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A PROJECT REPORT ON

(EQUITY ANALYSIS OF TELECOM INDUSTRY)

MASTER OF MANAGEMENT STUDIES (MMS) UNIVERSITY OF MUMBAI


SUBMITTED TO

SINHGAD INSTITUTE OF BUSINESS MANAGEMENT CHANDIVALI


UNDER THE GUIDANCE OF (PROF.SUSHMA VERMA)

SUBMITTED BY

(PRASHANT BOBADE)
(Div-A, Roll No-82) (Finance)
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CERTIFICATE
This is to certify that Prashant

Dilip Bobade

has successfully

completed the project work as a part of academic fulfillment of Masters of Management Studies (M.M.S.) semester IV examination.

Name & Signature of Project Guide

Date : _________________

DIRECTOR SIBM

DECLARATION

I, Prashant Dilip Bobade of Master of Management Studies (Semester) of Sinhgad Institute of Business Management (SIBM), hereby declare that I have successfully completed this Project on Equtiy analysis of Telecom Industry in the academic year 2011-2012 The information incorporated in this project is true and original to the best of my knowledge.

_____________________________ Signature

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 Sharekhan Pvt Ltd, Bhandup(w), Mumbai 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 Sharekhan Pvt Ltd, for the support, cooperation and briefings they provided during the internship to make it a success. I express my sincere thanks to Mrs. Sushma Verma, Professor, Sinhgad Institute of Business Management, Mumbai 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 Sinhgad Institute of Business Management, Mumbai 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

PRASHANT BOBADE

Content
Sr No. 1 2 3 4 5 6 7 8 9 10 11 12 13

Topic Executive summary Objective and scope of the study Company Profile About Equity Analysis Research methodology Business Framework Indian Telecom Sector Data Analysis and Interpretation Findings Recommendation Limitation Conclusion Bibliography

Pg no 6 7 8 10 22 24 33 50 76 76 77 77 78

CHAPTER 1
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 in size. The project on Equity Analysis of Telecom Sector was carried out in Sharkhan Ltd., Mumbai, 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 May 2012 to 30th June 2012. 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 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. Idea Cellular, a company with not so strong financials was seen to be too risky and was recommended as a Sell

CHAPTER 2
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 majorplayers in the Telecom sector i.e. Bharti Airtel Limited and Idea cellular.

Chapter 3
Company Profile SHAREKHAN PVT. LTD. Sharekhan Pvt. Ltd. is one of the top retail brokerage houses in India with a strong online trading platform. The company provides equity based products (research, equities, derivatives, depository, margin funding, etc.). It has one of the largest networks in the country with 704 share shops in 280 cities and Indias premier online trading portal www.sharekhan.com. With their research expertise, customer commitment and superior technology, they provide investors with end-to-end solutions in investments. They provide trade execution services through multiple channels - an Internet platform, telephone and retail outlets. Sharekhan was established by Morakhia family in 1999-2000 and Morakhia family, continues to remain the largest shareholder. It is the retail broking arm of the Mumbaibased SSKI [SHANTILAL SHEWANTILAL KANTILAL ISWARNATH LIMITED] Group. SSKI which is established in 1930 is the parent company of Sharekhan ltd. With a legacy of more than 80 years in the stock markets, the SSKI group ventured into institutional broking and cor3porate finance over a decade ago. Presently SSKI is one of the leading players in institutional broking and corporate finance activities. Sharekhan offers its customers a wide range of equity related services including trade execution on BSE, NSE and Derivatives, Depository services, online trading, Investment advice, Commodities etc. Sharekhan Ltd. is a brokerage firm which is established on 8th February 2000 and now it is having all the rights of SSKI. The company was awarded the 2005 Most Preferred Stock Broking Brand by Awwaz Consumer Vote. It is first brokerage Company to go online. The Company's online trading and investment site - www.Sharekhan.com - was also launched on Feb 8, 2000. This site gives access to superior content and transaction facility to retail customers across the country. Known for its jargon-free, investor friendly language and high quality research, the content-rich and research oriented portal has stood out among its 8

contemporaries because of its steadfast dedication to offering customers best-of-breed technology and superior market information. Share khan has one of the best states of art web portal providing fundamental and statistical information across equity, mutual funds and IPOs. One can surf across 5,500 companies for in-depth information, details about more than 1,500 mutual fund schemes and IPO data. One can also access other market related details such as board meetings, result announcements, FII transactions, buying/selling by mutual funds and much more. Sharekhan's management team is one of the strongest in the sector and has positioned Sharekhan to take advantage of the growing consumer demand for financial services products in India through investments in research, pan-Indian branch network and an outstanding technology platform. Further, Sharekhan's lineage and relationship with SSKI Group provide it a unique position to understand and leverage the growth of the financial services sector. We look forward to providing strategic counsel to Sharekhan's management as they continue their expansion for the benefit of all shareholders." SSKI Corporate Finance Private Limited (SSKI) is a leading India-based investment bank with strong research-driven focus. Their team members are widely respected for their commitment to transactions and their specialized knowledge in their areas of strength. The team has completed over US$5 billion worth of deals in the last 5 years - making it among the most significant players raising equity in the Indian market. SSKI, a veteran equities solutions company has over 8 decades of experience in the Indian stock markets. "Sharekhan has always believed in collaborating with like-minded Corporate into forming strategic associations for mutual benefit relationships" says Jaideep Arora, Director Sharekhan Limited. Sharekhan is also about focus. Sharekhan does not claim expertise in too many things. Sharekhan's expertise lies in stocks and that's what he talks about with authority. So when he says that investing in stocks should not be confused with trading in stocks or a portfoliobased strategy is better than betting on a single horse, it is something that is spoken with years of focused learning and experience in the stock markets. And these beliefs are reflected in everything Sharekhan does for us! Sharekhan is a part of the SSKI group, an Indian financial services power house, with strong presence in Retail equities Institutional equities Investment banking. 9

Chapter 4

Equity Analysis
Professional investor will make more money & less loss than, who let their heart rule. Their head eliminates 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. 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. 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 10

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.

Fundamental analysis Any investor while making investment is concerned with the intrinsic value of the asset, which is determined by the future earning potential of the asset. In case of securities market, an investor has number of securities available for investment. But, he would like to invest in the one, which has good potential for future. In order to ensure the future earnings of any security, an individual has to conduct fundamental analysis of the company. Fundamental analysis of a company involves in-depth examination of all possible factors, which have bearing on the prospects of the company as well as its share price. Fundamental analysis is divided into 3 stages in sequential manner as follows: 1. Economic analysis 2. Industry analysis 3. Company analysis 1. Economic analysis The economic activity of any country has an impact on investment in many ways. When the state of economy is good and it is at the growing stage, the investment takes place and stock market is in boom phase. The reverse situation takes place when the economic activity is low. In view of this it is necessary to analyze all macro economic variables properly. The parameters, which are used to analyze all macro economic variables, are given below: Growth rate of gross domestic product 11

GDP represents the aggregate value of the goods and services produced in the economy. All the major investors, financial institutions, foreign financial institutions, portfolio manager first tries to estimate the growth rate of GDP of the country in which they are planning to invest.

Inflation The assessment of GDP growth rate is to be done in light of increase in inflation rate. If the rate of inflation grows in direct proportion to GDP, then the real rate of growth would be insignificant. The demand in consumer product industry is severely affected. If there would be increase in rate of inflation, the amount of saving left for investment would decrease which is not good for securities market investment. Inflation rate in these two months reaches to almost more than the 11%. Interest rates Most of the companies borrow funds from banks and financial institutions for meeting their capital and revenue expenses. If the rate if interest would increase, their interest expenses would also increase. This would lead to decrease in their profitability. Increase in interest rates would be reflected in negative manner in stock markets. Interest rates have to be increased for controlling inflation. It is a measure to control the inflation means withdrawing the excess money from the market in the form of interest. Budget Budget is statement of proposed revenue and expenditure of government. A deficit budget leads to higher rate of inflation and increase in cost of production for companies as explained above whereas surplus budget leads to deflation. Balance of payment

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Balance of payment is statement of receipts and payments of a country for the transactions it has entered with other companies. If receipts are more then BOP is favorable and if payments are more then unfavorable.

2. Industry analysis Classifying them on basis of business cycles does the industry analysis. They can be classified into following categories: Growth industry Growth industries are the ones those are independent of the business cycles. These industries show growth irrespective of changes in economy. For example, the information technology in India exhibited continuous growth irrespective of the recession and boom in the entire economy of the country. Cyclical industry The growth of these industries depends on the business cycle. When there is boom period in the business cycle of industries or economy as a whole, these industries also exhibit growth and vice versa. For example, steel industry. The growth of steel industry mainly depends on auto industry and construction industry. When there is boom in the auto industry, the steel is in demand.

Defensive industry These categories of industry exhibit constant growth during all phases of economy. They do not depend on business cycle of other industries. For example, food industry enjoys constant growth irrespective of growth in other industry. 13

Product of the industry The user of the product may be either other industries or the household sector or both. In case the product is to be used only by industrial sector, then the growth of other user industry is also need to be analyzed. However, if it is to be used by household sector, then factors such as inflation, increase in level of income etc. are to be taken into account while estimation growth of industry.

Government policy If the government offers tax subsidies and tax holidays, the industry has good prospects. For example, biotechnology industry is being given number of tax incentives as the government intends to promote the growth of industry.

Labor The industries which are labor intensive in nature require proper analysis of labor scenario. The activities of trade unions have bearing on productivity of the companies under that industry. The frequent strike by unions may lead to fall in the production.

The Market Share The rate of growth in the market share of the industry over a period of time shall be examined since it helps in finding the growth prospects and ability to compete with industry involved in related product. If the market share is decreasing over a period of time, it is not a good indicator for investment.

3. Company analysis:The strength of company can be assessed by examining certain quantitative factors. The quantitative factors normally comprise of various financial ratios which are used examine the operating efficiency of the company. They are enumerated below: 14

QUALITATIVE FACTORS Management

The management of a company should have expertise, competence to control the operations of the company. The past track record of the management towards shareholders should be examined. It should be a management, which has rewarded its shareholders whenever company has made good profits.

Product of the company

The growth prospect of demand of product being manufactured by the company shall be assessed by analyzing the type of users and existence of related products. Raw material

The raw material used by the company also has a bearing on its operating efficiency. If the raw material is to be sourced from indigenous sources the company would not face any problems but if

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it has to be imported from outside countries then the risk of change in government policies on importing of such material should be taken into consideration

QUANTIATIVE FACTORS 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 16

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.

Average revenue per user (ARPU) 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. Some of the main ratios to be used for analyzing the companys financial performance in this project are as follows: Net profit ratio :This ratio shows the earnings left for shareholders (equity and preference) as a percentage of net sales. It measures the overall efficiency of all the functions of a business firm like production, administration, selling, financing, pricing, tax management etc. This profit is mainly used by shareholders as dividend is paid out of net profit of the company. 17

Return on capital employed :This ratio indicates the percentage of net profits before interest and tax to total capital employed. Capital employed = Equity Capital + Preference Capital+ Reserve and Surplus + long term Debt Fictitious Assets. Return on capital employed = Net profit before interest and tax *100 Capital employed This ratio is considered to be a very important one because it reflects the overall efficiency with which capital is used. The ratio of a particular business should be compared with other business firms in the same industry to find out exact position of that business.

Return on equity :This ratio also known as return on shareholders funds indicates the percentage of net profit available for equity shareholders to equity shareholder funds. Return on equity = $Net profit available for equity shareholders*100 #Equity shareholders funds

$ #

Net profit after interest, tax, preference dividend Equity capital + reserve and surplus

This ratio indicates the productivity of the ownership capital employed in the firm. However, in judging the profitability of a firm, it should not be overlooked that during inflationary periods, the ratio may show an upward trend because the numerator of the ratio represents current values whereas the denomination represents historical values.

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Interest coverage ratio :This ratio compares the net profit before interest and tax with the interest payments and long term liabilities. This ratio indicates whether adequate coverage of net profit is available for the payment of interest or not. Interest coverage ratio = Net profit before interest and tax Interest on long term liabilities If this ratio is very high, it means that margin for creditors and lenders are very high. If this ratio is just one, it will indicate that profits are just equal to interest which is not at all satisfactory. This is not only dangerous for creditors but also unsatisfactory for shareholders.

Earnings per share :This ratio indicates the amount of net profit available per equity share of a business firm. Net profit after interest, tax, preference dividend No. of equity shares

EPS is one of the criteria of measuring the performance of a company. If earnings per share increase, the possibility of higher dividend paid by the company also increases. The market price of the share of a company may also be affected by this ratio. EPS may vary from company to company due to stock in trade, depreciation etc.

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Price earnings ratio := Market price per equity share EPS It means that the market value of every rupee of earnings is ....... times. ____Cost of Goods sold______ Avg. stock during that period

Current ratio :This ratio is calculated by dividing current assets by current liabilities. This ratio indicates how much current assets are there as against each rupee of current liabilities. If majority of current assets are in the form of inventory, even a 2:1 ratio will not result into favorable condition because inventory is considered to be the least liquid assets out of all current assets of a firm. _Current assets__ Current liabilities

Long term solvency/Debt Equity ratio Ratio like debt-equity ratio helps in examining long-term solvency of the company. Higher debt equity is not favorable as it indicates dependence of company on borrowed funds. Any increase in interest rates may significantly affect shareholders earnings. It should be assessed whether the company is able to make use of trading on equity or not. _Long term funds Shareholders funds Or 20 __

_________Long term funds________ Shareholders funds + long term funds

Shareholders funds consist of equity share capital, preference share capital and reserve and surplus. A low ratio will quite satisfactory from creditors angle. Book value :There are several ways to define a companys worth or value. One of the ways you define value is market capital or how much money would you need to buy every single share of stock at the current price. Another way to determine a cos value is to go to the balance sheet statement and look at the book value. The book value is simply the cos assets minus its liabilities. Book value = assets liabilities. In other words, if you wanted to close the doors, how much would be left after you settled all the outstanding obligations and sold off the assets. A co. that is viable growing business will always be worth more than its book value for its ability to generate earnings and growth. To compare companies, you should convert to book value per share, which is simply the book value divided by outstanding shares.

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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 reflects 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. Difference between Technical and Fundamental analysis Technical analysis mainly seeks to predict short term price movement, whereas fundamental analysis tries to establish long term values. The focus of technical analysis is mainly concentrated on past price and volume pattern of the shares whereas fundamental analysis also take into account the general industry and economic conditions.

The technical analyst make buying and sell recommendation on the basis of support and resistance level of the stock whereas in fundamental analysis recommend by comparing its market price with the intrinsic value of the shares 22

CHAPTER 5
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, behaviour 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: 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.

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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 6

Business Framework
Framework of Telecom Company

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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 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.

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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 corporate 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 corporate, 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 Industry 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. 28

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 tariffs allow for an increased usage of telecom services, while not having such an overbearing impact on telephone bills. 29

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 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. Telecom Company Cost Analysis After discussing the revenue aspects of telecom service providers, let us now understand the major cost heads for these companies. These cost heads can be broken up into regulated and 30

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 nonregulated 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). 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)] 32

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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Chapter 7 Indian Telecom Sector The telecom industry is one of the fastest growing industries in India. India has nearly 200 million telephone lines making it the third largest network in the world after China and USA. With a growth rate of 45%, Indian telecom industry has the highest growth rate in the world. History of Indian Telecommunications started in 1851 when the first operational land lines were laid by the government near Calcutta (seat of British power). Telephone services were introduced in India in 1881. In 1883 telephone services were merged with the postal system. Indian Radio Telegraph Company (IRT) was formed in 1923. After independence in 1947, all the foreign telecommunication companies were nationalized to form the Posts, Telephone and Telegraph (PTT), a monopoly run by the government's Ministry of Communications. Telecom sector was considered as a strategic service and the government considered it best to bring under state's control. The first wind of reforms in telecommunications sector began to flow in 1980s when the private sector was allowed in telecommunications equipment manufacturing. In 1985, Department of Telecommunications (DOT) was established. It was an exclusive provider of domestic and long-distance service that would be its own regulator (separate from the postal system). In 1986, two wholly government-owned companies were created: the Videsh Sanchar Nigam Limited (VSNL) for international telecommunications and Mahanagar Telephone Nigam Limited (MTNL) for service in metropolitan areas.

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In 1990s, telecommunications sector benefited from the general opening up of the economy. Also, examples of telecom revolution in many other countries, which resulted in better quality of service and lower tariffs, led Indian policy makers to initiate a change process finally resulting in opening up of telecom services sector for the private sector. National Telecom Policy (NTP) 1994 was the first attempt to give a comprehensive roadmap for the Indian telecommunications sector. In 1997, Telecom Regulatory Authority of India (TRAI) was created. TRAI was formed to act as a regulator to facilitate the growth of the telecom sector. New National Telecom Policy was adopted in 1999 and cellular services were also launched in the same year. Telecommunication sector in India can be divided into two segments: Fixed Service Provider (FSPs), and Cellular Services. Fixed line services consist of basic services, national or domestic long distance and international long distance services. The state operators (BSNL and MTNL), account for almost 90 per cent of revenues from basic services. Private sector services are presently available in selective urban areas, and collectively account for less than 5 per cent of subscriptions. However, private services focus on the business/corporate sector, and offer reliable, high- end services, such as leased lines, ISDN, closed user group and videoconferencing. Cellular services can be further divided into two categories: Global System for Mobile Communications (GSM) and Code Division Multiple Access (CDMA). The GSM sector is dominated by Airtel, Vodfone-Hutch, and Idea Cellular, while the CDMA sector is dominated by Reliance and Tata Indicom. Opening up of international and domestic long distance telephony services are the major growth drivers for cellular industry. Cellular operators get substantial revenue from these services, and compensate them for reduction in tariffs on airtime, which along with rental was the main source of revenue. The reduction in tariffs for airtime, national long distance, international long distance, and handset prices has driven demand. The telecom sector is also afflicted by a number of restraints. These include:

Sluggish pace of reform process. 35

Lack of infrastructure in semi-rural and rural areas, which makes it difficult to make Limited spectrum availability.

inroads into this market segment as service providers have to incur a huge initial fixed cost.

But notwithstanding these constraints, telecom sector has undergone a revolution in the past decade and has played a major part in bridging the rural-urban divide.

Sector-Wise Distribution Chart for SENSEX

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Major players in Telecom Industry The telecom industry of India has registered manifold growth in the recent years. Personalized telecom access is essential necessity of life for increasing number of the people. The sector offers unlimited prospects when we consider future growth. Both Public Players and Private Players are enhancing their technologies and taking the telecom industry to a much higher growth state. Not only service providers but also handset manufacturers are contributing significantly to the industry and economy of India. The Indian telecom sector is witnessing great competition. MTNL, BSNL, VSNL are the major Public Players, whereas Airtel, Idea, Vodafone, Tata, Reliance, BPL are the leading Private Players in the country. The consumer is emerging as the clear winner in this competition where the players in the mobile segment are coming up with new tariffs and discount schemes to gain the competitive advantage. Service Provider Bharti Airtel Reliance Com + RTL Vodafone Essar BSNL Tata Teleservices IDEA Aircel MTNL Uninor Sistema Shyam Loop Mobile STel Videocon HFCL Infotel Etisalat/Allianz Subscriber (Mn) 130.61 105.15 103.75 70.62 67.88 65.28 38.46 5.12 5.02 4.21 2.89 1.11 0.65 0.327 0.004 Market Share (%) 21.73 17.49 17.26 11.75 11.29 10.86 6.4 0.85 0.84 0.7 0.48 0.19 0.11 0.06 0

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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.

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Current Scenario of Telecom Industry


Telecom Regulatory Authority of India (TRAI) has recently published a press notice containing Highlights on Telecom Subscription Data as on 31st March 2012. According to the notification India now has total of 951.34 million Telecom (Both Wireless & Wireline) subscribers by the addition of 7.85 Million new subscribers in March 2012 with a monthly growth of 0.83%. MNP i.e. Mobile Number Portability requests has been increased from 37.11 million subscribers at the end of February 2012 to 41.88 million at the end of March 2012. In March 2012 alone, 4.76 million requests have been made for MNP. Read thoroughly this section, for further details.

1000 900 800 700 600 500 400 300 200 100 0

SUBSCRIBER (IN MILLIIONS)

Subscriber ( In Million)

2001

2003

2005

2007

2009

2011

YEARS

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According to the Telecom Subscription data as on 31st March 2012 the wireless (mobile) subscribers base in India increased to 919.17 million in the month of March, 2012 from 911.17 Million in February 2012, registering a growth of 0.88%, with Bharti Airtel alone signing 2.5 million of the 8 million new subscribers. The data also says that Bharti Airtel, the first ever 4G service providers in India, has now total 181.3 million subscribers across the country. Idea Cellular has added 2 Million subscribers taking the total subscribers base to 112.72 million.

Growth Prospects: Telecom in India


Indian mobile industry is at the cross-roads now. After growing at a fast pace in the last couple of years, the subscriber addition has declined significantly and the operator revenues are not growing. The interest of foreign players is waning and some of the operators are now in the process of shutting down their operations. The article would not only give an overview of the industry but would also delve into the reasons for the decline in the fortunes of this industry. Indian telecom industry has been hailed as the proof of Indias progress post liberalization. The country actually leapfrogged to the mobile platform bypassing the fixed line. Since in India, the fixed line subscribers are not even 5% of the mobile subscriber base, in this article, I am going to talk about mobile subscribers and its market only. The country was divided into 23 circles when the mobile phones were introduced in the country. Separate licenses were given out for each of the circles in 1994. The circles were classified as Metros, A, B or C depending upon the revenue potential for the circle with Metros & A circles expected to have the highest potential. The mobile operators brought in a lot of innovations like outsourcing of networks, focus on prepaid, etc. to make the mobile services affordable to the masses. As a result, the prices declined significantly over the years and the base continued to increase. The chart below gives a good overview of the various events in the industry over the years and the impact of the events on the adoption of the services.

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Till 2009, the number of operators was around 5-6 per circle which meant that there was enough competition to keep the prices down but there still some sanity in terms of profitable growth. The EBITDA levels till 2009 were almost 40%. However, in 2008, the Government issued licenses to 8 new operators taking the number of operators to 14. The only way the new operators could have got subscribers was by indulging in tariff wars and hence the tariff wars lead to sharp decline in rate per minute. The minutes of usage per customer did not increase with the falling rates so the overall revenues stagnated despite significant increase in subscriber additions. The new subscribers were from lower income groups who used the phone more as an incoming device bringing down the ARPU levels. The following table lists the current telecom circles and the mobile subscriber base in each of them:

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The above subscriber numbers are highly inflated by the operators as they vie for market share and spectrum. The real or active subscription levels are just 73% of the above reported numbers.

There are wide variations in the ratio of active subscribers to the reported subscribers. The old GSM players like Airtel, Idea and Vodafone have relatively 42

clean operations while the new operators and the CDMA players are struggling to keep their subscribers active. The best of the lot is Idea with over 93% active base while the worst are the new operators like S Tel and Etisalat. No wonder both S Tel and Etisalat have decided to exit the telecom space. Please note that the active subscribers have been calculated using VLR (Visitor Location Registry) as a proxy. Visitor Location Register (VLR) is a database part of the GSM mobile phone system which stores information about all the mobiles that are currently under the jurisdiction of the MSC (Mobile Switching Center) which it serves. This means that a subscriber cannot be present in more than one VLR at a time and hence can be used as a proxy for active subscriber base. The table below shows the wide variations across operators in terms of active subscriber proportion.

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Trends in the industry


VAS-the game changer The past year has been an exciting one for the telecom industry. With the slow but sure emergence from the plague of recession, operators decided to quickly enforce corrective telecom practices to up their falling revenues. With 3G finally surfacing on the Indian telecom horizon, giving way to 5 MHz of extra spectrum to 9 successful operators, customers were promised an end to the inconsistent voice network, and additionally provided with a plethora of data applications like live mobile TV, video calling, video and music streaming, video conferencing, and much more. Tata DoCoMo being the first private player to have started 3G services, it remains to be seen how 3G will catch up with enterprise and retail customers next year, when all other successful 3G operators are likely to start services as well. Vendors have also decided to make hay when the sun shines-bringing in cheap 3G handsets, and offering the best of applications which are upgradable, and have security tags in place. And of course there is BWA and MNP-the latter has been promised to customers for a long time now. This will allow them to easily switch service networks, in order to get best quality. BWA, which was a step taken by the government to significantly increase broadband penetration to all corners of the country, especially rural areas, has not yet waved its magic wand but most experts are hopeful that WiMax, slated to come in by the first half of 2011, will throw up some changes in the current broadband usage patterns. The far-reaching effects that MNP will have on operators' ARPUs are to be seen in 2011, and also the stiff competition for lower-priced services that will emerge as a result of this. Tracking all these changes and more, we present to you the likely trends that are set to take the Indian telecom industry by storm in the new year. 3G: According to Anuj Kapoor, country head, Telcordia, 3G mobile broadband for enterprise and retail customers will reach capacity in 2011, and by the second-half of 2011 we are likely to see LTE as well, which will compete directly with 3G. This will also lead to a highly competitive market for cross-bundling of voice and data packages, instead of separate plans for each, and there will be higher use of a service creation environment for quick responsiveness to the market. Mobile advertising as a mode of subsidizing the service and as an added revenue stream will witness a boost, and mobile payments will also increase, with higher speeds and restrictions on online payments being removed. Besides, other applications like GPS and social networking will also pick up, with high-speed broadband. However, competitive pricing of 3G services will be a key to its uptake, and sachet pricing for various apps will be ideal. Adds Syed Safawi, CEO, Wireless Business, Reliance Communications, Innovative applications, enhanced user experience, and decreasing prices of 3G enabled handsets would be the key drivers for mobile broadband in India.

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MNP: As far as MNP is concerned, with 15 operators in the market, and now with the integration of 3G, there is enough choice for customers in terms of a quality network provider. Says Natesh Mani, president, Consumer Infrastructure Services, Sify Technologies, Dynamics like MNP will kick in and will further challenge the life cycle of the consumers. Operators will have to focus on better segmentation of market and retention of existing base. Managing consumer experience and brand preference will be key. BWA, WiMax, Wi-Fi and LTE: According to Sanjay Nayak, CEO & MD, Tejas Networks, The average bandwidth consumed by a mobile broadband device is expected to grow by 10-15 times in the next few years. With the majority of Indian telecom networks built for a predominant voice component of traffic, operators will continue to adopt innovative solutions that extend the life of their existing network assets such as microwave radios, optical transmission equipments and reuse of fiber on the ground to support data, VAS and content services. With 20 MHz of spectrum in the hands of 6 players, it is yet to be decided whether the first broadband rollouts will be for WiMax or LTE. However, most experts believe that WiMax will be rolled out first, and will slowly be upgraded to TD-LTE. While Ericsson and NSN both feel that TD-LTE is gaining popularity as the technology of choice, others argue that India still doesn't have an affordable LTE standard that matches with the rest of the world, and, for now, will roll out WiMax. According to Vaibhav Mehta, Elitecore, WiMax will offer high bandwidth and speeds to encompass a new generation of wireless services such as Mobile VoIP, Multimedia-based Mobile services (Presence,IM) and multiple air interface support. Location-based services will integrate with wireless networks including WiFi and WiMax to provide integrated applications usable in outdoor or dense urban environments. Some like Ruckus Wireless are also of the opinion that Wi-Fi will offer last-mile connectivity, superceding WiMax, and LTE as well. Rural Mobile Penetration: With over 200 mn rural subscribers, as of June 2010, having a 26.4% teledensity, it is clear that the masses are catching up with the mobile mania, and operators are quick to cash in on this with special low-priced schemes, crop and weather alerts, m-wallet and m-banking, e-learning through video on mobile, telemedicine, egovernment and multi-lingual applications. While 3G may take a while to reach the masses, BWA, with the BSNL WiMax rollout project for rural broadband, may come sooner providing data connectivity to far-flung reaches of the country. Remarks Nayak, Multiple government initiatives such as Rural Broadband, National Knowledge Network and USO Fund are expected to close this gap by building high-capacity information highways with nationwide coverage. The network will be future-proofed to support a full basket of applications to bridge the urban-rural divide.

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Cloud, Wireless and all-IP Network: According to NSN, The market for cloud computing will grow and play a fundamental role in re-shaping how telecom service providers offer apps to end users and how their internal systems are implemented. Solution delivered through cloud technology may eliminate operator's need to invest in its own IT infrastructure, personnel or premises in certain scenarios. With data center virtualization being routed through the cloud, a lot of traffic due to the data explosion can be plugged. Whether it is moving from a private to a public cloud, sharing data centers with other operators or becoming a virtual cloud SP leasing out services as an additional form of revenue, the cloud trend is fast catching up in the telecom space. According to John Samuel,President-India, Verizon Business , Building for peak capacity is yesterday's way to manage IT resources. Today's smart CIO uses only those resources required to power his or her business. Plus, with today's new IT delivery model centered on the cloud, enterprises need not make large investments in capital equipment or additional IT resources. Besides, as Vaibhav Mehta, VP, Elitecore says, Operators have realized the benefit of IP as a core for all communications related to voice, data and video and it will be the preferred enabler to reduce cost and maximize resource utilization. Wireless and fibre will thus be the technology of choice, going forward. According to NSN, A smarter network will have a common core and common optical transport. This will be all all-IP based and providing a combination of fixed and mobile access to meet all customer needs. It will be able to deliver context-specific services according to the user profile and location, the device, and the application's requirements. Not only will this bring more value to the user, but also differentiate the operator's offering from over-the-top services. The shift from IPv4 to IPv6 is also something to look out for. Infrastructure Sharing and Consolidation: In a recent interview, Dr JS Sarma, chairman, Trai said, Looking at the scarcity of spectrum, some form of operator consolidation will be required in the long term to preserve sustainability. While M&As have ruled 2009-10, tower and infrastructure sharing has also caught up, in an effort to reduce Capex and Opex, while maintaining quality. Says Kapoor, Operator consolidation is expected for those operators who haven't started services yet, but this will depend on the regulatory environment. We have seen vendor consolidation at a global level, now we will see more operator consolidation next year. Agreeing with him, Safawi says, 2011 will be a year of consolidation since the lock-in period of three years for the new operators will be over in Jan 2011, and thus this allows the promoters to sell their stakes. An MVNO-based business model for operators who did not win 3G spectrum, or leasing out of 3G spectrum by successful 3G operators may also be seen. M&As with global investors in the Indian market are set to increase, with further liberalization of government policy. Besides, use of existing infrastructure, or infrastructure sharing by companies will be the preferred mode to keep costs down and share latest technology.

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Smart Grid and Green Technology: With ICT contributing 2% of the world's total carbon emissions, there is an increased pressure on the industry to adopt green IT practices. The telecom sector on its part is working hard towards this as well-with tower and infrastructure sharing, solar-powered BTS and mobile phones, and much more. While the USO fund in rural areas is being used to promote solar and wind energy in rural areas, carbon credits or direct subsidies by the government to operators could serve as a further incentive to greening their operations. According to NSN, 86% of a mobile operator's total energy consumption typically occurs in the network infrastructure. Improved energy efficiency and renewable energy are competitive factors because they help communication SPs meet 3 objectives: expanding into areas with no grid or an unreliable grid supply, reducing operating costs, and cutting greenhouse gas emissions to meet climate change targets. Adds Nayak, Operators are deploying multi-functional equipments called Packet Optical Transport Platforms (POTP) that integrate traditional stand-alone network elements into a single device to realize significant power savings. Advanced features such as optical bypass of transit IP traffic, video multicasting, sub-wavelength grooming and lambda switching are incorporated to realize energy efficient networks. Convergence and M2M: While FMC hasn't really caught up in India due to regulatory policies, this is set to get a boost in the new year, with the uptake of high-speed unified communications and broadband and video technology, making it possible to link one's office to one's home and use a mobile like a mini-office. Besides, managed services are helping operators outsource network infrastructure maintenance to third-party service providers, and concentrate on their core customer offerings. According to NSN, Outsourcing complex operations to expert vendors is the most effective route to the highest network quality, to improve operational efficiency, to expand network coverage cost-effectively, and to enhance customer experience. Talking about how M2M applications will see a boost, Samuels says, By 2014, it's estimated that more than 8 bn devices will be connected to the global Internet. Mobile devices with an IP address will be discoverable no matter where they are located at a given point in time. M2M will help to enable a smart-grid evolution and improve healthcare, specifically diagnosis and care. Growth of Smart Devices and Local MNCs: India is becoming a regional hub, with expertise going from local to global, like in the case of Bharti's acquisition of Zain, says Kapoor.The local-global trend can also be seen in the increase of local services being outsourced, and many companies calling themselves local MNCs today. Talking about the growth of smart devices and its usage, Mani says, Consumers will show higher adoption of smartphones and Smartphone applications. App stores by device manufacturers and by operators will be brand differentiators. consumers will have choices and more pull-based strategy will work for higher adoption. New handheld devices like the Apple ipad tablet will kick in and influence the adoption positively. With tablet PCs like Dell and Samsung Galaxy Tab giving the iPad a run for its money, smartphones will also continue to have increased usage with 3G and emerging technology.

Security: A hot topic in recent times, the government has now agreed to set up a dedicated security lab with experts to determine whether telecom equipment that are imported adhere 47

to local security norms. However, it has also been suggested that operators look at scalable security technology at the time of buying equipment and keep frequent checks on their networks to prevent unlawful hacking. But there are other security concerns as well. Says Kapoor, Networks will have to be more geared up, and there will have to be more restrictions from operators for over-the-top players to restrict blocking of direct revenue channel from third party to consumer. According to NSN, Integrated security-as-a-service into a service operator's operational support system/business support system (OSS/BSS) platforms will allow the operators secure, centralized, and continuously updated platforms to protect fixed Internet access. Good security programs include constant monitoring and tweaking to safeguard an organization, and compliance with stringent government regulations. Remarks Samuel, Once an afterthought, security today must be factored in at every step of the way when deploying new technologies and protecting existing ones, whether it's premises equipment, in the cloud solutions or end-user devices. VAS: Adding value and reducing the effect of falling ARPUs and stiff competition, VAS has been taken to a new level and will keep on progressing with newer applications and apps stores, and with the coming in of 3G, especially. Explains Safawi, New Age VAS at a broad level is all about open systems, open networks, democratic framework for partners and consumers and availability of the best products based on the consumer's usage. In the new age VAS regime, the services will be provided under the verticals of access, video, applications and gaming. It is likely that mobile phone would become the center of commercial transactions and an infotainment gadget. MVAS-that would include mcommerce, m-banking, m-trading (in the near future), m-wallet, location-based offers and mobile TV at attractive prices are the most talked about trends in the industry today. Says Samuel, Smarter, more portable devices combined with fourth-generation wireless networks and an increased demand for workforce mobility and advanced mobile enterprise application platforms will make business apps more attractive and popular. More powerful devices, backed by huge libraries of applications and large developer communities will help businesses capitalize on LTE-based mobile broadband that offer mobile computing experiences we can only begin to imagine. Nayak agrees, With mobile phones becoming a gateway to Internet access, mobile social media applications for facebook, linked in and twitter will continue to proliferate amongst the urban mid to high end segment.

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BUDGET IMPACT

Indian mobile handset brands have welcomed the union budget 2012, which proposes to remove customs duty on parts of mobile phones and memory cards. Finance Minister Pranab Mukherjee has also proposed an increase in tax exemption on money spent on research and development by mobile phone manufacturers. Reacting to the budget proposals, Pradeep Jain, managing director of Karbonn Mobiles said, "We welcome the Finance Minister's move to cut customs duty on memory cards for mobile phones which while complementing the usage of storage cards and will definitely help in increasing the usage of extensive mobile phones in the country." "Another welcoming move which will definitely help in the emergence of India as a communication superpower of the world is the exemption of mobile phone parts from basic custom duties which while bringing down the manufacturing cost of mobile phones. It will aid in deeper penetration of mobile phone manufacturers into the untapped portions of the Indian market," added Jain. Welcoming the increase in tax exemption for R&D, co founder and director of Lava Mobile, SN Rai said, "For telecom industry it is a good budget. It would be beneficiary us to increase investment on R&D initiative." MNC players like Nokia, Samsung, LG and some of the vendors like Qualcomm have also R&D centres in India and they will benefit from this move. However analysts like Jaideep Ghosh, partner, KPMG advisory on Telecom sector see the custom duty exemption having limited impact in the handset prices. "Exemption of customs duty on parts of mobile phone memory cards is unlikely to result in a significant reduction in device prices and penetration, and likely to have a neutral impact on device penetration". The reason for skepticism comes from the fact that most of the handsets sold in India are manufactured outside the country and important handset prices are in-fact likely to increase. On other hand, Sanjay Kapoor, chief executive officer, Bharti Airtel, India & South Asia said, "The telecom sector is already burdened with multiple and high tax levies which account for 30 per cent of the telecom services revenue. The rise in Service Tax from 10 per cent to 12 per cent will increase cost of services to customers" "Additionally, FM's recommendation for gap funding of telecom towers, cables and optic fibres should lead to reduction in cost of capital for telecom infrastructure. Reduction on duties on mobile parts should enhance affordability and stimulate demand for mobile services across the country," Sanjay Kapoor further added.

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Company selection After understanding the dynamics of the telecom sector and the various issues revolving around it, two 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. Vodafone 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: 1. Bharti Airtel 2. Idea Cellular

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Chapter 8 Data Analysis and Interpretation BHARTI AIRTEL LIMITED Bharti Airtel Ltd (Formerly known as Tele-Ventures (BTVL)) was incorporated on 7th July, 1995, for promoting investments in diversified telecom service projects. The company was formed as a 80:20 joint venture between the Bharti Group through its subsidiary Bharti Telecom and STET International Netherlands NV, a company promoted by Telecom Italia, Italy. Bharti Airtel has bagged the 'Best Emerging Market Carrier' award at the Telecom Asia Awards 2007. The GSM service provider was adjudged best from among a list of 30 telecom companies in the Asia Pacific region. Earlier, Bharti Airtel had won the 'Best Indian Carrier' award for two consecutive years, in 2005 and 2006. The company introduced new products like BlackBerry wireless solution, Airtel Live and the company was the first wireless services operator to introduce Ring back tones(Hello Tunes). Also the company entered into the partnerships with the leading companies like Nokia, Siemens, Ericsson and IBM for its network planning, supply & management and for its IT requirements respectively. During 2005-2006, Vodafone acquired 10% economic interest in the company by way of subscription of convertible debentures in Bharti Enterprises Ltd, representing an indirect economic interest in Bharti Airtel Ltd and acquisition of direct interest in the company from Warburg Pincus LLC. The company also signed a managed capacity expansion contract with Ericsson to provide managed services and expand its GSM/GPRS network into rural India in 15 circles. Business Overview: Bharti is one of India's leading private sector service-provider of telecom services with more than 20 million customers in India and is the first to have an all India presence. The company is structured into three main units, Mobile Services which offers GSM Mobiles 51

Services and Infotel Services which provides broadband & Telephone, long distance and enterprise services which offer carriers and corporate. 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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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 is as follows:

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Price Information: Price Information (30-06-2012) BSE Rs.305.00 NSE Rs.305.05 P/E 12.17 EPS Rs 24.82 Market Cap Rs in Cr 114704.4 52W High Rs.444.70 52W Low Rs.280

COMPARATIVE CHART OF BHARTI AIRTEL WITH SENSEX

COMPARATIVE CHART -- BHARTI AIRTEL VS. SENSEX

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From the chart given above, it can observed that there has been an upside trend as well as downside trend in the SENSEX as well as the Share price of Bharti Airtel. But the decline in the value of Bharti Airtel is more than that of SENSEX and rise is less tha the sensex.

Key Financials

Bharti Airtel (CMP: Rs.308/ TP: Rs.360/ Upside:30%)

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Profit and Loss Statement (Rs in Cr)

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Balance sheet

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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Cash Flow Statement

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Key Financial Ratios Key Ratios EBITDA Ratio Formulae EBITDA / Income Net Profit Ratio PAT/ Income Debt-Equity Ratio Debt / Equity Current Ratio Current Assets / Current Liabilities Interest Cover EBIT / Interest Return on Equity PAT / Equity (%) Return on Capital EBIT / Employed (%) Capital Employed Observations Net Revenues: The net revenues of the company are growing positively every year. 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. 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 constantly above 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. FY2008 FY2009 42.1 41.0 24.8 0.4 0.84 22.9 0.4 0.95 FY2010 38.2 23.0 0.1 0.94

32.7 37.4 23.8

3.8 32.2 27.6

8.9 25.4 24.2

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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. 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. 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.

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 60

creditors.

Current Ratio: The current ratio measures the ability of the firm to meet its current liabilitiescurrent 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 has declined considerably from 32.7 to 8.9 in last 2 years. Return on Equity: This ratio measures the profitability of equity funds invested in the firm. Bharti Airtel has a seen decline on Return on Equity from 37.4 to 25.4 in 2years duration. This has impacted greatly on interest of equity shareholders lead to declined in market price in last 2 year

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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 shown marginal rise from 23.8 to 24.2 but is expected to give comparatively low returns in coming years due to comparatively low PBIT and increasing interest.

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RECENT IMPORTANT DEVLOPMENT

Bharti Airtel Limited Recommends Dividend


Bharti Airtel Limited announced that the Board of Directors of the Company in their meeting held on May 02, 2012, has considered and recommended a dividend of INR1 per equity share of INR5 each for the financial year 2011-2012.

TRAI To Take Action Against Bharti Airtel Limited For Violating MNP Norms
Telecom regulator TRAI is in the process of taking legal action against Bharti Airtel Limited for violating the mobile number portability (MNP) guidelines. It was found that Bharti Airtel has violated the provisions of the MNP regulations. Accordingly, TRAI is in the process of taking necessary legal action against Bharti Airtel. TRAI had earlier issued a showcause notice to private telecom operator Bharti Airtel for violation of MNP norms. TRAI has investigated rejection of MNP requests by various service providers, including Bharti Airtel, by sending a team of its officers.

Bharti Telecom Buys 14.93 Lakh Bharti Airtel Limited Shares


Bharti Telecom, the majority stakeholder in the Bharti Airtel Limited, has purchased a total of over 14.93 lakh shares of the Company for INR54.51 crore (INR545.1 million), through open market transactions. Bharti Telecom has purchased a total of 14,93,046 shares of the telecom firm through four market transactions worth a cumulative INR54.51 crore (INR545.1 million).

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Bharti Airtel Stock Analysis: The biggest cellular service provider in India Has customers more than 10 crore Indias Bharti Airtel became the fifth-largest telecom provider in the world after Zain acquisition Bharti is entering into Media and Entertainment sectors Between 2009 and 2011, the revenues and profits are expected to grow by compound rates of 19% and 15% respectively Bharti continues to maintain its leadership status in customer and revenue market share helped by strong subscriber addition (33.7mn in FY2010) and high ARPU of Rs 220 (Industry average of Rs164).

The competition (price war) is unlikely to further intensify as the cost of operation for the new players is high and unsustainable. Bharti with high EBIDTA/minute

of Rs 0.16 is relatively placed better than peers.

Invest in Bharti Airtel stock for long term gains. From the current levels the stock has the potential to reach upto Rs 360 in the next one year.

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IDEA CELLUAR LIMITED

Idea Cellular ltd. (Idea) was incorporated as Birla Communications Limited in 1995, IDEA Cellular is a publicly listed company, having listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) in March 2007. IDEA Cellular is a leading GSM mobile services operator in India with 67 million subscribers, under brand IDEA. It is a pan India integrated GSM operator covering the entire telephony landscape of the country, and has NLD and ILD operations. A frontrunner in introducing revolutionary tariff plans, IDEA Cellular has the distinction of offering the most customer friendly and competitive Pre Paid offerings, for the first time in India, in an increasingly segmented market. From basic voice & Short Message Service (SMS) services to high-end value added & GPRS services such as Blackberry, Datacard, Mobile TV, Games etc - IDEA is seen as an innovative, customer focused brand. IDEA offers affordable and world-class mobile services to varied segments of mobile users. Be it high end users, or low-end, price sensitive consumers - IDEA's tariff plans The established service areas are Delhi, Andhra Pradesh, Gujarat, Maharashtra, Haryana, Kerala, Madhya Pradesh and Uttar Pradesh (West). Licenses for the Maharashtra and Gujarat Service Areas were awarded in December 1995, with network rollout and commercial launch achieved in 1997. In January 2001 the mobile operations in Andhra Pradesh Service Area were integrated with IDEA through a merger with Tata Cellular Limited. In June 2001, the mobile operations in Madhya Pradesh Service Area were fully integrated with IDEA through an acquisition of RPG Cellcom Limited. In October 2001, the license for Delhi Service Area was acquired during the fourth mobile license auction, with network rollout and commercial launch in November 2002. In January 2004, Escotel Mobile Communications Private Limited ("Escotel"), was acquired with its original licenses in the Service Areas of Haryana, Uttar Pradesh (West) and Kerala. All these Service Areas were re-branded and integrated with IDEA in June 2004.

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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. 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 (30-06-12) NSE (30-06-12) P/E EPS Market Cap. 52W High at BSE 52W Low at BSE Rs. Rs. x Rs. Rs. In Cr Rs. Rs. 75.85 75.80 20.62 3.19 21,583.31 103.70 65.60

COMPARATIVE CHART OF IDEA WITH SENSEX

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 IDEA, But later the price of Idea is less than that of SENSEX.

One Year Price movement of IDEA:

The chart given above shows some fluctuations which can prove unfavourable from investorss piont of views. There is a negative movement seen in the stock. Also, it can be said that the stock volumes traded on the exchange is quite less.

Net Revenues:
The net revenues of the company are growing at an average rate of 8.5% per year. The revenues of the company underwent a sudden fall in 2004 due to the entry of various new players in the industry. But after that the company is trying to regain its earlier position by growing at a medium pace but with consistency. 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.

Expenses:
The expenses of the company are growing but the company is able to keep them within permissible limits, except the selling expenses which are expected to increase comparatively more due to need arisen for more marketing. Ultimately, this would enable the company to earn not only higher profit but also increase the subscriber base.

Operating Profit:
The operating profit of the company as a percentage of net revenues is constantly above 20%, 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.

Profit after Tax:


Though the growth in PAT is consistent, as is observed over a period of time, the amount of interest is much more high as compared to the interest that was paid some few years back.

Operating profit before tax:


The operating profit before tax of the company is increasing consistently every year. This is a positive sign for the company that the operating profit of the company is ever increasing though at a low pace as compared to the other players in the industry. It shows that the performance of the company in terms of their operations is satisfactory.

The increase in debts of the company is more as compared to the equity. The Company is continuously making investments but there is no remarkable increase in the profits made by the company. Also, the net current assets held by the company are reducing every year. The Capital Work in Progress is increasing continuously over a period of time.

PROJECTED CASH FLOW SUMMARY

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 2009 and 2010. 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 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.

Key Ratios

Formulae

Mar-10

Mar-09

Mar-08

EBITDA Ratio Net Profit Ratio Debt-Equity Ratio

EBITDA / Income PAT / Income Debt / Equity Current Assets /

0.31 0.083 0.57

0.28
0.086 1.7

0.33
0.15 2.3

Current Ratio Interest Cover Return on Equity (%) Return on Capital Employed (%)

Current Liabilities EBIT / Interest PAT / Equity EBIT / Capital Employed

1.23 3.12 0.28

1.4 3.42 0.32

0.6 5.02 0.39

0.14

0.16

0.17

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 but still there is no rise in the operating profit margin. This signifies lack of efficiency on the part of the company even if the companys operating profit margin is consistently over 20%.

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 declining over a period of years, which is considered to be unfavorable

Debt-Equity Ratio:

The debt-equity ratio shows the relative contributions of creditors and owners. The debt-equity ratio of the company is decreasing since 2008, and is expected to stay constant. The lower the debt-equity ratio, the higher the degree of protection enjoyed by the creditors. So there is relief over here.

Current Ratio:
The current ratio measures the ability of the firm to meet its current liabilitiescurrent assets get converted into cash during the operating cycle of the firm, and provide the funds needed to pay current liabilities. The current ratio of the firm is declining (Twice in 3 years) and also it is lower than the general norm i.e. 1.33 in India.

Interest Coverage Ratio:


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 IDEA is quite unfavourable as it is decreasing. Also it is been observed that there was a sudden fall in the interest coverage ratio in FY08.

Return on Equity:
This ratio measures the profitability of equity funds invested in the firm. IDEA has got an unfavourable Return on Equity as it is decreasing every year i.e. from 0.39 it has reached 0.28 in 2years duration. This ratio being of great interest to the equity shareholders, they may lose interest in the company due to declining RoE.

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). IDEA has attained a continuous decline in ROCE in previous two years and is expected to give comparatively low returns in 2010 due to comparatively low PBIT and increasing interest value. In case of IDEA, the EPS is expected to increase in FY08 but as observed in the earlier years, there is no consistency in EPS.

SHAREHOLDING PATTERN:

FINIDINGS

Investment rationale: At CMP 880.75 (as on 13 June 2007) the share price trades at 41.4 times (on the basis EPS of FY2007 i.e. 21.27) and at 30.59 times (on the basis EPS of FY 2008e i.e. 28.79). I predict that the share prices would rise from 880.75 to 1079.63 in a span of 8 months to 10 months. New technologies and paradigms: The trend towards adoption of Next Generation Networks (NGN) is global and the discussions in India are still at a preliminary stage. Technologies like Triple Play, wherein a single cable can deliver voice, data and video on demand and IPTV, provide the company with a unique opportunity. Global foray: Sri Lanka is the first international operation of Bharti Airtel and is in line with the Company's plan to expand its telecom operations internationally in select markets. Bharti Airtel is in the process of preparing a detailed business plan for rolling out GSM operations in Sri Lanka within the next financial year. Strong strategic partnerships: Singtel continues to be an investor and a strategic alliance partner and the company expects to leverage the strengths and experience of Singtel in years to come RECOMMENDATIONS

On completion of the company analysis, I feel that Bharti Airtel is fundamentally a very strong company and has a tremendous growth potential. I recommend to Buy/Hold the company shares and derive maximum value from it.

According to me, the fundamentals of Idea Cellular are weak. The company has made huge investments in domestic market as well as in international markets but still there is no significant rise in the profits made by the company and also the P/E ratio is rising. I recommend to Sell the shares of Idea Cellular as the rise in price is expected to be quite low

LIMITATION

Future changes are largely unpredictable; more so when the economic and business environment is buffeted by frequent winds of change. In an environment characterized by discontinuities, the past record proves to be a poor guide to future performance.

The market behavior if irrational may give rise to under-valuations for extended periods; over-valuations from unjustified optimism and misplaced enthusiasm for unreasonable lengths of time. The slow correction of under or over valuation poses a threat to the analysis.

CONCLUSION

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.

There are two key drivers for the growth in this business. First, the enhanced capability of the Company to deliver services on a global basis is attracting new customers and opening up new markets. Second, there is significant growth in the existing customers' businesses globally.

Bharti Airtel, one of the major payers in the telecom service provider industry has attained a significant market share in the country with its widespread network, huge subscriber base and quality service. Also, the company to make its presence felt all across the globe, is spreading its wings to international markets.

As per the analysis Idea cellular has all its ratio working in not so good conditions so one should move out before the prices go down and realise losses.

Idea Cellular, a company striving to make its presence felt in domestic as well as international market is lagging behind in the race against the new players. The reason behind this is the inability of the company to operate efficiently due to the large number of its subsidiaries, because of which there is no direct access to its end customers

BIBLIOGRAPHY

WEBSITES: o www.sharekhan.com o www.google.com o www.moneycontrol.com o www.bseindia.com o www.nseindia.com Books: o Stock market book by G.N.Bajpai