in money & percentage term & nothing else. Greed must be avoided

patience may be a virtue, but impatience can frequently be profitable.

In Equity Analysis,anticipated growth and calculations are based on considered

FACTS & not on HOPE. Equity analysis is basically a combination of two independent

analysis, namely fundamental analysis & Technical analysis. The subject of Equity

analysis, i.e. the attempt to determine future share price movement & its reliability by

references to historical data is a vast one, covering many aspect from the calculating

various FINANCIAL RATIOS, plotting of CHARTS to extremely sophisticated

indicators.

A general investor can apply the principles by using the simplest of tools: pocket

calculator, pencil, ruler, chart paper & your cautious mind, watchful attention. It should

be pointed out that, this equity analysis does not discuss how to buy & sell shares, but

does discuss a method which enables the investor to arrive at buying & selling decision.

EQUITY ANALYSIS

Economic Analysis Industry Analysis Company Analysis

Fundamental Analysis Technical Analysis



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Economic Analysis:

An Economic analysis is the filter or scanner of the surrounding at the time of

equity research, which help the analyst to make a rational decision. In the economic

analysis, the following factors are considered as a whole with a perspective of industry &

also considered with a perspective of individual company:

1. Inflation rates.

2. Economic growth.

3. Governmental Exim & other policies regarding businesses & industry.

4. LPG (liberalization, privatization, globalization)

5. Interest rates: standards of returns for measurement.

6. FII s perception to share market.

7. Political feel.

Industry Analysis:

Since each industry is unique, a systematic study of its specific features and

characteristics must be an integral part of the investment decision process. Industry

analysis should focus on the following:

Structure of the industry.

Nature of the competition.

Nature and prospects of the demand.

Costs, efficiency and profitability.

Technology and research.

Company Analysis:

In the company analysis, the investor assimilates the several bits of information

related to the company and evaluates the present and future values of the stock. The risk

and return associated with the purchase of the stock is analysed to take better investment



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decisions. The present and future values of the stock are affected by a number of factors

such as:

Earnings

Capital structure

Management

Competitive edge

Operating efficiency

Financial performance

Fundamental Analysis:

Fundamental analysis is the study of economic, industry and company conditions

in an effort to determine the value of a company s stock. Fundamental analysis typically

focuses on key statistics in company s financial statements to determine if the stock price

is correctly valued.

Most fundamental information focuses on economic, industry and company

statistics. The typical approach to analyzing a company involves four basic steps:

1 Determine the condition of the general economy.

2 Determine the condition of the industry.

3 Determine the condition of the company.

4 Determine the value of the company s stock

Fundamental analysis facilitates comparison between two companies. It reflects

the financial efficiency & financial position of a company. Fundamental analysis is

fruitful in preparing plans for the future. However, fundamental Analysis should not be

considering as the ultimate objective test but it may be carried further based on the

outcome & revelations about the cause of variations. Fundamental Analysis is helpful in

forecasting likely position of company in near future.

Fundamental analysis is a very powerful analytical tool useful for measuring

performance of an organization. The ratio analysis concentrates on the inter-relationship

among the figures appearing in the financial and accounting statements. The ratio



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analysis helps the investor to analyze the past performance of the firm and to make

further future projection regarding financial position. Ratio analysis allows interested

parties like shareholders, investors, creditors and government to make an evaluation of

financial aspect of a firm s performance.

Fundamental Analysis consist of following:

Study of Balance sheet

Study of Profit and Loss a/c

Study of Ratios

Technical analysis:

Technical analysis refers to the study of market generated data like prices and

volume to determine the future direction of prices movements. Technical analysis mainly

seeks to predict the short-term price travels. It is important criteria for selecting the

company to invest. It also provides the base for decision-making in investment. It is one

of the most frequently used yardstick to check and analyze underlying price progress. For

that matter a variety of tools are used.

The Technical analysis is helpful to general investor in many ways. It provides

important & vital information regarding the current price position of the company.

Technical analysis involves the use of various methods for charting, calculating

and interpreting graph & chart to assess the performances & status of the price. It is the

tool of financial analysis, which not only studies but also reflecting the numerical &

graphical relationship between the important financial factors.

The focus of technical analysis is mainly on the internal market data, i.e. prices &

volume data. It appeals mainly to short term traders. It is the oldest approach to equity

investment dating back to the late 19th century.



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RESEARCH METHODOLOGY

Research is often described as an active, diligent and systematic process of

inquiry aimed at discovering, interpreting and revising facts. This intellectual

investigation produces a greater understanding of events, behavior or theories and makes

practical applications through laws and theories. The term research is also used to

describe a collection of information about a particular subject, and is usually associated

with science and scientific method.

BASIC RESEARCH:

Basic research is also called as fundamental or pure research. Its primary

objective is the advancement of knowledge and the theoretical understanding of the

relations among the variables. It is exploratory and often driven by researchers curiosity

or interest. It is conducted without any practical end in mind. Basic research often lays

down the foundation for further applied research.

APPLIED RESEARCH:

Applied research is done to solve specific, practical questions. Its primary

objective is not to gain knowledge for its own sake. It is usually descriptive in nature. It isalmost always done on the basis of basic research.

As far as equity research is concerned there are two types of research methods

that are followed:

Fundamental analysis

Technical analysis

Financial statement analysis is the biggest part of Fundamental analysis also

known as quantitative analysis, it involves looking at historical performance data to

estimate the future performance of stocks whereas Technical analysis does not care one

bit about the value of the company, it is only interested in the price movements of the

company s share in the market.



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This project deals with the fundamental analysis aspect of the equity research.

The researcher in this project has tried to look into the details of the financial statements

of the companies, the environment surrounding the telecom sector, the latest

developments in this regard, the management discussions on the part of every company

and the government policies concerned with the telecom sector.

DATA COLLECTION:

Primary data for a project is the first hand information regarding the project being

studied. In this regard the primary data for this project would be getting the

necessary information from the company management by an interview, telephonic

conversation or direct mail.

Secondary data for a project would be the collection of information that has a

bearing on the outcome of the project from secondary sources like news, press

releases, internet etc.

The data collected for this project was from a secondary source. The data was

complied with the help of sources like News articles, Internet, Capitaline software. In this

research, primary data could not be gathered as the company officials could not be

contacted for a one to one interview or a telephonic interview.



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CHAPTER V

THEORETICAL FRAMEWORK

BASIC MODEL OF A TELECOM COMPANY

A brief description of the four major segments that make up the telecom industry

is as follows:

I. Wireless/Mobile/Cellular services:

The cellular mobile service providers (CMSPs) make available mobile telephone

services where by a customer on possession of a handset and obtaining a connection by

way of SIM card (for GSM based technology phones) is able to connect to the network



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of the service provider. This is a wireless service that allows the customer to connect

with other wireless customers as also wire line customers. A CMSP derives its revenues

by way of tariff charges for outgoing calls made by subscribers on its network.

II. Fixed line services:

The fixed (wireline) services are dominantly provided for by the PSUs (BSNL

and MTNL) in India. A customer can obtain a connection where by a wireline provides

him with the last mile connectivity on the national telecom network. Although this had

been a dominant mode of telecommunication in the past, it is fast being replaced with

mobile telephony, which has the advantage of connectivity on the move. The

fundamental business of a fixed line operator is almost similar to that of a CMSP, in

terms of ARPU and Subscriber base.

III. Internet/Broadband:

The Internet services are provided either by telecom service providers or

independent Internet service providers (ISP) who deal exclusively in providing this

service. There are two forms of Internet that are currently popular - the dial-up

connections and the broadband connections. While both these forms are used for

transmitting and receiving data, a broadband connection (Internet access that allows

minimum download speed of 256 kilo bits per second from the point of presence of the

service provider) allows you to transmit data at faster rate.

IV. Enterprise services:

These services are used by large and medium corporates for data transfer between

their offices and/or their suppliers' offices, which may be spread in a city, or a country,

or even across continents. The need of users to have a seamless connectivity with their

associates is what drives this business for telecom companies. Considering that this

business takes care of data transfer needs of corporates, who are not as 'affordability'

conscious as the individuals, telecom companies generally earn higher margins on

Enterprise services than they earn on any of the other three business lines. IT and BPO

sectors, whose business is so data dependent, are the major users of Enterprise services.



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TELECOM COMPANY - REVENUE ANALYSIS

Let us first take up the revenue analysis of the various segments of the telecom

service providers and then move on to their cost structure.

A Cellular Mobile service provider (CMSP) derives its revenues by way of tariff

charges for outgoing calls made by subscribers on its network. As such, revenue for a

CMSP is simply a multiple of average revenue per subscriber per month (ARPU) and

number of subscribers. Let us now understand what determines the ARPUs and

subscriber base.

Average Revenue Per User (ARPU):

Average revenue per subscriber per month, or ARPU, is the amount of money that

a CMSP generates per subscriber per month. It can be obtained by dividing the total

wireless revenues by number of subscribers and then dividing the output by number of

months in a period (i.e., 3 months for a quarter and 12 months for a year's calculation of

ARPU). To even out the volatility in ARPUs, if any, it is better to arrive at the figure by

averaging the wireless revenues and subscriber base for the latest two years. However,

considering the rapid pace of subscriber addition for Indian CMSPs, ARPU calculated as

dividing the trailing 12-months wireless revenues by latest subscriber base is also an

appropriate figure. For instance, if a CMSP has earned a total of Rs 50,000 m as wireless

revenues in the past 4 quarters (or trailing 12 months) and its current subscriber base

stands at 20 m, its ARPU will be Rs 208 per month (Rs 50,000 m of wireless revenues

divided by 20 m subscribers divided by 12 months).

Another way to arrive at ARPU is to multiply the average number of minutes of

usage (MOU) per subscriber per month with the per minute tariff. Most of the Indian

CMSPs generally disclose their MOUs and per minute tariff and as such, these can be

used to determine the ARPU.

The ARPU in current industry scenario is decreasing day-by-day due to the

decline in the margins and also competition.



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Subscribers:

Growth in a CMSP's subscriber base is dependent on several factors, the key

amongst them being:

Economic growth: With growth in the economy, and the consequent increase in

activity, it requires people to be in touch even when on the move. This brings out a

pressing need for owning mobile/cellular phones. Thus, with a growth in economic

activity there will be more and more people subscribing to telecom services, thus leading

to growth in subscriber base for CMSPs.

Rising income level: As the real income levels in a society rise, more and more

people are able to afford usage of cellular phones. Also, with rising incomes, as personal

consumption expenditure (as percentage of income) reduces, the consumer does not feel

the pinch of rising telephone bill, thus having the propensity to talk more, thus leading to

higher MOUs for telecom services providers.

Affordability: While there may be a need to be in constant touch as outlined by the

above two factors, it is the increased affordability that really increases the demand for

such services. The affordability is interplay of lower tariff charges and availability of

cheaper handsets. While lower handset costs make mobile more affordable at the entry

level thus allowing more people to be a part of the 'mobile community', lower tariffsallow for an increased usage of telecom services, while not having such an overbearing

impact on telephone bills.

Apart from the usual - economic growth and rising income levels - the growth of

the Internet business is dependent upon:

PC penetration:

Internet penetration in India is currently at very low levels, as compared to its

developing peers. This is set to take off with the rise in PC penetration, which will again

be a consequence of affordability in terms of lower PC costs and reduced cost of data

transfer. The cost of data transfer depends on whether one is using a dial-up or a

broadband connection. The dial-up package entails a fixed charge for Internet access and

a variable charge for the telephone connection. On the other hand, tariffs for broadband



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are usually designed on the basis of quantum of data transmission. As there is

rationalisation of these tariffs going forward, Internet will become more affordable and

this will drive growth, as the recurring expenditure will reduce.

Parental encouragement:

An interesting change that has come is the way parents now look at computers.

The age of a typical computer user has dropped significantly as parents increasingly

realise the growing importance of computers in education in the years to come. So, unlike

most products where children are targeted to drive sales of consumer durables, in the case

of computers, it is the parents who are going all out to ensure that their child grows up to

be a computer literate. Thus, with computers coming into homes, it will not be long

before parents will wish their children to be wired to the web owing to the rich source of

information.



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TELECOM COMPANY COST ANALYSIS

After discussing the revenue aspects of telecom service providers, let us nowunderstand the major cost heads for these companies. These cost heads can be broken up

into regulated and non-regulated costs. Entry fee, access deficit charge and license fee are

regulated. On the other hand, sales, general and administrative (SG&A) and employee

expenses are non-regulated in nature.

Entry fee:

The companies providing national and international long distance (NLD and ILD)

services are required to pay a flat entry fee of Rs 25 m each (from earlier fees of Rs 1,000

m and Rs 250 m respectively). These fees are to be paid to the central government for

obtaining a license for providing these services.

Access deficit charge:

The government also collects from the cellular operators an access deficit charge.

The charge payable is 1.5% percent of non-rural annual gross revenue (AGR) of the

telecom service providers and the amount collected is used to subsidise the telecom

service provided by BSNL in rural areas.

License fees:

Telecom companies are required to pay an annual license fee of 6% of their AGR

to the Government of India. Licenses offered to the telecom players are for a limited

period of time and these are required to be renewed on expiry.

SG&A expenses:

Telecom companies incur expenditure in the form of advertisement costs for

enhancing their visibility and also to make their brand more appealing to the consumers.

Expenses are also incurred on customer acquisition and on maintenance of telecom

equipment and network.



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Personnel expenditure:

These are costs incurred for maintaining the staff for executing the telecom

companies' marketing strategies, for general administrative purposes, for maintenance

and repair of telecom infrastructure, and customer relationship management in call

centers.

Apart from these operating costs, telecom companies also incur cost for servicing

debt and tax payments. Telecom is an operating leverage play (indicates that each new

subscriber will come at a higher profitability than the previously added subscriber), and,

as such, the benefits of faster subscriber addition are directly seen on companies'

improving operating profitability (as fixed costs are apportioned over a larger subscriber

base).



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KEY FINANCIAL METRICS:

Before investing in a telecom stock (or for that matter any stock), an investor

must closely look at the key financial operating and profit ratios of the company. The

ratios are nothing but an arithmetical representation of a company's financial data that

help in gauging the health of the company. Key ratios to be look at for a telecom

company are as under. It is important to look at these ratios for 3-5 years in the past,

considering that most telecom companies in India do not have a history before that.

Sales growth

Average revenue per user

Subscriber growth

EBIDTA margins or Operating margins [(Sales - Operating expenditure)/Sales)]

Interest coverage [Profit before interest and tax/Interest]

Net profit margins [Net profits/Sales]

Earnings per share

EBIDTA per share

Debt to equity

Return on equity [PAT/Equity or Net worth]

Return on capital employed [PBIT/Capital employed, which is Equity + Debt]

Free cash flow [Profit after tax + Depreciation - Dividend & Dividend Tax - Capex -

Working capital changes]

Apart from these, investors should also compare other key ratios like receivable days,

working capital turnover and asset turnover, amongst others to arrive at a final view on

the company (not the stock!).

Importantly, these ratios must not be looked at in isolation and one should look at the

past data as well to arrive at a trend, which shall give a better perspective of the

company's performance over the years. Also, an investor must compare ratios of the

company with the industry leader and its peers to gauge a company's relative

performance.



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[25]

TELECOM SECTOR IN INDIAN ECONOMY

India, emerging as a major player:

In 1975, the Department of Telecom (DoT) was separated from P&T. DoT wasresponsible for telecom services in entire country until 1985 when Mahanagar Telephone

Nigam Limited (MTNL) was carved out of DoT to run the telecom services of Delhi and

Mumbai. In 1990s the telecom sector was opened up by the Government for private

investment as a part of Liberalisation-Privatization-Globalization policy. Therefore, it

became necessary to separate the Government's policy wing from its operations wing.

The Government of India corporatised the operations wing of DoT on October 01, 2000

and named it as Bharat Sanchar Nigam Limited (BSNL). Many private operators, such as

Reliance India Mobile, Tata Telecom, Hutch, BPL, Bharti, Idea etc., successfully entered

the high potential Indian telecom market.

Growth of mobile technology:

India has become one of the fastest growing mobile markets in the world [2]. The

mobile services were commercially launched in August 1995 in India. In the initial 5-6

years the average monthly subscribers additions were around 0.05 to 0.1 million only andthe total mobile subscribers base in December 2002 stood at 10.5 millions. However,

after the number of proactive initiatives taken by regulator and licensor, the monthly

mobile subscriber additions increased to around 2 million per month in the year 2003-04

and 2004-05.

Although mobile telephones followed the New Telecom Policy 1994, growth was

tardy in the early years because of the high price of hand sets as well as the high tariff

structure of mobile telephones. The New Telecom Policy in 1999, the industry heralded

several pro consumer initiatives. Mobile subscriber additions started picking up. The

number of mobile phones added throughout the country in 2003 was 16 million, followed

by 22 millions in 2004, 32 million in 2005 and 65 million in 2006 and over 100 million



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[26]

by mid of 2007. The only countries with more mobile phones than India with 156.31

million mobile phones are China 408 million and USA 185 million.

India has opted for the use of both the GSM (global system for mobile

communications) and CDMA (code-division multiple access) technologies in the mobile

sector. In addition to landline and mobile phones, some of the companies also provide the

WLL service.

The mobile tariffs in India have also become lowest in the world. A new mobile

connection can be activated with a monthly commitment of US$ 5 only. In 2005 alone 32

million handsets were sold in India. The data reveals the real potential for growth of the

Indian mobile market.

PRESENT SCENARIO

Although India's tele-density has improved from under 4% in March 2001 to over

18% at the end of March 2007, we are way behind other developing nations. The total

annual telecom revenue is estimated to be over Rs 650 bn.

The cellular telephony segment has emerged as the fastest growing segment in the

Indian telecom industry. The mobile subscriber base (GSM and CDMA combined)

has grown from 1.9 m at the end of FY00 to 140 m at the end of July 2007. A slew of

tariff reduction in the past few years has helped the segment to gain in scale. The

cellular segment is playing an important role in the industry by making itself

available in the rural and semi urban areas where teledensity is the lowest.

As far as the Internet services are concerned, India currently has a subscriber base of

6.9 m users. Of this, around 19% is accounted for by broadband users (>=256 kbps).

The ARPU for this segment was Rs 210 at the end of FY06. PSU major, BSNL holds

the top spot with a market share of 42%, followed by MTNL with a share of 12%,.

This is followed closely by Sify, which ranks third with a market share of 11%.



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[27]

On the international basic telephony front, the end of VSNL's monopoly in 2002

brought three private players in the international basic telephony business and the

immediate effect was the fall in tariffs. In the first six months only, the tariffs fell by

50% and the trend is likely to continue. With the most favored customer status given

to VSNL by fixed line majors like BSNL and MTNL going away, the segment has

been witness to fierce competition.

KEY POINTS:

Supply:

Intense competition has resulted in prompt service to the subscribers. However,

smaller towns and villages continue to have waiting periods on account of non-

availability of adequate infrastructure.

Demand:

Given the low penetration levels in the country and continuously falling tariffs,demand will continue to remain higher in the foreseeable future across all the segments.

Barriers To Entry:

o High capital investments

o Older and well-established players who have a nation wide network

o License fee

o Continuously evolving technology, and

o Falling tariffs.



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[28]

Bargaining Power Of Suppliers:

Improved competitive scenario and commoditization of telecom services has led

to reduced bargaining power for services providers.

Bargaining Power Of Customers:

A wide variety of choices available to customers both in fixed as well as mobile

telephony has resulted in increased bargaining power for the customers.

Competition:

The entry of fourth cellular player and commencement of WLL services has

resulted in intense competition in the bigger cities. Reducing tariffs will hurt the new

entrants, as they will be unable to recover their high capital investments.

CHART SHOWING TOTAL TELECOM SUBSCRIBER BASE:

0

50

100

150

200

250

No.ofSubscribers(Mn)

1999 2000 2001 2002 2003 2004 2005 2006 2007

year

Total Telecom Subscriber Base

Subscriber Base

(Source: TRAI)



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[29]

The Indian telecom industry is witnessing rapid rise in subscriber base, thanks to

multiple growth drivers like:

improving demographics

lower handset prices

expansion by wireless operators

infrastructure sharing

lower regulatory levies.

SECTOR CONTRIBUTION TO SENSEX GROWTH:

SECTOR CONTRIBUTION TO SENSEX GROWTH

4.80%

2.80% 2.70% 2.40% 2.10%1.20% 0.90% 0.90% 0.80% 0.70% 0.60% 0.40%

19.40%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

Telec

omBa

nks

Ceme

nt

Softw

are

Petro

chemica

lsE&

C

Oila

ndGas

Consum

er

Metals

Pharm

aPo

wer

Auto

Sensex

SECTOR

CO

NTRIBUTION(%)

CONTRIBUTION TO SENSEX

(Source: Merill Lynch Research)

The Sensex has grown immensely since 2005 and is still increasing. Currently it

has reached 15,000. This growth would not have been possible without the help and

support of the various sectors in the industry. One of the sectors which has a major

contribution in this growth is the Telecom Sector. In the last year, Sensex grew by 19.4%

whereas the contribution of Telecom sector was seen to be 4.8%.



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[30]

TRENDS IN INDIAN CELLULAR SERVICES

Cellular Subscriber Base

Operator May'2007 May'2006 Var. (%)

BSNL (21) 27994410 18000908 56%

Bharti Airtel (23)* 40743725 21860212 86%

Idea (11) 15266618 8062961 89%

Hutchison Essar (18)$ 18083466 11040797 64%

Spice Communication (2) 3007118 2027551 48%

MTNL 2547895 2097478 21%

BPL Mobile (1) 2091353 1792966 17%

Dishnet Wireless (7) 1874481 424475 342%

Reliance Telecom (23)# 4014404 2049254 96%

Total Cellular Subscriber

base 130607955 75290092 73%

Source: COAI & AUSPI

Figure in the brackets denotes the current operating circles

* Include the WLL subscribers

# Include the GSM Subscribers in 7 telecom circles, the subscribers of Reliable Internet

in Kolkata circle and the WLL subscribers

$ Includes the subscribers of BPL Cellular but excludes subscribers of BPL Mobile

Mumbai



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[31]

Cellular Subscriber base

0

50

100

150

200

250

300

350

400

450

BSNL

BhartiAirte

lIde

a

Hutch

Spice

Comm

.

MTNL

BPLM

obileDi

shnet

Relia

nceC

omm

.

Operator

SubscriberBase

(inlakhs)

May'2006

May'2007

( Source: Cellular Operators Association of India)

Indian Telecom subscriber base has increased rapidly by 47% to touch

218.85 million in May 2007, from 148.39 million in May 2006. The surge in

subscriber based was powered by impressive 73% spurt in GSM cellular subscriber

base to 130.61 million in May 2007 from 75.29 million in May 2007. Nevertheless,the country has been witnessing sustained fall in Average Revenue Per Unit (ARPU)

from Rs 375 per unit in September 2005 to Rs 335 per unit in September 2006.

Nevertheless, thanks to strong growth in subscriber base, increasing non voice

revenues and lowering fixed cost per unit, the Indian telecom service sector is set to

report buoyant growth in revenues and profitability in the short to medium term.



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[32]

MARKET-SHARE OF THE MAJOR PLAYERS IN THE TELECOM SECTOR:

Players Market-

share (%)

Bharti Airtel 22

Reliance Communication 20.3

BSNL 15.97

Hutch 10.4

Idea 8.56

Tata teleservices 9.7

Others 13.07

Total 100

From the chart given above, it is observed that Bharti Airtel leads the race with a

major market share i.e. 22%. The reason behind this is the widespread network, huge

subscriber base, plethora of services, pace with the new technology, etc. whereas reliance

communication being a comparatively late entrant has attained a significant market share.

As competition among the existing players is huge, it makes the role of new players

unnoticeable. The major players in the telecom industry cover almost 86.93% of the

market share.



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[33]

REGULATORY CHANGES

* Access Deficit Charge (ADC) regime:

A revised ADC regime has been implemented w.e.f. April 01, 2007 wherein

revenue-share ADC reduced to 0.75% of AGR and per-minute ADC on outgoing ILD

calls has been abolished. ADC on incoming calls reduced to Rs.1.00 per minute. The

revised estimate for ADC for 2007-08 is Rs. 20.5 bn

* Universal Service Obligation (USO) Tender:

The DoT has finally extended the USO subsidy to wireless networks with the

successful conclusion of bidding under the USO scheme. 7,954 towers are entitled to the

subsidy - in 19 service areas (except Metros).

* National roaming tariff:

Domestic roaming tariffs have been revised with effect from February 15, 2007.

Under the new structure, there is no rental/surcharge for national roaming and lower

ceiling for the 'per-minute charges' for roaming calls. Incoming SMS while roaming is

free though outgoing SMS rates continue under forbearance.

* Subscriber re-verification:

In November 2006, DoT directed all service providers to complete the re-

verification of their entire prepaid subscriber base by March 31, 2007, in terms of

collation of their identity/address proofs and updating of their database with subscriber

details. As DoT had imposed a penalty of Rs.1,000 per unverified subscriber after the

expiry of the deadline, most operators had to disconnect some subscribers whose

documentary proofs could not be collected until March 31, 2007.

* Increase in Foreign Direct Investment (FDI) cap from 49% to 74%:

On November 03, 2005, Government of India announced-enhancement of FDI

ceiling from 49% to 740% in the telecom sector, subject to certain preconditions.

In view of the complications involved in implementation of the preconditions, DoT



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had granted several extensions to the telecom licensees to ensure compliance. On

April 19, 2007 DoT finally notified the FDI limit with a deadline of July 18, 2007 to

report compliance.

* Terms and Conditions of resale in IPLC segment:

DoT has accepted the recommendations of TRAI on the terms and conditions on

which reselling of international bandwidth is to be permitted in India. The broad

conditions include entry fee at Rs.10 mn. License Fee at 6% of AGR, term of license

being 10 years and identical terms for FDI ceiling as applicable to ILDOs.

* Port Charges Regulation:

In February 2007, TRAI amended the existing Port Charges Regulation 2001, by

reducing the port charges payable by private operators to BSNL/MTNL w.e.f. April 01,

2007. Another significant change is that the slab rate for ports shall now be determined

on the basis of the demand made and not on the basis of ports finally allotted by BSNL.

* Regulation on QoS for broadband services:

In October 2006, TRAI issued a regulation on QoS for broadband services

offered by all access and internet service providers pursuant to a public consultation

conducted in June 2006. This regulation was implemented on January 01, 2007.

* TRAI decision on Interconnect Usage Charge for Short Message Service

(SMS):

On August 21, 2006, TRAI published its decision to refrain from specifying any

termination charge for SMS, thus leaving it under the Forbearance' category. At the same

time TRAI has expressed its concern that the tariff for premium rate SMS Is high and

apparently unrelated to cost, hinting to operators to voluntarily reduce these tariffs

* TRAI decision on roaming revenue sharing:

After a public consultation, TRAI published its decision on September 11, 2006

disallowing any revenue sharing on roaming calls. TRAI reiterated that the termination

charges prescribed by them are cost based and since no additional cost is incurred in



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[35]

terminating roaming traffic, there is no justification for higher payout to the terminating

network.

* Regulation for interconnection of Intelligent Networks (IN) of all service

providers:

On November 27, 2006, TRAI issued a regulation mandating all service

providers to provide interconnection to all eligible service providers so that subscribers of

all access providers can access the IN services offered by other service providers.

Service providers are required to enter into reciprocal and non-discriminatory agreements

for technical and commercial aspects of such connectivity within three months.

* Changes in the NLD and ILD licenses:

There have been significant changes in the NLD and ILD licenses recently.

The entry fees for these licences have been substantially reduced to Rs.25 million each

for ILD and NLD licences, which has already led to a number of new players entering the

field.



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[36]

RECENT DEVELOPMENTS

The Bharti group's application for direct-to-home (DTH) broadcasting is all set to

be cleared and soon the group may be issued a letter of intent (LoI) for the DTHservice. Recently, clarifications were sought from Bharti on its foreign direct

investment (FDI) component and the equity structure, in connection with its DTH

proposal.

Anil Ambani-promoted Reliance Blue Magic is expected to launch its DTH

service soon. Sun TV is also in the queue for DTH. As against the multi-operator DTH

scenario in India, in most countries, DTH attracts only one or two players.

Idea Cellular and Nokia Siemens Networks announced signing of a USD 500

million GSM network expansion contract. Under the contract, Nokia Siemens Network

will expand Idea Cellulars GSM/GPRS/EDGE networks to cover population centres

across six more circles. The 2-year contract includes supply and services of GSM

equipment, Intelligent Network, Value Added Services and Circuit and Packet core

equipment. Nokia Siemens Networks will deploy the latest state of art equipment like

flexi BTS, mini-ultra base stations, Release 4 architecture, media gateways and MSS

servers.

Spice Communications promoted by Dilip Modi, part of the B K Modi group and

providing cellular services in the states of Punjab and Karnataka, has lined up a public

issue to raise Rs 464 crore at lower band (Rs 41) and Rs 520 crore at upper band (Rs

46). The net proceeds from the issue are intended to be used for part repayment of long-

term debt, for payment of NLD and ILD license fee and related capital expenditures to

set up base infrastructure for NLD/ILD.

The Bangalore-based value-added services (VAS) provider OnMobile is planning

to tap the capital market with an initial public offering (IPO) of Rs 500-600 crore. Thecompanys maiden offer is expected to open during the current financial year and it

intends to invest the proceeds for its foray into the Wireless Application Protocol

(WAP) and General Packet Radio Service (GPRS) segments. The company was

incubated by Infosys Technologies in 2000, and at present the IT major holds a 14 per

cent stake in it.



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[37]

PROSPECTS OF TELECOM SECTOR

As far as the fixed line business goes, the low penetration levels in the country and the

increasing demand for data based services such as the Internet will act as major

catalysts in the growth of this segment, which has touched 50 m subscribers by the end

of FY06 (including WLL subscribers). The huge market share of public sector

behemoths, MTNL and BSNL (together they account for 82% of the total fixed line

connections) is likely to get reduced further as the penetration by private players

spreads. In spite of this the PSUs will continue to retain their dominant position this is

on account of high capital investments required in setting up a nation wide network. As

a result, the private sector players will have to rely on key business centers and pockets

of high urbanization for their growth.

Increasing choice and one of the lowest tariffs in the world have made the cellular

services an attractive proposition for the average consumer. The segment has grown at

over 73% YoY in FY06. It is being estimated that during the tenth five-year plan,

around 31.6 m subscribers would jump onto the cellular bandwagon all over India and

this would entail an investment to the tune of Rs 252.4 bn. Policy measures like

lowering of taxes on the cellular industry and benefits of enhanced FDI limits shall

further the prospects of the cellular industry.

The International Long Distance (ILD) telephony business is expected to witness

increased competition with the entry of private players. Already, private players like

Bharti, Reliance and Data Access have started providing ILD services and this has

pulled the tariffs significantly down. Although increased competition will result in

depressed revenues in the near term, low tariffs would ultimately result in increased

volumes and higher usage.

Taking the competition further in the ILD space where we saw huge tariffs fall last year

due to the entry of private players, TRAI has written to the Ministry of

Telecommunication and Information Technology to permit resale of IPLC. If the move

goes through, apart from increasing competition in this space, it is expected that the

bandwidth prices will come down by a further 20-25%. This move is also believed to

be a step forward in opening up the ILD sector



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[38]

SELECTION OF THE COMPANY

After understanding the dynamics of the telecom sector and the various issues

revolving around it, three companies were chosen from a group of players in the telecom

sector. Such companies have been chosen which showed consistent performance in the

past and were also fundamentally sound.

Some of the major players in Telecom sector are as follows:

Bharti Airtel

BPL Mobile Comm.

Escorts telecomm.

Hutchison Essar

Idea Cellular

MTNL

Reliance Communication

Spice Telecommunication

Tata Teleservices

VSNL

Time (2 months duration) being a major constraint, two companies were chosen

from the whole telecom sector. Companies chosen for further analysis are:

Bharti Airtel

VSNL



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[40]

Mobiles Servies and Infotel Services which provides broadband & Telephone, long

distance and enterprise services which offers carriers and corporates. All the services of

company is been provided under brand name AIRTEL.

The company was first GSM Operator to have more than ten million customers

and also the first telecom company to cover all the 23 telecom circles of India. The

Company has a presence in 4,676 census towns and in 207,327 non-census towns and

villages, covering an addressable population of 59% of the total population. With this

coverage facility the company became the first operator to have an All-India footprint.

BUSINESS RISK:

The business is subject to extensive regulation by the Government; which could

have an adverse effect on the business. Technical failures and natural disasters could

damage the telecommunication networks. Changes in available technology could increase

competition and the capital costs.

MARKET RISK:

There is very little market risk in this segment, considering the ever increasing

demand of the telecom services. There have been substitutes for telecom services like the

Postman, which has been available for years but the demand for it is getting decreased

whereas the demand for telecom services has never been affected due to that. There is a

permanent market for the product, and it does not face any serious market risk.

VOLUME BASED BUSINESS:

The profits of the company are totally based on the volume of their business. The

more efficiently they provide the service, their turnover will increase accordingly and

thereby adding additional profits to the companys account. With the expansion

undertaken by the company in recent times, it is slated to make the most of this situation.



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[41]

FUTURE FORECAST:

In long term the demand for telecom services is expected to rise further. The

reasons being the low tariffs, technology, focus on rural areas, ever increasing population,

etc. Telephony penetration in urban areas is quite high as compared to rural penetration

and as of now this is been taken into consideration by various players. Technology is also

expected to improve a lot in the years to come, which would help not only in cost

reduction but also in providing services efficiently.

MANAGEMENT OVERVIEW:

It is evident that the management of the company is very experienced and the

company looks to be in safe and able hands. The management structure of Bharti Airtel isas follows:



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[42]

PRICE INFORMATION:

Price Information

BSE(13-07-07) Rs. 880.75

NSE(13-07-07) Rs. 881.9

P/E x 37.5

EPS Rs. 21.27

Market Cap. Rs. In Cr 166930.2

52W High at BSE Rs. 960

52W Low at BSE Rs. 410

COMPARATIVE CHART OF BHARTI AIRTEL WITH SENSEX:

Comparative Chart of Bharti Airtel with SENSEX

0

100

200

300

400

500

600

700

800

900

2003 2004 2005 2006 2007

year

MarketpriceofBharti

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

Sensex

Avg. Price

BSE_SENSEX



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[43]

From the chart given above, it is observed that there has been an upside trend in

the SENSEX as well as the Share price of Bharti Airtel. But the rise in the value of Bharti

Airtel is more than that of SENSEX.

ONE YEAR PRICE MOVEMENT OF BHARTI AIRTEL:

One year Price movement of Bharti Airtel

0

100

200

300

400

500

600

700

800

900

1000

7-Apr

7-May

7-Jun

7-Jul

7-Aug

7-Sep

7-Oct

7-Nov

7-Dec

7-Jan

7-Feb

7-Mar

7-Apr

7-May

7-Jun

7-Jul

7-Aug

price(R

s.)

The Chart given above shows a consistent rise in the price of Bharti Airtel in the

previous one year. Some minor fluctuations were observed during the year but it did not

affect the price movement to a remarkable extent. The stock observed an uptrend during

the year and is expected to rise further.



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[44]

PROJECTED PROFIT AND LOSS ACCOUNT

Projected Operating Income Statement (Rs. In Crs.)

Year Mar 06(12) Mar 07(12) Mar 08(12)e

INCOME :

Net Sales 11,231.47 17,851.60 26871.9

Other Income 178.56 80.46 268.72

Total Income 11,311.93 18,030.16 27140.62

EXPENDITURE :

Raw Materials 54.42 53.95 81.21059

Power & Fuel Cost 26.98 39.72 59.79026

Employee Cost 754.99 1,102.03 1658.879

Other Manufacturing Expenses 4,404.78 6,709.58 10099.89

Selling and Administration Expenses 1,330.07 1,973.64 2970.908

Miscellaneous Expenses 671.92 801.13 1205.936

Less: Pre-operative Expenses Capitalised 0.85 1.8 2.709529

Total Expenditure 7,242.31 10,678.25 16073.9

Operating Profit 4,069.62 7,351.91 11066.72

Interest 236.81 282.07 303.58

Gross Profit 3,832.81 7,069.84 10763.14

Depreciation 1,547.02 2,468.47 4532.05

Profit Before Tax 2,285.79 4,601.37 6231.09

Tax 273.71 568.14 769.365

Reported Net Profit 2,012.08 4,033.23 5461.725

No. of Shares 1,894,613,936 1897148464 1897148464

Earnings Per Share 10.62 21.27 28.79

Market price of share 430.25 798.57 1079.63

P/E Ratio 40.5 37.5 37.5



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[45]

Net Revenues:

The net revenues of the company are growing at an average rate of 50.52% per

year. As the industry is under the growth stage, this may help in boosting the revenues

further. Some of the reasons behind this are declining prices due to competition,

increasing rural penetration, technology, etc.

7903.03

11231.47

17851.6

26871.9

0

5000

10000

15000

20000

25000

30000

Turnov

er

(Rs.

InC

rs.)

2004-05 2005-06 2006-07 2007-08

Year

Turnover Chart

Turnover

Expenses:

The expenses of the company are growing but the company is able to keep them

within permissible limits, which would enable the company to earn higher operating

profit.

Operating Profit:

The operating profit of the company as a percentage of net revenues is constantlyabove 30%, which indicates that even though the company is operating on a larger scale

the operations of the company are being carried out with utmost efficiency. The

profitability of the company has not taken a beating and real income of the company

continues to look good.



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[46]

Profit after Tax:

The company is being able to manage its financing very well and on that account

has managed to retain more interest of its shareholders. An increase in the interest

payments by the company is reflected in the profit after tax of the company. Inspite of

this, the PAT shows a consistent growth in the future years.

0

1000

2000

3000

4000

5000

6000

PAT

(Rs.

InCrs.)

2004-05 2005-06 2006-07 2007-08

Year

PAT Growth

PAT

Operating profit before tax:

The operating profit before tax of the company is increasing consistently every

year. This is a very good sign for the company that the operating profit of the company is

ever increasing. It shows that the performance of the company in terms of their

operations is good. The company is not only increasing its business in terms of volume

but it is also realizing more profits or in other words its margins have not dropped.



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PROJECETED BALANCE SHEET

Projected Balance Sheet (Rs. In Crs.)

Year Mar 06 Mar 07 Mar 08eSOURCES OF FUNDS :

Share Capital 1,893.88 1,895.93 1,895.93

Reserves 5,456.38 9,562.45 12,949.30

Total Shareholders Funds 7,350.26 11,458.38 14,845.23

Total Debt 4,772.84 5,285.89 7,255.61

Total Liabilities 12,232.20 16,939.09 22,100.84

APPLICATION OF FUNDS :

Net Block 13,818.60 20,504.38 29,013.70

Lease Adjustment 0 0 0

Capital Work in Progress 2,436.48 2,470.88 2,505.47

Investments 247.95 147.14 97.11

Current Assets, Loans & Advances 3,346.35 5,433.72 8,310.00

Total Current Liabilities 7,430.28 11,380.97 17,825.44

Net Current Assets -4,083.93 -5,947.25 -9,515.44

Total Assets 12,232.20 16,939.09 22,100.84

The capital structure of the firm is stable i.e. there is proportionate rise in the

shareholders funds and the debts of the company. As the current liabilities in the form of

creditors are more, it signifies the creditworthiness of the company. Also, there is a

consistent increase in the fixed assets of the company.



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[48]

PROJECTED CASH FLOW SUMMARY

Projected Cash Flow Summary (Rs. In. Crs)

Year Mar-06 Mar-07 Mar-08

Cash and Cash Equivalents at Beginning of

the year 384.14 307.43 571.61

Net Cash from Operating Activities 4631.33 8107.95 13343.34

Net Cash Used in Investing Activities -5084.39 -7975.05 -14954.8

Net Cash Used in Financing Activities 376.35 340.13 2420492

Net Inc/(Dec) in Cash and Cash Equivalent -76.71 473.03 -1530.31

Cash and Cash Equivalents at End of the year 307.43 780.46 1302.97

Total cash from operations:

The total cash flow from operations for the company is also increasing. The rise

in cash flow from operations increases considerably in the years 2007 and 2008. This is a

good sign for the company. The rise in the cash flow from the operations signifies that

the company is able to extract maximum value from its available resources. The company

has managed to maintain its margins and thus not allowed its operating profit to dip.

On looking at the operating profit before tax and the total cash flow from

operations it is clear that the cash position of the company is secure. The company looks

to be in a cash rich position. The cash flow statement of the company indicates that the

company is managing its cash position very well and the inflows of cash are very well

managed by the company and it is also evident that the company is allocating adequate

cash to increase their fixed assets.



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[49]

Key Financial Ratios:

Key Ratios Formulae Mar-06 Mar-07 Mar-08e

EBITDA Ratio EBITDA / Income 0.36 0.41 0.41

Net Profit Ratio PAT/ Income 0.18 0.23 0.2

Debt-Equity Ratio Debt / Equity 0.83 0.54 0.49

Current Ratio

Current Assets /

Current Liabilities 0.46 0.47 0.47

Interest Cover EBIT / Interest 10.7 17.31 21.53

Return on Equity (%) PAT / Equity 27.37 35.2 36.8

Return on Capital

Employed (%)

EBIT / Capital

Employed 20.26 28.83 29.57

EBITDA or Operating Profit Margin:

The operating profit margin in true sense is the indicator of the companys actual

operating efficiency. The company has increased its sales considerably but if there is no

rise in the operating profit margin then there is a lack of efficiency on the part of the

company. In this case the companys operating profit margin is consistently over 30%.

This means that even though the company is undertaking huge expansions it has

maintained its operating profit margin.

Net Profit Margin Ratio:

The net profit margin ratio measures the overall efficiency of production,

administration, selling, financing, pricing, and tax management. After looking at the

companys net profit margin, one can say that it is consistent, which is considered to be

favorable.



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Debt-Equity Ratio:

The debt-equity ratio shows the relative contributions of creditors and owners.

The debt-equity ratio of the company is declining, and is expected to still lower down.

The lower the debt-equity ratio, the higher the degree of protection enjoyed by the

creditors.

Current Ratio:

The current ratio measures the ability of the firm to meet its current liabilities-

current assets get converted into cash during the operating cycle of the firm, and provide

the funds needed to pay current liabilities. Even though the current ratio of the firm is

consistent but it is much lower than the general norm i.e. 1.33 in India.

Interest Coverage Ratio:

Interest Coverage Ratio, a major determinant of bond rating is widely used by

lenders to assess a firms debt capacity. High interest coverage ratio signifies the ability

of the firm to meet its interest burden even if the PBIT suffer a considerable decline.

Interest Coverage ratio in case of Bharti Airtel is quite favorable as it is increasing

consistently.

Return on Equity:

This ratio measures the profitability of equity funds invested in the firm. Bharti

Airtel has a favourable Return on Equity as it is increasing every year i.e. from 27.37 it

has reached 36.8 in 2years duration. This ratio is of great interest to the equity

shareholders.

Return on Capital Employed:

The ROCE measures the profitability of the capital employed i.e. shareholders

funds plus the total debt (both short term as well as long term). Bharti Airtel has attained

a sharp rise in ROCE in 2007 but is expected to give comparatively low returns in 2008

due to comparatively low PBIT and increasing interest.



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Earnings per share:

This ratio indicates the actual profit left for the owners of the company i.e.

shareholders. A growing EPS shows that the company is contributing to the shareholders

value. A growing EPS leads to increase in the value (price) of the company in the market.

Thus, it can be said that Bharti is contributing consistently to the shareholders value.

P/E Ratio:

It is the parameter to judge the proper valuation of the company in the market.

Higher P/E shows that the market is valuing the company at a higher multiple. This is the

widely used parameter by the market for judging the over or under valuation of the

company for investment purpose. A lower P/E is considered one of the most important

criteria for the selection of the company by the investors. The P/E ratio of Bharti is

decreasing from 40.5 to 37.5, which is a good sign from the point of view of the

shareholders.

SHAREHOLDING PATTERN:

(AS ON Jun 2007) No. of Shares [%]Foreign 598,742,301.00 31.56

Institutions 78,799,714.00 4.15

Govt Holding 0 0

Non Promoter Corp. Hold. 39,163,397.00 2.06

Promoters 1,155,645,678.00 60.92

Public & Others 24,797,374.00 1.31

Totals 1,897,148,464.00 100



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FUTURE PROSPECTS:

The company has already completed the testing of IPTV in NCR region and will

launch in select part in NCR region in November-December this year and in the

next calendar year in other parts of the country.

The company plans a $8bn spread by 2010 and 25% of the market share i.e.

approximately 125 million subscriber base.

Bharti Airtel signed a memorandum of Understanding with Nokia Siemens

Networks for USD 900 Million in July 2007. This is an expansion contract across

Airtels mobile, fixed Network platforms. Nokia Siemens Networks will expand

Airtels GSM network in eight circles; its NLD and ILD network with 1.8 millionNext Generation Network (NGN) ports and its International Calling Card prepaid

service capacity by 4.5 million new users.

The company is making major investments in international infrastructure and

going to buy full ownership of the i2i cable.

Company expects to achieve 72-74% population coverage till March 2008 from

current level of 62%.

The company has filed the scheme of de-merger for approval of the Honourable

High Court of New Delhi of its passive telecom (mobile) infrastructure to Bharti

Infratel, its wholly owned subsidiary. The company expects the demerger to take

place in October 2007.

Currently the company has 40000 telecom towers and expected to reach about

65000 towers by March 2008. After demerger with 65000 towers, Bharti Infratel

would be the biggest tower company in the world.



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VIDESH NIGAM SANCHAR LIMITED.

Videsh Sanchar Nigam Ltd (VSNL) was incorporated in 1st April 1986 as a GOI

company, to take over the activities of the erstwhile Overseas Communication Services

(OCS) and with a view to provide International Telecommunication Services to and from

India. The company took control and management of all international telecommunication

services from OCS, a Department of the Ministry of Communications. VSNL is the

leading Indian provider of International Long-distance (ILD) and Internet related

services. VSNL is the first company to introduce retail internet services in India in 1995.

Initially, GOI was holding 52.97% stake in VSNL. In February 2002, GOI

divested 25% stake to the Tata Group as a strategic partner along with the right to

manage the company. M/s.Panatone Finvest Limited, a company which is owned by

various Tata Group companies picked the stake at a price of Rs.202 per share. Following

GOI's subsequent open offer of further 20% equity of VSNL's, the tata group has become

the biggest shareholder with a holding of over 45%, while the GOI stake in VSNL came

down to 26.12%. The company offers its products and services under the brand name

Tata Indicom in India.

BUSINESS OVERVIEW:

The company operates under three business segments in India- Wholesale Voice,

Enterprise and Carrier Data and other services. The company provides value added

telecommunication services such as international telephony, leased channels, dial-up

internet, broadband, net telephony, national long distance, enterprise data, frame relay

and Internet Services. Apart from these services the company is also providing TV

uplinking services, transponder leasing services etc. VSNL's main gateway centres are

located at Mumbai, New-Delhi, Kolkata and Chennai. The international

telecommunication circuits are derived via Intelsat and Inmarsat satellites and wide band

submarine cable systems e.g. FLAG, SEA-ME-WE-2 and SEA-ME-WE-3.

VSNL is the first Indian service provider to enter in to a Wireless Broadband

roaming alliance with an international operator Star Hub, which is Singapore's second



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largest info-communication company. The company one of the leading player in the

growth of Wi-Fi hotspot industry in India has the largest public hotspot network in india

with over 250 hotspots.

BUSINESS RISK:

The business is subject to extensive regulation by the Government; which could

have an adverse effect on the business. Technical failures and natural disasters could

damage the telecommunication networks. Changes in available technology could increase

competition and the capital costs.

MARKET RISK:

There is very little market risk in this segment, considering the ever increasing

demand of the telecom services. There have been substitutes for telecom services like the

Postman, which has been available for years but the demand for it is getting decreased

whereas the demand for telecom services has never been affected due to that. There is a

permanent market for the product, and it does not face any serious market risk.

VOLUME BASED BUSINESS:

The profits of the company are totally based on the volume of their business. Themore efficiently they provide the service, their turnover will increase accordingly and

thereby adding additional profits to the companys account. With the expansion

undertaken by the company in recent times, it is slated to make the most of this situation.

FUTURE FORECAST:

In long term the demand for telecom services is expected to rise further. The

reasons being the low tariffs, technology, focus on rural areas, ever increasing population,etc. Telephony penetration in urban areas is quite high as compared to rural penetration

and as of now this is been taken into consideration by various players. Technology is also

expected to improve a lot in the years to come, which would help not only in cost

reduction but also in providing services efficiently.



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PRICE INFORMATION:

Price Information

BSE (27-07-07) Rs. 451.85

NSE (27-07-07) Rs. 450.9

P/E x 27.96

EPS Rs. 15.68

Market Cap. Rs. In Cr 11448.45

52W High at BSE Rs. 515

52W Low at BSE Rs. 342

COMPARATIVE CHART OF VSNL WITH SENSEX:

Comparative chart of VSNL with SENSEX

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From the chart given above, it is observed that there has been an upside trend in

the SENSEX as well as the Share price of VSNL. But the rise in the value of VSNL is

more than that of SENSEX.

One Year Price movement of VSNL:

One Year Price movement of VSNL

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The chart given above shows some fluctuations which can prove unfavourable

from investorss piont of views. There is not much movement in the stock price and even

if its there keeps on fluctuating. Also, it can be said that the stock volumes traded on the

exchange is quite less.



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PROJECTED PROFIT AND LOSS ACCOUNT

Projected Profit & Loss A/C (Rs. In Crs.)

Year Mar 06(12) Mar 07(12) Mar 08(12)

INCOME :

Net Sales 3,780.95 4,041.83 4377.3

Other Income 245.75 212.18 132.69

Total Income 4,026.70 4,254.01 4509.99

EXPENDITURE :

Raw Materials 0 0 0

Power & Fuel Cost 36.92 43.09 46.66

Employee Cost 207.99 266.26 288.36Other Manufacturing Expenses 2,285.05 2,378.29 2473.42

Selling and Administration Expenses 254.54 221.4 244.95

Miscellaneous Expenses 194.3 234.1 253.53

Less: Pre-operative Expenses

Capitalised 0 0 0

Total Expenditure 2,978.80 3,143.14 3306.92

Operating Profit 1,047.90 1,110.87 1203.07Interest 1.8 6.91 7.48

Gross Profit 1,

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