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30th Mar 2012

Telecom Industry

TELECOM LANDSCAPE IN 2012-14 India has emerged as one of the youngest and fastest growing economies in the world today. One of the sectors that has shown the signs of profitability and contributed significantly to the countrys economy is the telecom industry. In fact, the Indian telecom market has gained recognition as one of the most lucrative markets globally.

In 2012, the total Telecom Subscriber base is expected to reach approximately 950 million and the internet subscriber base is expected to rise to approximately 60 million. After auction on 3G & WIMAX in 2009, initially they concentrate on top 20 cities in India. Based on this, 3G subscriber base could reach 30 35 million by 2012. The entry of MVNOs will help achieve growth faster by targeting niche customer segments.

The Telecom Industry in India has witnessed a phenomenal and manifold growth over the recent years and it contributes nearly 2% to Indias GDP. The launch of 3G services will drive data revenues. Indias data revolution is going to be fuelled by 3G and WiMax.

Risk & Return Matrix

Company Nutek Tulip Telecom Bharti Airtel CMP 0.85 90.40 330 Target 42.65 422.10 1005.8 Risk High Moderate Low

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NUTEK INDIA BSE CODE NSE CODE Market Cap (Rs Cr) 52 week High/Low (Rs) Lat. Face Value Lat. EPS (TTM) Lat. Book value (Rs) Lat. P/E Ratio

CMP:0.85 533015 NUTEK 14.06 13.35/0.70 5 0.08 32.78 11.38

INVESTMENT ARGUMENTS

TGT: 42.65

Nutek is a Telecom Infrastructure services company providing rollout solutions for wireless and fixed telecom networks. During the FY2011, NUTEK witnesses a change in revenue mix where in the revenue contribution from FTK services declined while the contribution from other service verticals (TI, TIS and O&M). However, owing to intense competition in the sector and the resultant low call rates, margins at all the verticals in the Telecom value chain are under pressure. NUTEK plans to foray into power sector in a major way, ranging from owing raw material assets to setting up power generating capacities, and has made an acquisition to tie up its backend raw material supply notably the coal assets. NUTEK recently acquire 45% equity in Gulf Corporation, a company having coal mines in Indonesia, for USD 45 Million through its Hong Kong subsidiary. Company is actively looking to acquire both existing downstream projects in the conventional power generation space as well as foray into non-conventional power generation area which appears to be lucrative proposition in the long run. NUTEK Company is eyeing to enter into the lucrative defence sector in India. With Army recently announcing investments of over Rs.40000 crores for its Private Communication Network, the defence sector looks attractive .NUTEK has set-up a branch office in Nepal to capture the opportunities offered by the underdeveloped Telecom market in Nepal.

Valuation outlook With the positive change in revenue mix of NUTEK from FTK services to TI, TIS and O & M the growth in NUTEK would be expected as high. Based on DCF valuation model NUTEK occupies the 1st place among Telecom Service Providers in India with subject to increase in value per share in 2014(e). The estimated value of NUTEK is 42.64 rupees per share.

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30th Mar 2012

SWOT Analysis

DCF Valuation
Fair Value Value Per share WACC Calculation Cost of equity Rf Beta Rm Rm-Rf Cost of equity Total equity Cost of debt Tax rate Total debt Enterprise value WACC 8% 0.572471694 22.00% 14.00% 16.01% 5215 282.72% 30.00% 10.3 5,225.30 16.37% 6588.27 42.64 FREE CASH FLOW(Rs in MILLIONS) EBITDA Net Income Interest 1-tax rate Interest * (1-tax rate) Add: Depreciation Less : Fixed Capital Investment Less :Working Capital Investment FREE CASH FLOW TO FIRM NET BORROWING Interest * (1-tax rate) FREE CASH FLOW TO EQUITY 2012(e) 622.71 186.81 46.70325 0.70 32.69 18.68 42.00 -540.80 736.99 0.00 32.69 704.29 2013(e) 684.98 205.49 51.373575 0.70 35.96 20.55 42.00 -540.80 760.81 0.00 35.96 724.84 2014(e) 753.48 226.04 56.5109325 0.70 39.56 22.60 42.00 -540.80 787.01 0.00 39.56 747.45

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Income Statement (Rs in Millions)

2008 TOTAL INCOME YOY % EBITDA % of sales depreciation % of sales EBIT % of sales TAX % of sales Profit after tax YoY % of sales Tax expenses % of sales Interest expenses % of sales 20.44% 107.9 11.34% 8.5 0.89% 484.5 50.91% 8.8 0.92% 302.8 31.82% 107.9 11.34% 194.5 951.6 2009 1803.1 89.48% 717.1 39.77% 11.9 0.66% 215.3 11.94% 111.1 6.16% 175.3 -10.95% 9.72% 111.1 6.16% 8.6 0.48% 2010 1943 7.76% 652.2 33.57% 16.3 0.84% 267.5 13.77% 60.2 3.10% 182.7 4.05% 9.40% 60.2 3.10% 28.3 1.46% 2011 2830.5 45.68% 643.5 22.73% 18.1 0.64% 313.3 11.07% 87.9 3.11% 193.1 5.39% 6.82% 87.9 3.11% 41.6 1.47% 2012 e 3113.55 10.00% 622.71 20.00% 18.6813 0.60% 373.626 12.00% 93.4065 3.00% 186.813 20.10% 6.00% 93.4065 3.00% 46.70325 1.50% 2013 e 3424.905 10.00% 684.981 20.00% 20.54943 0.60% 410.9886 12.00% 102.74715 3.00% 205.4943 3.72% 6.00% 102.74715 3.00% 51.373575 1.50% 6.00% 113.0219 3.00% 56.51093 1.50% 2014 e 3767.396 10.00% 753.4791 20.00% 22.60437 0.60% 452.0875 12.00% 113.0219 3.00% 226.0437

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30th Mar 2012

TULIP TELECOM

CMP: 90.40

TGT: 422.11

BSE CODE NSE CODE Market Cap (Rs Cr) 52 week High/Low (Rs) Lat. Face Value Lat. EPS (TTM) Lat. Book value (Rs) Lat. P/E Ratio

532691 TULIP 1405.78 173.80/92.40 2.00 22.95 83.90 4.22

Incorporated in 1990 Tulip Telecom Ltd has emerged as Indias leading Enterprise Data Connectivity ( EDC) player. By having the rapid growth in telecom sector, EDC market was Rs 62 billion (FY10) and with increasing demand for data connectivity from private and government sector it is anticipated to expand to Rs 130 billion by FY16(e) at a CAGR of 12% With the greater demand in IT infrastructure, TTL is identifying opportunities in this segment by providing end-to-end IT Infrastructure solutions covering managed security, unified communication and colocation & data canters to its customers. TTL currently enjoys a leadership position in fastest growing MPLS/VPN services with 30.6% market share Reliance emerges as the single player having Pan-India license for 4G network. But, we believe, Reliance for that matter may like to partner with TTL or government allows for more competition to break the monopoly of Reliance in the emerging scenario, any other player apart from reliance may utilize the fiber network service of TTL for speedy roll-out of 4G services. This scenario can prove to be a big boon to TTL.

Valuation Outlook
TTL, a leading player in EDC space, is slowly moving to enterprise data services space by and has huge opportunity on its hands. Using DCF valuation we found that TTL occupies 2nd place with subject to the increase in market price per share in 2014(e). The estimated value of TTK is 422.11 rupees per share.

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30th Mar 2012

Business Segments

SWOT Analysis

Figure 3.19

DCF Valuation
FREE CASH FLOW(Rs in MILLIONS) EBITDA Net Income Interest 1-Tax Rate Interest * 1-Tax Rate Add: Depreciation Less : Fixed Capital Investment Less : Working Capital Investment Free cash Flow of Firm Interest * 1-tax rate Net Borrowing 2012(e) 9028.03 3916.50 -705.32 0.70 -493.72 2398.07 8964.32 -1916.17 -1227.30 -493.72 0.00 2013(e) 10833.64 4699.80 -846.38 0.70 -592.46 2877.69 8964.00 -1916.00 -62.98 -592.46 0.00 2014(e) 13000.37 5639.76 -1015.65 0.70 -710.96 3453.22 8964.00 -1916.00 1334.02 -710.96 0.00

Fair value (Rs in MILLIONS) Value Per Share WACC Calculation Cost of Equity Rf Beta Rm Rm-Rf Cost of Equity Total equity Cost of Debt Tax Rate Total Debt Enterprise Value WACC

61206.10 422.11

8% 0.642055461 21.50% 13.50% 16.67% 12125 3.56% 30.00% 15061 27,186.00 8.81%

FCFE DISOUNT FACTOR Present value of free cash flow

-733.58 0.96 -703.24

529.49 0.88 466.47

2044.98 0.81 1655.68

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30th Mar 2012

Income Statement (In Millions Rupee)

Revenue YoY % EBITDA 2008 12189.8 2009 16144 32.44% 3851.9 23.86% 414.4 2.57% 2952.6 18.29% 2497.8 25.09% 15.47% 330.4 2.05% -327 -2.03% 2010 19664 21.80% 5857.5 29.79% 1353 6.88% 3901.8 19.84% 2304.4 -8.39% 11.72% 899.4 4.57% -638 -3.24% 2011 23510.5 19.56% 7355 31.28% 1717 7.30% 4916.9 20.91% 3053.3 24.53% 12.99% 1000 4.25% -766 -3.26% 2012 E 28212.6 20.00% 9028.03 32.00% 2398.07 8.50% 6629.96 21.00% 3916.50 20.10% 13.88% 847.66 3.00% -705.32 -2.50% 2013 E 33855.12 20.00% 10833.64 32.00% 2877.69 8.50% 7955.95 21.00% 4699.80 13.88% 1017.20 3.00% -846.38 -2.50% 2014 E 40626.14 20.00% 13000.37 32.00% 3453.22 8.50% 9547.14 21.00% 5639.76 13.88% 1220.64 3.00% -1015.65 -2.50%

2776.9 22.78% 418.1 3.43% 2038 16.72% 1871.2 15.35% 139.5 1.14% -171 -1.40%

Depreciation

EBIT

Profit after tax YoY % % of sales Tax expenses

Interest expenses

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BHARTI AIRTEL BSE CODE NSE CODE Market Cap (Rs Cr) 52 week High/Low (Rs) Lat. Face Value Lat. EPS (TTM) Lat. Book value (Rs) Lat. P/E Ratio 532454 BHARTIARTL 125052.67 447.82/316.00 2.85 15.78 115.42 20.87

CMP: 330

TGT: 1005.8

As a market leader in the Indian Telecom space, Bharti Airtels outlook is promising and is in line with future growth potential of the sector. Emerging markets of Sri Lanka and Bangladesh and newer product family of Digital TV will continue to be the focus areas and Airtel will continue to build its integrated solutions created for enterprise and small & medium business. As regard the Africa operations, looking forward into FY 2011-12, the Company will be focusing on strengthening its business model across all the 16 countries of operation. It will also be leveraging the opportunities that 3G, data, MNP and Airtel money presents. Exploited fully, these opportunities have the potential to make Airtel truly unique to both current and prospective customers in the market. The growing demand of digital content, especially High Definition (HD) content, will further accelerate the growth of digital TV services. Digital Media Exchange (DMX), coupled with Teleport Services, will get content aggregation capabilities to the market, thereby opening new avenues for a telecom service provider in digital signage and digital cinema content delivery domains

With technologies like cloud computing and grid computing gaining momentum, the Indian Data Centre Services are on the rise and is emerging as a long-term growth opportunity. Cloud based services such as Software as a Service (SaaS), Platform as a Service (PaaS) offer new opportunities for small and medium businesses.

Valuation Outlook
BHARTI AIRTEL concentrating into rural market and with the advantage of new technologies like 3G, BWA and VAS, it will gain moderate profit and huge subscribers as well. Based on DCF model we found that BHARTI AIRTEL occupies 3rd place among Telecom Service Providers in India with respect to value per share in 2014(e) The estimated value of BHARTI AIRTEL is 1005.8 rupees per share.

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30th Mar 2012

SWAT Analysis

DCF Valuation
FREE CASH FLOW EBITDA EBIT NET PROFIT INTEREST 1-TAX RATE INTEREST * 1- TAXRATE ADD: DEPRECIATION LESS : CAPEX LESS : WCINV FREE CASH FLOW TO FIRM INTEREST INT*1-TAX RATE NET BORROWING FCFE 2012 205161.84 76925.87 41032.37 -24313.21 0.70 -17019.25 55014.21 176461.00 1540.20 -98973.87 -24313.21 -17019.25 0.00 -81954.62 2013 235936.12 88464.75 31458.15 -27960.19 0.70 -19572.13 335422.51 176461.00 1540.00 169307.53 -27960.19 -19572.13 0.00 188879.66 2014 271326.53 101734.46 27132.65 -32154.22 0.70 -22507.95 385735.89 176461.00 1540.00 212359.59 -32154.22 -22507.95 0.00 234867.54 TOTAL NO OF EQUITY SHARES DISOUNT FACTOR PRESENT VALUE OF FREE CASH FLOW Enterprise value Value per share WACC CALCULATION COST OF EQUITY RF BETA RM RM-RF COST OF EQUITY TOTAL EQUITY COST OF DEBT TAX RATE TOTAL DEBT ENTERPRISE VALUE WACC 3797.5 0.95 -77751 3819523.3 1005.8

0.85 161280.9

0.77 180503.5

9% 0.89489424 22.00% 13.11% 20.62% 516231 0.12 2.68% 30.00% 532298 1,048,529.00 11.11%

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30th Mar 2012

Income Statement (Rs in Millions)

2008 TOTAL INCOME 270249.3 2009 369615.5 36.77% EBITDA 117037.4 43.31% DEPRECIATION 0 0.00% TAX 8378.1 3.10% PAT YoY % of sales TAX EXPENSES 24.79% 8378.1 3.10% INTEREST EXPENSES -4053 -1.50% 67008 154664.2 41.84% 0 0.00% 6614.6 1.79% 84699.1 20.89% 22.92% 6614.6 1.79% -27617.9 -7.47% 2010 418472 13.22% 224228 53.58% 62832 15.01% 13453 3.21% 89768 5.65% 21.45% 13453 3.21% -7626 -1.82% 2011 594672 42.11% 307065 51.64% 102066 17.16% 17790 2.99% 60467 -48.46% 10.17% 17790 2.99% -20378 -3.43% 2012 E 683872.8 15.00% 205161.84 30.00% 55014.20847 8.04% 18970.77345 2.77% 41032.368 20.10% 6.00% 18970.77345 2.77% -24313.20937 -3.56% 4.00% 21816.38947 2.77% -27960.19078 -3.56% 3.00% 25088.848 2.77% -32154.22 -3.56% 2013 E 786453.72 15.00% 235936.116 30.00% 335422.5116 42.65% 21816.38947 2.77% 31458.1488 2014 E 904421.78 15.00% 271326.53 30.00% 385735.89 42.65% 25088.848 2.77% 27132.653

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30th Mar 2012

Research Manager: Vijayababu M Email: vijayababum@ambalalshares.com

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