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The fast track growth of the Indian telecom industry has made it a key contributor to
Indias progress.
India adopted a phased approach for reforming the telecom sector right from the
beginning. Privatization was gradually introduced, first in value-added services, followed
by cellular and basic services. An independent regulatory body, Telecom Regulatory
Authority of India (TRAI), was established to deal with competition in a balanced
manner. This gradual and thoughtful reform process in India has favored industry growth.
Today, there are more than 225 million telecom subscribers in India. Every month, 6-7
million new subscribers are added. Upcoming services such as 3G and WiMax will help
to further augment the growth rate.
Furthermore, the Indian economy is slated to sustain its 7-9 per cent growth rate in the
near future. This is supported by the political stability that the country is experiencing
currently. Indias demographic outlook makes it one of the largest markets in the world. A
conducive business environment is also created by a favorable regulatory regime. There
exists enormous business potential for telecom companies on account of the countrys
low teledensity, which is close to 19 per cent presently. The Indian telecom industry is
growing at the fastest pace in the world and India is projected to be the second largest
telecom market globally by 2010.

Equity Research is nothing but research of equities. Use of equity research depends on
the maturity of financial markets in an economy and the extent of market depth and
As our markets grow in terms of depth and breadth, we are seeing an increased demand
for information, research and analysis of Indian companies since such data is necessary
for taking informed investment decisions. With this growth in capital markets, brokerage
firms and investment bankers have started churning out more and more research on
Indian companies. This research is targeted toward large institutional investors who use
these reports in their investment decision-making process.

The primary use of equity research is for making investment decisions whether they are
large institutions, foreign investors, private equity, venture capital, high net worth or
retail investors.
In addition to investment decisions, equity research is utilized by a variety of other users:
investment bankers use it to determine pricing for an IPO they want to bring to the
market; they use it to figure out valuations in merger and acquisition deals and to outline
key areas of pricing negotiations.

Corporate finance professionals use equity research in their investment decisions-short

term as well as strategic/financial investments in other firms and companies.
Another community that is increasingly relying on equity research are the private equity
and venture capital funds that have been coming to India is hordes seeking fast growing
companies to deploy their capital.
Other, like individual investors, employees of accompany, potential employees and
competitors also make use of equity research reports in their decision making process.


Equity research entails a holistic understanding of a business. This includes quantitative
as well as qualitative information and its analysis. Quantitative information including
financial aspects start with financial statements such as profit & loss statements, balance
sheet, cash flow statements, schedules to accounts, etc.
Qualitative information involves gaining an insight on business and industry dynamics
and can be obtained through a variety of sources including all sorts of reading materials
on the company and the industry, news reports that keep you updated on recent company
developments, detailed discussions with promoters can give you insights that is
irreplaceable, discussions with management and sector experts, site visits can give an
analyst a flavour of the working culture that no amount of discussions can, talking to
customers, suppliers, competitors, employees, etc. can throw up issues that analysts can
delve deeper into. These steps facilitate equity analysts in getting a deep insight into the
performance of the company.

This kind of deep equity research is required to forecast revenues, earning, and other
financial parameters of the business for the next few years.
However, equity research is fundamental to the investment process as it helps in
identifying attractive businesses as investment opportunities. The future belongs to those
who possess a clear understanding of what is expected from their research and how they
should go about conducting it.

Equity valuation is aimed at valuing a company or its stock. An equity analysts job is to
find out how much a company makes and is likely to make leading to determination of
the worth of the companies and hence its stock.
A business value is based on its future prospects so it is understandable that valuation
models that involve forecasts have considerable importance. A valuation model is usually
expressed as a formula but in reality is a methodical approach to tackle the task of
valuation. Any valuation model as at least two features-it specifies what is to be forecast
to capture future prospects of a business and secondly, a method to convert these
forecasts to a stock valuation.
Valuation is the essence of asset management. Simplistically speaking, valuation experts
and asset manager globally try to gauge the appropriate value of assets and businesses
and seek to buy for less that that value or sell for more than that value.


The objective of the study is to answer the following questions:

Is the companys revenue growing?

Is it actually making a profit?

Is it in a strong-enough position to beat out its competitors in the future?

Is it able to repay its debts?

Is management trying to "cook the books"?

It boils down to one question: Is the companys stock a good investment?


The scope of this study entails an overview of the Telecom Sector in terms of its growth,
factors leading to its growth, its regulatory framework and recent trends in the economy
impacting this industry.
Analysis done includes economic analysis in relation to this sector, industry analysis
Further the study narrows down to company analysis of Bharati Airtel and RCOM.


Time Constraints
Fundamental analysis may offer excellent insights, but it can be extraordinarily timeconsuming.
Industry/Company Specific
Valuation techniques vary depending on the industry group and specifics of each
company. For this reason, a different technique and model is required for different
industries and different companies. This can get quite time-consuming, which can limit
the amount of research that can be performed. A subscription-based model may work
great for an Internet Service Provider (ISP), but is not likely to be the best model to value
an oil company.
Fair value is based on assumptions. Any changes to growth or multiplier assumptions can
greatly alter the ultimate valuation.
Analyst Bias
The majority of the information that goes into the analysis comes from the company
itself. Companies employ investor relations managers specifically to handle the analyst
community and release information.

Equity Valuation focuses on analyzing businesses from Valuation Forecasting
perspectives. It begins with analysis of economy, industry and company (E-I-C). In
economic analysis, the performance of the economy at both macro and micro level is
analyzed to understand the businesses for forecasting and valuation of businesses.
Analysis of business requires thorough understanding of the economy of the country and
its various sectors. Changes in economy have their implications on all business firms
either directly or indirectly. Macroeconomics deal with aggregate variables of an
economy like the output, its composition and rate of growth, level and growth rates of
money supply, employment, investment, exports, imports, variation in interest rate,
government finances, public borrowing etc.
John Manyard Keyens, during 1930s, through his book The General Theory of
Employmant, Interest and Money, turned the attention of policy makers towards
macroeconomic management of economies, particularly free market economies. The
present as well as expected performance of the domestic and global economies play a
vital role in setting the overall movement of stock market indices all over the world.
Policy makers worldwide make use of macroeconomic principles to give proper direction
to their respective national economies. Macroeconomic analysis tries to analyze the
process of economic growth, unemployment and inflation. It also examines the concept
of business cycles, reasons for and recovery measures.


The questions macroeconomic analysis tries to investigate are:

Why do countries differ in their growth performance? What are the determinants
of growth?

How do we measure productivity?

What are the inter-linkages between inflation, interest rates and inflation and how
are they determined?

How the countrys monetary, fiscal and exchange rates policies impact the
economic growth?

What are the global spillover effects of crude oil, gold prices on domestic capital
inflows and exchange rates?

Microeconomic analysis tries to analyze the issues relating to product, labour and
financial markets behaviour. It analyses the

Demand and supply conditions in product, financial and labour markets

Market structures in terms of perfect competition, monopoly, oligopoly, and


How do firms manage their costs

Production possibilities and efficiencies

Pricing strategies

Markets have undergone substantial changes in terms of major transformations of their
business models. Micro level analysis helps us to anticipate future developments. Supply
and demand dynamics will help us to evaluate the business model in terms of likely risks
to the firm. Market structure analysis would enable to get insights into the extent of
competition, pressure on margins and sustainability of the profit.

Analysts need to understand the dynamics of market in order to read the expectations
given by various players in the markets. For instance the economic growth forecasts,
economy getting into recession, business confidence indices, and concepts of soft
landing/hard landing we come across in the media and markets have underlying
economic analysis
The interaction of real and financial sector in an economy how and why only some
economies are able to succeed and others fail to sustain the economic growth. The extent
of financial deepening and openness will enable the economy to progress on a rapid pace.
The countrys financial sector reforms will throw opportunities to global investors a wide
choice of instruments and investment avenues.

An indicator, as the name suggests, is a statistic that is used to predict future trends about
the economy. For example, the economic survey released by Reserve Bank of India,
publications of Centre for Monitoring Indian economy (CMIE) and other such

publications by other accredited sources Popular indicators include GDP growth rates,
inflationary indices, Index of Industrial Production (IIP), etc.

Leading indicators help us predict the likely performance of the economy in the near
future. Examples of leading indicators are rainfall, unemployment, credit off-take,
corporate profit, money supply, stock market indices, etc.
Coincidental indicators indicate the current position of the economy or a sector.
Examples include GDP/GNP or sectoral output, Index of Industrial Production, etc.
Lagging indicators highlight what has already taken place and the outcome of such past
development. Examples include piled up inventories (unsold stock during recession),
large scale unemployment, outstanding debt, interest rates on commercial loans, etc.

Inflation has an enormous effect in the economy. Within the country it erodes purchasing
power. As a consequence, demand falls. If the rate of inflation in the country from which
a company imports is high then the cost of production in that country will automatically
go up. This might reduce the cost competitiveness of the product finally manufactured.
Conversely, if the rate of inflation in the country to which one exports is high, the
products become more attractive resulting in increased sales. Low inflation within a
country indicates stability and domestic companies and industries prosper at such times.

Interest rates decide the level of investment activity in the country. Nominal Interest rate
is the contractual rate of interest when a business firm/individual borrows money from a
bank or financial institution. Real interest rate is the inflation adjusted interest rate (Real
interest rate=nominal interest rate minus inflation rate).

A low interest rate stimulates investment and industry. Conversely, high interest rates
result in higher cost of production and lower consumption. When the cost of money is
high, a company's competitiveness decreases

Government policy has a direct impact on the economy. The liberalization policies of the
Narsimha Rao government excited the developed world and foreign companies grew
keen to invest in India and increase their existing stakes in their Indian ventures. The
initiative of the former BJP government in improving the infrastructure grabbed the
attention of foreign investors. The present government continues to focus on
infrastructure as it is realized progress at a decent rate would not be possible without


Policy Environment
The unprecedented growth of the Indian telecom industry has been well supported by the
policy reforms in the post liberalization era. Telecom sector reforms can be traced to the
1980s, when the Department of Posts and Telegraph was disintegrated to form
Department of Telecommunications. Further, DoT was split into Mahanagar Telephone
Nigam Limited (MTNL) and Videsh Sanchar Nigam Limited (VSNL). However, the real
thrust began with the National Telecom policy in 1994, which aimed at creating the right
platform for the industry in India.
The manufacturing sector opened in 1984
Private players allowed to enter value added services in 1992
National Telecom Policy 1994 was formulated

The industry witnessed a movement from monopoly to duopoly, as the Government

mandated two fixed and two mobile operators in each circle (1995)
Bidding started as per fixed license fee
Independent regulator, TRAI, established (1997)

NTP 1999 signaled the migration from high-cost fixed license fee to a low-cost revenue
sharing regime
DoT was transformed into a state-owned company, Bharat Sanchar Nigam Limited
(BSNL) in 2000
TRAI amendment act was unleashed to streamline its intervention
Additional licences in basic and cellular services

ILD services unlocked to competition

Reduction of licence fee

Go-ahead to CDMA technology

Limited launch of CDMA WLL (M)

Initiation of internet telephony in India

Reduction of GSM cellular tariff

Reduction of license fees

Widening of service coverage by the then players

Initiation of 3rd and 4th GSM operator networks

Calling Party Pays (CPP) implemented
Unified Access Licensing (UAL) regime established
Reference interconnect order issued

Intra-circle merger guidelines were
Broadband Policy 2004 was formulated to
target 20 million internet users by 2010

An attempt to boost rural telephony was made
FDI limit was raised from 49 to 74 per cent

Independent Regulations
Time and again, the Indian government has devised various regulations aimed at
augmenting the industry competitiveness. While some of these regulations have been
instrumental in ending the licence regime, others have paved the way for industry growth.
Unified Access Licensing Regime (UALR)
Unified licensing marked the end of the license regime in Indian telecom industry. It
helped in aligning convergent technologies and services.
The establishment of the UALR (2003) eliminated the need for separate licences for
different services. Players are now allowed to offer both mobile and fixed-line services
under a single license after paying an additional entry fee. This does not take into account
the national and international long-distance services and internet access services.
Access Deficit Charge (ADC)Subsidizing the Infrastructure Cost
ADC makes it essential for the service provider at the callers end to share a certain
percentage of the revenue earned with the service provider at the receivers end in long
distance telephony. This actually subsidises the infrastructure costs of a service provider
enabling access at receivers end, especially because rental for fixed-line services is low.
Revision in the ADC regime is expected to be followed by further tariff reduction in
telecom services. TRAI has revised the ADC regime, so that the benefit can be passed on
to the consumers. ADC has now been reduced to 0.75 per cent from 1.50 per cent of
AGR for all service providers. Per minute ADC on incoming international calls has
also been reduced.

Universal Service Obligation (USO)Building Rural Network

In order to widen the reach of telephony services in rural India, the USO policy was laid
along with NTP 99. All telecom operators are bound to contribute 5 per cent of their
revenues to this fund.
Initially, only basic service providers were under the purview of USO. Later, its scope
was expanded to include mobile services as well.
This system was put in place to bridge the wide gap between urban and rural
teledensities, bringing it down to 2 per cent as against the current 31 per cent. In the
prereforms era, a monopolistic DoT was solely responsible to USO. In the revised context
of open competition, the obligation lies with every stakeholder. The Government
enforced USO contribution on all operators except value added service providers
from 1 April 2002. This is a non lapsable fund and also absorbs any grants and loans from
the central government. Although it increases the cost burden for the telecom companies,
USO helps in building telecommunication infrastructure in the rural areas.
Policy Impact
At present, India is the third largest deregulated telecom market in the world. The Indian
government has continuously laid strong focus on the development of world-class
telecom infrastructure and the industry has witnessed synchronous policy changes 1999
onwards. Buoyed by this, the entry of numerous private players has triggered an
improvement in the quality of services; a reduction in the tariff level across all segments
and the development of infrastructure. Currently, private participation is permitted in all
segments of the telecom industry, including international long distance, domestic long
distance, basic cellular, internet, radio paging, etc.

Foreign direct investment (FDI) is one of the important sources to meet the huge funds
that are required for rapid network expansion. The FDI policy provides an investorfriendly environment for the growth of the telecom sector. The policy of the Government
of India is to strive to maximize the developmental impact and spin-offs of FDI. At
present, 74% to 100% FDI is permitted for various telecom services. The total FDI
equity inflows in telecom sector have been 1261 million USD during 2007-08.
The government is now looking forward to achieve the target of 600 million telephone
subscribers by the end of Eleventh Plan and to achieve rural teledensity of 25% by means
of 200 million rural connections at the end of 11th Plan. It is also envisaged that internet
and broad-band subscribers will increase to 40 million and 20 million, respectively, by
Deregulation in the telecom sector facilitated growth in the telecom sector. Let us
have a look at some facts and figures showing the same


Source: TRAI Website

Source: TRAI Website

India is among the fastest growing mobile markets in the world: India, the second
largest mobile market in the world, is also among the fastest growing mobile markets
globally. The total number of mobile subscribers in India (i.e., the subscriber base) has
increased from 6.4 million in March 2002 to around 350 million in December 2008, at a
compounded annual growth rate (CAGR) of 81%, aided by a significant increase in
network coverage and a continual decline in tariffs and handset prices.

Source: TRAI Annual report

The Indian telecom industry witnessed a CAGR of approximately 22 per cent from
2002 03 to 2006-07. The CAGR from 2006-07 to 2009-10 is expected to stabilise at 21
per cent. The Indian telecom market generated revenues of approximately US$ 20 billion
in 2006-07. The market witnessed a growth rate of 33 per cent over the last year and
recorded a CAGR of 22 per cent for the period 2002-03 to 2006-07. This growth has
resulted in doubling the revenues of the telecom segment in the past three years. Further,
it is expected that the industry will generate revenues worth US$ 43 billion by 2009-10.


Countries go through the business or economic cycle and the stage of the cycle at which a
country is in has a direct impact both on industry and individual companies. It affects
investment decisions, employment, demand and the profitability of companies.
The four stages of an economic cycle are:





At the time of depression, demand is low and falling. Inflation is high and so are interest
rates. Companies, crippled by high borrowing and falling sales, are forced to curtail
production, close down plants built at times of higher demand, and let workers go.
During this phase, the economy begins to recover. Investment begins anew and the
demand grows. Companies begin to post profits. Conspicuous spending begins once
again. Once the recovery stage sets in fully, profits begin to grow at a higher
proportionate rate. More and more new companies are floated to meet the increasing
demand in the economy. In India 2003 could be seen as a year of recovery. All the
attributes of a recovery are evident in the economy.
In the boom phase, demand reaches an all time high. Investment is also high. Interest
rates are low. Gradually as time goes on, supply begins to exceed the demand. Prices that

had been rising begin to stabilize and even fall. There is an increase in demand. Then as
the boom period matures prices begin to rise again.

The economy slowly begins to downturn. Demand starts falling. Interest rates and
inflation Demand starts falling. Interest rates and inflation are high. Companies start
finding it difficult to sell their goods. The economy slowly begins to downturn. Demand
starts falling. Interest rates and inflation begin to increase. Companies start finding it
difficult to sell their goods.

The Investment Decision

Investors should attempt to determine the stage of the economic cycle the country is in.
They should invest at the end of a depression when the economy begins to recover.
Investors should disinvest either just before or during the boom, or, at the worst,
just after the boom. Investment and disinvestments made at these times will earn the
investor greater benefits. It must however be noted that there is no rule or law that states
that a recession would last a certain number of years, or that a boom would be for a
definite period of time. Hence the length of previous cycles should not be used as a
measure to forecast the length of an existing cycle. An investor should also be aware that
government policy or other events can reverse a stage and it is therefore imperative that
investors analyze the impact of government and political decisions on the economy
before making the final investment decision.

Business cycle-Telecom industry

Telecom is one area in India where significant improvements have happened. Even in the
current scenario, where most of the industries are suffering due to global economic
recession, telecom is one sector which is still going strong.
In February 2009, total subscriber addition was 13.25 million. Though this was
marginally lower than 15.35 million additions in January.
The total subscriber base in the country now stands at 375 million, nearly 50% more
than that a year ago.

Every company operates within a certain industry. At times, a company may have
businesses that are diversified and hence dependent on more than one industry. It is an
integral part of the valuation process to understand industry dynamics to ensure that the
valuation exercise yields meaningful results.


There are two central questions that an analyst has to answer before deciding on the
attractiveness of investment ideas: industry attractiveness and competitive advantage of
the business being evaluated.
Industry Attractiveness can be understood at two levels: Short term profitability which is
determined in totality by demand supply scenario for the product in question and long
term profitability which is a function of industry structure which defines returns,
profitability and cash flows.
Competitive Advantage, on the other hand, helps businesses realize above-average
returns for an extended period of time. These are the two criteria that an investment in a
companys stock must satisfy.
Competitive Advantage depends on three sources:

The Industry: development of an attractive industry structure which minimizes

buyer/supplier power avoids excessive rivalry and raises barriers to entry

The Firm: identifying, developing and leveraging key resources and capabilities
to create cost-based advantages or product differentiation advantages which
cannot be easily imitated

Competitive Reaction: developing response strategies to competitor to effectively

anticipate and neutralize competitor actions

The first step in industry is to determine the cycle it is in, or the stage of maturity of the
industry. All industries evolve through the following stages:
1. Entrepreneurial, sunrise or nascent stage
2. Expansion or growth stage
3. Stabilization, stagnation or maturity stage, and
4. Decline or sunset stage


The Entrepreneurial or Nascent Stage

At the first stage, the industry is new and it can take some time for it to properly establish
itself. In the early days, it may actually make losses. At this time there may also not be

many companies in the industry. It must be noted that the first 5 to 10 years are the most
critical period. At this time, companies have the greatest chance of failing. It takes time to
establish companies and new products. There may be losses and the need for large
injections of capital. If a company or an industry is not nurtured or husbanded at this
stage, it can collapse.

The Expansion or Growth Stage

Once the industry has established itself it enters a growth stage. As the industry grows,
many new companies enter the industry. At this stage, investors can get high reward at
low risk since demand outstrips supply. In 2000, a good example was the Indian software
In 2003, the BPO industry is arguably in the growth stage. The mobile phone industry
is also in the growth stage - with newer models and newer entrants. The growth stage
also witnesses product improvements by companies that have survived the first stage. In
fact, such companies are often able to even lower their prices. Investors are keener to
invest at this time as companies would have demonstrated their ability to survive.

The Stabilization or Maturity Stage

After the halcyon days of growth, an industry matures and stabilizes. Rewards are low
and so too is the risk. Growth is moderate. Though sales may increase, they do so at a
slower rate than before. Products are more standardized and less innovative and there are
several competitors. The refrigerator industry in India is a mature industry. Growth is
slow. It is for the time seeing safe. Investors can invest in these industries for comfort and
average returns. They must be aware though that should there be a downturn in the
economy and a fall in consumer demand, growth and returns can be negative.

The Decline or Sunset Stage

Finally, the industry declines. This occurs when its products are no longer popular. This
may be on account of several factors such as a change in social habits. The film and video
industries for example have suffered on account of cable and satellite television, changes
in laws, and increase in prices. The risk at this time is high but the returns are low, even

negative. The various stages can be likened to the four stages in the life cycle of a human
being - childhood, adulthood, middle age and old age. Investors should begin to
purchase shares when an industry is at the end of the entrepreneurial or nascent
stage and during its growth stage, and should begin to disinvest when at its mature


The Telecom Industry in India is in its growth stage. Telecom is one area in India where
significant improvements have happened. Now the private operators also are providing
services which are giving rise to more choice.
The Telecom sector in India is experiencing a stage of Mature Growth. The growth in
sales is still above normal. Due to rapid growth of sales and profit margins, new players
are getting attracted to the Industry giving rise to more and more competitors. This is
leading to an increase in the level of supply and lower prices. Profit Margins will start
declining over time.


Investors must ascertain how an industry reacts to changes in the economy. Some
industries do not perform well during a recession; others exhibit less buoyancy during a
boom. On the other hand, certain industries are unaffected in a depression or a boom.
What are the major classifications?
1. Industries that are generally unaffected during economic changes are the evergreen
industries. These are industries that produce goods individuals need, like the food or agro
based industries (dairy products, etc.).

2. Then there are the volatile cyclical industries which do extremely well when the
economy is doing well and do badly when depression sets in. The prime examples are
durable goods, consumer goods such as textiles and shipping. During hard times
individuals postpone the purchase of consumer goods until better days.

3. Interest sensitive industries are those that are affected by interest rates. When interest
rates are high, industries such as real estate and banking fare poorly.
4. Growth industries are those whose growth is higher than other industries and growth
occurs even though the economy may be suffering a setback.

What should Investors do?

Investors should determine how an industry is affected by changes in the economy and
movements in interest rates. If the economy is moving towards a recession, investors
should disinvest their holdings in cyclical industries and switch to growth or evergreen
industries. If interest rates are likely to fall, investors should consider investment in real
estate or construction companies. If, on the other hand, the economy is on the upturn,
investment in consumer and durable goods industries are likely to be profitable.


Regulatory Framework
The Indian telecommunication system is governed by the Indian Telegraph Act, 1885
(ITA 1885) and the Indian Wireless Act, 1933. The Department of Telecommunications
(DoT) governs the Indian telecom industry. DoT, in coordination with its arm, Telecom
Commission, looks after licencing, policy making, and frequency management. A prime
ministerial council, the Group on Telecom and IT (GoT-IT), handles important ad-hoc
issues if any.
To streamline policy reforms and safeguard consumer interests, DoT established the
Telecom Regulatory Authority of India (TRAI) in 1997. The Telecom Disputes
Settlement and Appellate Tribunal (TDSAT) was also established at the same time.
Another regulatory body is the Wireless Planning Commission (WPC) under the aegis of
the Ministry of Communications.

Demand Analysis
Indian telecom continues to register a significant growth in the current fiscal year. This
has been due to the impact of economic reforms and pro-active policies of the
government. Today, Indian telecom network with about 364 million connections in
October 2008 is the third largest in the world .Indian telecom has achieved another
milestone as it has become the second largest wireless network in the world by

surpassing USA. With the current pace, where about nine million telephones are being
added every month, the target of 500 million connections by 2010 is well within our
The total number of telephones has increased from 76.53 million on March 31, 2004 to
363.95 million on October 31 2008. While 94.63 million telephones were added during
the twelve months of 2007-08, about more than nine million subscribers are being added
every month during the current fiscal year.
Tele- density has also increased from 12.7 per cent in March 2006 to 31.50 per cent in
October 2008. Rural teledensity increased to 13.4 per cent in October 2008 with 109.05
million rural telephone connections. Urban teledensity on the other hand has been 74.61
per cent in October 2008.
The growth of wireless services has been phenomenal, with wireless subscribers growing
at a compound annual growth rate (CAGR) of 87.7 per cent per annum since 2003. The
share of private sector in total telephone connections is now 77.44 per cent as per the
latest statistics available for October 2008 as against a meager 5% in 1999.
Rural telephones have gone up from 12.3 million in March 2004 to 109.05 million in
October 2008 with a teledensity of 13.04%. The target of 100 million rural telephones by
2010 has been achieved well in advance.
It is also envisaged that internet and broad-band subscribers will increase to 40 million
and 20 million, respectively, by 2010. As per the latest available statistics for September
2008, about 5.7% villages have broadband coverage and the number of rural broadband
connections is 1.55 lakh.

Supply Analysis
Degree of Concentration

Today, the telecommunications industry is a vast one with a large number of

private players who are constantly bringing down the cost to consumers thereby
making services more affordable and helping improve life in general and business
in particular. On the Indian business scene are successful government owned
institutions like MTNL and BSNL on the one hand, and even more successful and
aggressive players like the Tatas and Reliance on the other. Competition has just
begun and is heating up every day with either lowering of tariffs or introduction
of newer and improved services to keep a larger share of the market. Reliance, for
instance, has been one of the recent, more aggressive players in the telecom
business when it introduced a wireless phone in the market for as low as Rs. 500.

Ease of entry
Friction does exist between existing players and the newer entrants, as also
between the providers of
services based on different technologies (CDMA Vs Cellular). The same needs to
be resolved with government intervention through the regulator in order to further
improve the services. The telecom sector today is not a small one and covers
various services and many players within each service. One of the most vibrant
developments in telecommunications has been Cellular telephony a technology
that gives us the power to communicate anytime and anywhere. This segment, a
part of the broader telecommunications industry, has today spawned an entire
industry in mobile telecommunication. Mobile phones today are an integral part
of growth, success and economic efficiency of businesses. The government in
India has today recognized, providing world-class telecommunications
infrastructure as the key to rapid economic and social development of the country.

Industry capacity
Conservative estimates put a tag of a 3% increase in the growth of GDP for every
1% rise in the tele-density in the nation. Accordingly, this sector has received a
great thrust from the government for investments and development.


Increased FDI Flows

The Telecom sector is one of the largest attractor of Foreign Direct Investment in
the country, accounting for almost a fifth of FDI approvals since 1991.

Heavy investment in Infrastructure

The cellular industry is responsible for the single largest chunk of investment by
any individual industry.
The industry has already invested over Rs. 20,000 crores and is expected to invest
even more in the years to come.

Revenue Generation for the Government of India

The cellular telephony sector is poised for big growth going forward provided the
government controls the
sector and its players in a healthy manner. Basic and Cellular telephony form the
back bone of communications in the country though the internet too has played a
pivotal role.

Employment Generation
As the number of licensees goes up and they start their operations with 77
networks on air, the employment opportunities in this sector will be huge.


Source: CIA Factbook

The median age of Indians is 25.1 years.

The majority of the Indian population is in the age group of 15-64 years. Mostly users of
mobile phones belong to this category of age. Hence, Indian holds a great potential
market for telecom service providers. Even young generation of India is attracted more
and more towards cell phones and this has become a trend and need of even small
children in India. This assures a high growth in this industry in future.
Most of the service providers have covered majority of the urban population of India. But
many far fledged villages of India still need to be connected through mobile phones. The
untapped rural population of India is a huge proportion of the 72.2% total rural

population of India. Also, the demand for telecom service in rural people is increasing
day by day. This further ensures growth in the industry.



Strengths, Weaknesses, Opportunites and Threats (SWOT)

SWOT analysis is a tool for auditing an organization and its environment. It is
the first stage of planning and helps marketers to focus on key issues. SWOT
stands for strengths, weaknesses, opportunities, and threats. Strengths and
weaknesses are internal factors. Opportunities and threats are external factors.

In SWOT, strengths and weaknesses are internal factors.

For example:A strength could be:

Ones specialist marketing expertise.

A new, innovative product or service.

Location of your business.

Quality processes and procedures.

Any other aspect of ones business that adds value to your product or service.
A weakness could be:

Lack of marketing expertise.

Undifferentiated products or services (i.e. in relation to your competitors).

Location of ones business.

Poor quality goods or services.

Damaged reputation.
In SWOT, opportunities and threats are external factors.
For example: An opportunity could be:

A developing market such as the Internet.

Mergers, joint ventures or strategic alliances.

Moving into new market segments that offer improved profits.

A new international market.

A market vacated by an ineffective competitor.

A threat could be:

A new competitor in ones home market.

Price wars with competitors.

A competitor has a new, innovative product or service.

Competitors have superior access to channels of distribution.

Taxation is introduced on ones product or service.

Simple rules for successful SWOT analysis.

Being realistic about the strengths and weaknesses of ones organization when
conducting SWOT analysis.

SWOT analysis should distinguish between where ones organization is today,

and where it could be in the future.

SWOT should always be specific. Grey areas should be avoided.

Always apply SWOT in relation to ones competition i.e. better than or worse than

ones competition.
SWOT must be kept short and simple. Complexity and over analysis must be

SWOT is subjective.



Large population and dynamic economy provide considerable growth

opportunity for a wide range of communications technologies

Telecoms market has a level of competition across its various sectors

The market plays host to a large number of strategic investors including

Singapores SingTel, Vodafone of the UK, Telekom Malaysia, Norways Telenor,
Etisalat of the UAE, Japans NTT DoCoMo and Russias Sistema

Mobile market continues to expand rapidly

Regulatory framework is generally seen as having helped to facilitate competition

and an attractive business environment for telecoms sector investors; government
continues to loosen the restrictions on foreign participation in telecoms market


Fixed line sector appears to be shrinking in the wake of a growing mobile

substitution trend

Wireline infrastructure is extremely limited; fixed-line services are

unavailable in much of rural India

Poor fixed-line infrastructure has limited the growth of wireline broadband

services such as ADSL

Mobile sector is highly dependent on prepaid services; this appears to have led to
declining mobile ARPU levels

Disagreements between the telecoms regulator and various government ministries

has led to delayed policy implementation in a number of areas, most notably in
3G licensing


The weak state of the countrys wireline infrastructure has provided investment
opportunities in broadband wireless networks

The regulator has recommended that foreign operators should be allowed to

participate in the auction for 3G spectrum without a local partner

Government has recently reversed an earlier decision and declared that operators
will be permitted to use WiMAX networks to offer voice services

The regulator has published recommendations permitting ISPs to offer

unrestricted VoIP services

The government is currently considering recommendations made by the countrys

telecoms regulator to allow the operation of MVNOs in the mobile market

The government will cut licence fees by up to 33% for those operators whose
services cover over 95% of the residential areas in a circle

Recently introduced policy framework on IPTV services will allow IPTV

providers to use content from broadcasters


Disappointing broadband growth may result in the government failing to meet its
broadband development target of 20mn broadband lines in operation by the end of

Danger that current slowdown in domestic consumption will impact negatively on

telecoms market

Uncertainly as to whether spectrum allocations for 3G services will be sufficient;

severe lack of spectrum in nine of the 22 calling circles

Government plans to increase spectrum usage charges for telcos planning to offer
3G services could negatively affect the 3G licensing process

Network capacity, particularly in mobile market, could struggle to keep up with



Porter's five forces analysis is a framework for the industry analysis and business
strategy development developed by Michael E. Porter of Harvard Business School in
1979 . It uses concepts developed in Industrial Organization (IO) economics to derive
five forces which determine the competitive intensity and therefore attractiveness of a
market. Attractiveness in this context refers to the overall industry profitability. An
"unattractive" industry is one where the combination of forces acts to drive down overall
profitability. A very unattractive industry would be one approaching "pure competition".
They consist of those forces close to a company that affect its ability to serve its
customers and make a profit. A change in any of the forces normally requires a company
to re-assess the marketplace. The overall industry attractiveness does not imply that every
firm in the industry will return the same profitability. Firms are able to apply their core
competences, business model or network to achieve a profit above the industry average.
A clear example of this is the airline industry. As an industry, profitability is low and yet
individual companies, by applying unique business models have been able to make a
return in excess of the industry average.
Porter's five forces include three forces from 'horizontal' competition: threat of
substitute products, the threat of established rivals, and the threat of new entrants;
and two forces from 'vertical' competition: the bargaining power of suppliers,
bargaining power of customers.


The threat of substitute products

The existence of close substitute products increases the propensity of customers to

switch to alternatives in response to price increases. New inventions are always
taking place and new and better products replace existing ones. An industry that can
be replaced by substitutes or is threatened by substitutes is normally an industry one
must be careful of investing in. An industry where this occurs constantly is the
packaging industry - bottles replaced by cans, cans replaced by plastic bottles, and the
like. To ward off the threat of substitution, companies often have to spend large sums
of money in advertising and promotion. The industries that have to worry most are
those where the substitutes are either cheaper or better, or are produced by industries
earning high profits. It should be noted that substitutes limit the potential returns of a


The threat of the entry of new competitors

Profitable markets that yield high returns will draw firms. This results in many new
entrants, which will effectively decrease profitability. Unless the entry of new firms
can be blocked by incumbents, the profit rate will fall towards a competitive level.
New entrants increase the capacity in an industry and the inflow of funds. The
question that arises is how easy is it to enter an industry? There are some barriers to
a) Economies of scale: In some industries it may not be economical to set up small
capacities. This is especially true if comparatively large units are already in existence
producing a vast quantity. The products produced by such established giants will be
markedly cheaper.
b) Product differentiation: A company whose products have product differentiation
has greater staying power. The product differentiation may be because of its name or
because of the quality of its products - Mercedes Benz cars; National VCRs or
Reebok shoes. People are prepared to pay more for the product and consequently the
products are at a premium . It is safe usually to invest in such companies as there will
always be a demand.
c) Capital requirement: Easy entry industries require little capital and technological
expertise. As a consequence, there are a multitude of competitors, intense
competition, low margins and high costs. On the other hand, capital intensive
industries with a large capital base and high fixed cost structure have few competitors
as entry is difficult. The automobile industry is a prime example of such an industry.
Its high fixed costs have to be serviced and a fall in sales can result in a more than
proportionate fall in profits. Large investments and a big capital base will be barriers
to entry.

d) Switching costs: Another barrier to entry could be the cost of switching from one
supplier's product to another. This may include employee restraining costs, cost of
equipment and the likes. If the switching costs are high, new entrants have to offer a
tremendous improvement for the buyer to switch. A prime example is computers. A
company may be using a Honeywell computer. If it wishes to change to an IBM
computer, all the terminals, the unit and even the software would have to be changed.
e) Access to distribution channels: Difficulty in securing access to distribution
channels can be a barrier to entry, especially if existing firms already have strong and
established channels.
f) Cost disadvantages independent of scale: This barrier occurs when established
firms have advantages new entrants cannot replicate.
These include:

Proprietary product technology

Favorable access to raw materials

Government subsidies

A prime example is Coca Cola. The company has proprietary product technology.
Similar cold drinks are available but it is not easy for a competition to compete with


The intensity of competitive rivalry

For most industries, this is the major determinant of the competitiveness of the
industry. Sometimes rivals compete aggressively and sometimes rivals compete in
non-price dimensions such as innovation, marketing, etc. Rivalry among competitors
can cause an industry great harm. This occurs mainly by price cuts, heavy advertising,
additional high cost services or offers, and the like. This rivalry occurs mainly when:

a) There are many competitors and supply exceeds demand. Companies resort to price
cuts and advertise heavily in order to attract customers for their goods.
b) The industry growth is slow and companies are competing with each other for a
greater market share.
c) The economy is in a recession and companies cut the price of their products and
offer better service to stimulate demand.
d) There is lack of differentiation between the product of one company and that of
another. In such cases, the buyer makes his choice on the basis of price or service.
e) In some industries economies of scale will necessitate large additions to existing
capacities in a company. The increase in production could result in over capacity &
price cutting.
f) Competitors may have very different strategies in selling their goods and in
competing they may be continuously trying to stay ahead of the other by price cuts or
improved service.
g) Rivalry increases if the stakes (profits) are high.
h) Firms will compete with one another intensely if the costs of exit are great, i.e. the
payment of gratuity, unfunded provident fund, pension liabilities, and such like. In
such a situation, companies would prefer remaining in business even if margins are
low and little or no profits are being made. Companies also tend to remain in business
at low margins if there are strategic interrelationships between the company and
others in the group; due to government restrictions (the government may not allow a
company to close down); or in case the management does not wish to close down the
company out of pride or employee commitment. If exit barriers are high, excess
capacity can not be shut down and companies lose their competitive edges;
profitability is eroded. If exit barriers are high the return is low but risky. If exit

barriers are low the return is low but stable. On the other hand, if entry barriers are
low the returns are high but stable. High entry barriers have high, risky returns.


The bargaining power of buyers

In an industry where buyers have control, i.e. in a buyer's market, buyers are
constantly forcing prices down, demanding better services or higher quality and this
often erodes profitability. The factors one should check are whether:
a) A particular buyer buys most of the products (large purchase volumes). If such
buyers withdraw their patronage, they can destroy an industry. They can also force
prices down.
b) Buyers can play one company against another to bring prices down.
One should also be aware that:
If sellers face large switching costs, the buyer's power is enhanced. This is
especially true if the switching costs for buyers are low.
If buyers have achieved partial backward integration, sellers face a threat as
they may become fully integrated.
If buyers are well informed about trends and details they are in a better
position vis--vis sellers as they can ensure they do not pay more than they
need to.
If a product represents a significant portion of the buyers' cost, buyers would
strongly attempt to reduce prices.

If a product is standard and undifferentiated, the buyer's bargaining power is


If the buyer's profits are low, the buyer will try to reduce prices as much as
In short, an industry that is dictated by buyers is usually weak and its profitability
is under constant threat.


The bargaining power of suppliers

Also described as market of inputs. Suppliers of raw materials, components, labor,

and services (such as expertise) to the firm can be a source of power over the firm.
Suppliers may refuse to work with the firm, or e.g. charge excessively high prices for
unique resources. An industry unduly controlled by its suppliers is also under threat.
This occurs when:
a) The suppliers have a monopoly, or if there are few suppliers.
b) Suppliers control an essential item
c) Demand for the product exceeds supply
d) The supplier supplies to various companies
e) The switching costs are high
f) The supplier's product does not have a substitute
g) The supplier's product is an important input for the buyer's business
h) The buyer is not important to the supplier
i) The supplier's product is unique


1. Threat from New Entrants
)a Supply Side Economies Of Scale

declining ARPU

Infrastructure tenancy costs

Other FC like BPO

b) Demand Side Benefits

Brand pull exists to some extent for brands like airtel /idea/

c) Customer Switching Costs

Cost of new connection low

Proposed number portability

d) Capital Requirement

Extremely high infrastructure setup costs

Spectrum License cost

e) Incumbent Advantages
Established brand image
Reliability of network
d) Uneven access to Distribution Channels

Not a factor

2. Power of the buyer

a) Lack of differentiation among the service provider
b) Cut throat competition
c) Customer is price sensitive
d) Low switching costs
e) Number portability to have negative impact

3. Supplier Bargaining Power

a) Large number of suppliers.
b) Shared tower infrastructure
c) Limited pool of skilled managers and engineers especially those well versed
in the latest technologies
d) Medium cost of switching since changing their hardware would lead
additional cost in modifying the architecture.
e) Overall influence on the industry medium

Physical Infra


Network Infrastructure

-Siemens Networks

Information Technology -IBM

Passive Infrastructure
-Bharti Infratel
-Indus Towers
Call Center Outsourcing -IBM Daksh
-Hinduja TMT
-Aegis BPO

4. Rivalry among Existing Competitors

a) High Exit Barriers
b) High Fixed Cost
c) 6-7 players in each region

d) 3 out of 4 BIG-Four present in each region

e) Very less time to gain advantage by an innovation (Eg. Caller tunes, life time
f) Price wars

5. Threat of Substitutes
Some Substitutes:
a. VOIP (Skype, Messenger etc.)
b. Online Chat
c. Email
d. Satellite phones
e. None of the above a major threat in current scenario
f. Price-Performance trade-off very high
g. Issues of mobility and penetration with the substitutes


Increasingly, corporate strategies have to be seen in a global context. Even if an
organization does not plan to import or to export directly, management has to look at an
international business environment, in which actions of competitors, buyers, sellers, new
entrants of providers of substitutes may influence the domestic market. Information
technology is reinforcing this trend. Michael Porter introduced a model that allows
analyzing why some nations are more competitive than others are, and why some
industries within nations are more competitive than others are, in his book The
Competitive Advantage of Nations. This model of determining factors of national
advantage has become known as Porters Diamond. It suggests that the national home
base of an organization plays an important role in shaping the extent to which it is likely
to achieve advantage on a global scale. This home base provides basic factors, which
support or hinder organizations from building advantages in global competition. Porter
distinguishes four determinants:

Factor Conditions
The situation in a country regarding production factors, like skilled labor,
infrastructure, etc., which are relevant for competition in particular industries
These factors can be grouped into human resources (qualification level, cost of labor,
commitment etc.), material resources (natural resources, vegetation, space etc.),
knowledge resources, capital resources, and infrastructure. They also include factors like
quality of research on universities, deregulation of labor markets, or liquidity of national
stock markets. These national factors often provide initial advantages, which are
subsequently built upon. Each country has its own particular set of factor conditions;
hence, in each country will develop those industries for which the particular set of factor
conditions is optimal. This explains the existence of so-called lowcost- countries (low
costs of labor), agricultural countries (large countries with fertile soil), or the start-up
culture in the United States (well developed venture capital market). Porter points out that
these factors are not necessarily nature-made or inherited. They may develop and change.
Political initiatives, technological progress or socio-cultural changes, for instance, may
shape national factor conditions.
Home Demand Conditions
Describes the state of home demand for products and services produced in a

Home demand conditions influence the shaping of particular factor conditions. They have
impact on the pace and direction of innovation and product development. According to
Porter, home demand is determined by three major characteristics: their mixture (the mix
of customers needs and wants), their scope and growth rate, and the mechanisms that
transmit domestic preferences to foreign markets. Porter states that a country can achieve
national advantages in an industry or market segment, if home demand provides clearer
and earlier signals of demand trends to domestic suppliers than to foreign competitors.
Normally, home markets have a much higher influence on an organization's ability to
recognize customers needs than foreign markets do.
Related and Supporting Industries
The existence or non-existence of internationally competitive supplying industries
and supporting industries.
One internationally successful industry may lead to advantages in other related or
supporting industries. Competitive supplying industries will reinforce innovation and
internationalization in industries at later stages in the value system. Besides suppliers,
related industries are of importance. These are industries that can use and coordinate
particular activities in the value chain together, or that are concerned with complementary
products (e.g. hardware and software). A typical example is the shoe and leather industry
in Italy. Italy is not only successful with shoes and leather, but with related products and
services such as leather working machinery, design, etc.

Firm Strategy, Structure, and Rivalry

The conditions in a country that determine how companies are established, are
organized and are managed, and that determine the characteristics of domestic
Here, cultural aspects play an important role. In different nations, factors like
management structures, working morale, or interactions between companies are shaped
differently. This will provide advantages and disadvantages for particular industries.

Typical corporate objectives in relation to patterns of commitment among workforce are

of special importance. They are heavily influenced by structures of ownership and
control. Family-business based industries that are dominated by owner-managers will
behave differently than publicly quoted companies. Porter argues that domestic rivalry
and the search for competitive advantage within a nation can help provide organizations
with bases for achieving such advantage on a more global scale.

The Diamond as a System

The points on the diamond constitute a system and are self-reinforcing.

Domestic rivalry for final goods stimulates the emergence of an industry that
provides specialized intermediate goods. Keen domestic competition leads to
more sophisticated consumers who come to expect upgrading and innovation. The
diamond promotes clustering.

Porter emphasizes the role of chance in the model. Random events can either
benefit or harm a firms competitive position. These can be anything like major
technological breakthroughs or inventions, acts of war and destruction, or
dramatic shifts in exchange rates.

1. When there is a large industry presence in an area, it will increase the supply of
specific factors (i.e: workers with industry-specific training) since they will tend
to get higher returns and less risk of losing employment.
2. At the same time, upstream firms (ie: those who supply intermediate inputs) will
invest in the area. They will also wish to save on transport costs, tariffs, inter-firm
communication costs, inventories, etc.
3. At the same time, downstream firms (ie: those use the industrys product as an
input) will also invest in the area. This causes additional savings of the type listed
4. Finally, attracted by the good set of specific factors, upstream and downstream
firms, producers in related industries (ie: those who use similar inputs or whose

goods are purchased by the same set of customers) will also invest. This will
trigger subsequent rounds of investment.

Implications for Governments

The government plays an important role in Porters diamond model. Like

everybody else, Porter argues that there are some things that governments do that
they shouldn't, and other things that they do not do but should. He says,

"Governments proper role is as a catalyst and challenger; it is to encourage or even push - companies to raise their aspirations and move to higher levels
of competitive performance."

Governments can influence all four of Porters determinants through a variety of

actions such as
a. Subsidies to firms, either directly (money) or indirectly (through
b. Tax codes applicable to corporation, business or property ownership
c. Educational policies that affect the skill level of workers
d. They should focus on specialized factor creation
e. They should enforce tough standards

The problem, of course, is through these actions, it becomes clear which

industries they are choosing to help innovate. What methods do they use to
choose? What happens if they pick the wrong industries?

Porters Diamond has been used in various ways.

Organizations may use the model to identify the extent to which they can build on home
based advantages to create competitive advantage in relation to others on a global front.
On national level, governments can (and should) consider the policies that they should
follow to establish national advantages, which enable industries in their country to
develop a strong competitive position globally. According to Porter, governments can

foster such advantages by ensuring high expectations of product performance, safety or

environmental standards, or encouraging vertical co-operation between suppliers and
buyers on a domestic level etc.


An analysis of the Indian telecom industry under the Porters Diamond Model reveals
that India offers a competitive advantage for firms operating in the country.
1. Government

The Government extends full support to industry through reform


Policies are in place to safeguard the interests of service

providers, as well
as those of consumers
2. Firm, Structure and Rivalry

Intensive competition in the country has made it possible for service providers to
offer the services with lowest fare in the world, profitably

Many new handsets have been launched

3. Demand Conditions

India has a large middle class of 300 million

Growing affordability and lifetime free schemes have created a market at the
bottom of the pyramid

Low teledensity (~18%) offers huge future potential

4. Related and Supporting Industries

Competent handset manufacturers have produced the lowest priced handsets for
the Indian market

Handset players are setting up manufacturing bases in India for better operation

Many telecom equipment and software companies are based in India

Various value added service providers and content developers are present in India

5. Factor Conditions

Presence of skilled labour pool

Rapidly developing robust telecom infrastructure

Increasing disposable incomes of consumers

Increasing demand due to changing lifestyles and growing attraction for mobiles
with new features

India is the fastest growing free market democracy in the world. It has a mature and
dynamic private sector, which accounts for 75 per cent of Indias GDP, and a market with
enormous potential due to its large size and diversity. It is also expected to achieve the
highest growth rate among the BRIC countries (Brazil, Russia, India and China). India
offers significant business opportunities to the services, as well as the manufacturing
sectors. This is because India offers benefits such as cost advantage in product
development and back-office processing and the large-scale availability of skilled
English-speaking professionals. The middle class population is also a significant market
for any business entity.
A decade of reforms has opened the country to greater competition and spurred
industries to become more efficient.

India is currently the fourth-largest economy on PPP basis and is well positioned on a
continuously increasing growth curve. Goldman Sachs had earlier predicted that India wil
become the third-largest economy in the world. However, it has now revised its previous
estimates and claims that by 2050, India will even surpass the US and become the
second-largest economy after China. The countrys economic growth has become more
attractive due to the rising share of the services sector in the GDP.

Large Market Potential

Around 30-40 million people in India join the middle class every year. The countrys
upper middle class spends 6 per cent of its earnings on telecom services. India is one of
the largest consumer markets in the world. Due to rapid economic growth and rise in
disposable income, the spending power of consumers is increasing rapidly. It has been
forecasted that 15 years down the line, Indians will be approximately four times richer
than they are today. As per this forecast, Indians will purchase five times more cars and
consume three times more crude oil than they do today.

According to the 2001 census, about 54 per cent of the countrys total population was
below 25 years of age. By 2013, another 200 million people will be joining the league,
representing an exponential growth in the consuming class. India will become a large
consumer of world resources - be it natural or man-made, thereby offering numerous
opportunities to marketers around the globe.
Approximately 33 per cent of Indias population will be residing in urban areas by 2026,
as against 28 per cent in 2001.
Large Talent Pool
The working age population is expected to rise by 83 per cent by 2026.

India has over 380 universities and about 1,500 research institutes, which churn out
approximately 200,000 engineers, 300,000 post graduates, 2,100,000 other graduates and
around 9,000 PhDs. This large base of skilled manpower offers unparalleled advantages
to the companies operating in India. As a result, many multinational companies have
either established operation hubs in India to leverage this sizeable talent pool, or they
have outsourced their work to a third party in India. The numerous BPOs and KPOs
flourishing in India are a direct consequence of companies choosing the latter option.

Low Labour Cost

CII estimates that manufactured product outsourcing accounted for US$ 10 billion in
2007. The value will escalate to US$ 50 billion by 2015.
India has one of the lowest labour costs among the developing countries, which is the
foremost factor for attracting multinational giants in every sector. The Ministry of
Commerce, Government of India, has estimated that off shoring operations to India can
provide a cost benefit of up to 40 to 60 per cent, as compared to developed countries. The
country has also emerged as a major R&D hub with more than hundred Fortune 500
companies based in India. An apt example is Nokia, which has set up its manufacturing
operations in India considering the long term sustainable demand for mobile telephony.
The company believes that this initiative will help the company in reducing time to
market and respond better to customer requirements. It has pumped in US$ 150 million
into its Chennai facility.


Source: COAI, AUSPI, Company data;

Note: Idea includes Spice, RCOM includes

It is expected the tariff wars will lead to lower than expected Average Revenues per
Minute (ARPM). A fall of a further 31% in tariffs to Rs0.45 by F2011 is expected even
though it is among the lowest in the world. Minutes of usage (MOU) in India are among
the highest in the world and so demand elasticity to lower tariffs may be low. Penetration

levels in India are at 30%, with Metros at over 95%. A forecast of 31% CAGR for
subscriber growth over F2008-F2011 has been made, almost half the growth rate of the
past three years, bringing ARPU 40% lower. Two regulatory risks exist overbidding
for 3G license fee and possible cut in termination rates.
Key Points
Tariffs to fall a further 31% by F2011E to Rs0.45 even though they are among the
lowest in the world.
Overbidding for a 3G license fee and a possible cut in termination rates as key
regulatory risks in the next six months.
Maintain Overweight on Bharti, downgrade RCOM and Idea to Underweight largely
because of pressure in wireless business.

Bharti Airtel, a part of Bharti Enterprise, is Indias first and largest private service
provider with a nation-wide operational presence. While it was founded in 1995 as Bharti
Televenture Ltd. (BTVL), in April 2006, the company changed its name to Bharti Airtel.
Today, it is one of the fastest growing telecom companies in the world with more than 40
million subscribers. The company has structured its business in three segments mobile
services, broadband and telephone services, and enterprise services.
Performance at a Glance
Rs. mn (Year ending March, 31)
License Fees
Network Charges
Employee Costs
Other Operating Expenses
Total Operating Costs



Non Operating Income
Profit Before
Income Tax
Profit after Tax







Number of Shares outstanding: 1896 for FY2007

Number of Shares outstanding: 1896 for FY2008

Balance Sheet
Rs mn (Year ending March 31)
Share Capital
Share Premium
Reserves &
Shareholders' Funds
Deferred Tax Liability
Loan Funds
Other Non-Current
Net Block
Capital Work in Progress
Net Fixed Assets
License Fee
Other Intangibles, Non-Current Assets
Current Assets
Current Liabilities
Net Current Assets




111,407 *100 = 42.1%

156,536 *100 = 57.92%



Net Profit *100
43,038 *100 = 23.15%

68,159 *100 = 25.22%



3. EPS
Profit after Tax
No. of equity shares


43,038 =


68,159 =




Shareholders funds (net worth)
No. of equity shares
135,555 =


222,587 = 117.3




Profit after Tax


Shareholders funds (net worth)




43,038 *100 = 31.75%

68,159 *100 = 30.62%




Debt (Long Term Loans)

Equity (Shareholders Funds)



52,461 = 0.4

97,063 = 0.4

Current Assets
Current Liabilities








Profit after Tax

* 100

CAPITAL EMPLOYED (Shareholders Funds + Loan Funds)



43,038 *100 = 22.9%

68,159 *100 = 21.3%



Source: BMI

Overweight rating on Bharti, but net profit estimates are lowered for F2010/11 by 8%
and 13%, respectively. Bhartis strong balance sheet, integrated strategy, size and free
cash flow status give it an edge over peers. Key concern for Bharti is that it seems overowned and growth is slowing. A 14-15% growth in F2009-11E EPS is expected.
Cash flow analysis shown in Exhibit 4 suggests RCOM and Idea will have peak debt in
F2011 and F2012 whereas Bhartis debt should peak in F2009E. In addition, RCOM and

Idea are likely to take a further 4-6 years to lower their debt levels to reach Bhartis
current. Debt level this is the basis on which there is more positive view on Bharti over
RCOM and Idea despite valuations.

Why an Overweight Rating on Bharti?

a) It is estimated that the company will invest a cumulative US$7.6bn over F2009-2011E
and should be the first company in the Indian wireless space to turn free cash flow (FCF)
positive for an entire year in F2010E.
b) Bharti has non-wireless EBITDA growth of 47% during F08-11E and the largest
passive infrastructure base in the country of close to 60,000 towers, which it can share
with new operators.
c) Though the estimates assume a net adds market share of 19% by F2011, as against
26% in F3Q09, its revenue market share is an impressive 31%, as shown below.


Subscriber Market Share

(mn), As at End of Dec08

Wireless Market Share

Revenue Market Share







Source: BMI

Source: BMI

Investment Thesis
India is the worlds fastest-growing telecom market.
Bharti is Indias leading wireless operator and has increased market share by 108 bps in
the past 12 months.
Continued acceleration in net additions is leading to strong quarterly performances.
Key Value Drivers
Bharti should turn FCF positive in F2010.
Improvement in EBITDA margins, driven by economies of scale and improvement in
wireless business margins.
Strong net adds market share.
Tower business could increase earnings 5-10% in the medium term on consolidation.
Potential Catalysts

Unlocking value in the tower business through listing, strategic sale.

It is estimated that there would be a 100bps EBITDA margin improvement for Bharti
due to lower license fees once it meets the governments 95% coverage criteria.
Higher than expected fall in tariffs due to aggressive pricing by new operators to gain
Competition from regional operators intensifies, leading some to exit the business or
The CDMA operators resume major handset subsidies.
Regulatory uncertainty regarding spectrum and termination charges.

Share Price Movement: BHARATI


31.12.07 31.03.08 30.06.08 30.09.08 31.12.08 13.02.09

20286.99 15644.44 13461.6 12860.43 9647.31 9618.54

% change over
Close Price











From the above price movements we can see that over the period, when sensex has fallen
by 30% Bharati Airtels share price has fallen by 16%. Thus, it has outperformed the

Reliance Communications, previously known as Reliance Infocom, brought about a
digital revolution in the Indian telecom industry by providing Indias vast population with
affordable means of information and communication. Reliance Infocom, with the aim of
making mobile calls cheaper than postcards, built a 60,000-kilometre-long fibre optic
backbone, crisscrossing the entire country.
Reliance currently offers its services in 340 towns with its eight circle footprints; it also
initiated mobile data services through its R world mobile portal. This portal leverages the
data capability of the CDMA 1X network.
Performance at a Glance

Rs. mn (Year ending March 31)
Net Revenues
Total Operating Costs
Non Operating Income
Interest Expenses
Profit before Tax
Income Tax
Profit after Tax
Minority Interest







Number of Shares outstanding: 2045 for FY2007

Number of Shares outstanding: 2063or FY2008

Balance Sheet
Rs. mn (Year ending March 31
Share Capital



Reserves &
Shareholders' Funds
Loan Funds
Minority Interest
Net Block
Capital Work in Progress
Net Fixed Assets
Current Assets
Current Liabilities
Net Current Assets













*100 = 39.5%

1, 44,683


*100 = 42.4%


Net Profit *100


*100 = 22.1%
1, 44,683

66,839 *100 = 35.4%


3. EPS
Profit after Tax

No. of equity shares




31,941 = 15.61

66,839 = 32.4

Shareholders funds (net worth)
No. of equity shares

= 112

290,263 = 140.6




Profit after Tax


Shareholders funds (net worth)


*100 = 13.92%





*100 = 23.02%

Debt (Long Term Loans)

Equity (Shareholders Funds)




174,384 = 0.8




= 0.8

Current Assets
Current Liabilities


208,244 = 1.3






Profit after Tax

* 100

CAPITAL EMPLOYED (Shareholders Funds + Loan Funds)


* 100 = 8%


* 100 = 12.1%

No. of Reliance GSM Subscribers (mn)

Source: BMI

No. of Reliance CDMA Subscribers (mn)

Reducing RCOM to Underweight There has been a cut in F2010/11 profit estimates
by 20-30% largely due to pressure in its wireless and global business. RCOM has a
huge depreciation and interest burden, which it would have to incur through the income
statement post its GSM launch; so far it is being capitalized. This would lead to a cut in
profit in F2010E. The price target has been reduced to Rs132. Net debt stands at
US$3.8bn, the highest in the industry.

Source: BMI

Source: BMI

Investment Thesis
Net additions for RCOM remain at highest ever, but should peak in F2010E
Near-term execution risk due to GSM launch/aggressive pricing
Huge interest and depreciation burden
Key Value Drivers
Improvement in EBITDA margins by F2011, driven by economies of scale and stability
of operations in newly launched areas.
Strong net adds through pan-India presence in both CDMA and GSM.
Market share in long-distance and enterprise businesses.
Potential Catalysts
Strong net adds post All-India GSM launch.
It is estimated that there would be a 100bps EBITDA margin improvement for RCOM
due to lower license fees once it meets the governments 95% coverage criteria.
Higher Network and rollout costs lead to EBITDA Margin contraction

Increased competition.
Rollover of dual services, GSM and CDMA
Balance sheet risk due to high debt and hence high interest costs
Lesser than expected increase in network costs could surprise on EBITDA margins

Share Price Movement: RELIANCE


31.12.07 31.03.08 30.06.08 30.09.08 31.12.08 13.02.09

20286.99 15644.44 13461.6 12860.43 9647.31 9634.74

% change over
Close Price











From the above price movements we can see that over the period, when sensex has fallen
by 30% RCOMs share price has fallen by 44%. Thus, it has underperformed the market.

The India Growth Story to Continue
It is expected Indian wireless subscribers to grow 26% p.a. for the next two years to
reach a wireless subscriber base of 581 million by F2011E. More players, increased
spectrum, higher capex spend by operators, and an increase in active and passive sharing
should all lead to high subscriber growth. Early last year, the Indian government provided
all-India licenses to five new players as well as start-up licenses to existing operators
wanting a pan-India presence because they aimed to provide services under dual
technology. These licenses have so far released over 450 MHZ of pair band spectrum
(4.4MHz per operator per circle). The Department of Telecommunications (DoT) as well
as THE Telecom Regulatory Authority (TRAI) of India suggest 3G spectrum is on the
way. Higher spectrum for the operators means strong subscriber growth is likely ahead.
Increased capex spend by virtually every player should result in a peak in capex spend by

the industry in F2009E at US$15bn. With the industry nearly tripling its towers in the
next three years and tower sharing on the rise, it is believed telecom coverage for the
country could reach 90% by F2011, from about 55% currently.

However at a slower rate than in the past

Penetration level estimate 581mn subscribers by F2011, implies a penetration rate of
49%, similar to the penetration level of China today, and among the lowest in the world.
Though it is forecasted that India would add almost 107mn subscribers each year in
F2010 and F2011 to reach 581mn, the expected growth rate is half of that for the last
three years and ARPU would be 40% lower. Incremental returns would be significantly
lower. New entrants would take even longer of breaking even in 4-5 years and earning
profits in 7-8 years.

Tariff Wars Are Getting Worse than Expected

There are new schemes being launched with low tariff rates which aim at a higher
subscriber base thus compromising on the revenues generated.
RCOMs GSM tariffs for its Mumbai launch are significantly lower than those of existing
operators and it is expected that the company will make EBITDA losses purely on these
new subscribers. Idea currently has 325 lakh subscribers in Mumbai and recently
launched a new tariff in Mumbai that is about 31% lower in terms of ARPM than Bhartis
and generating a much lower EBITDA. The company has, however, added caveats that
the offers and tariff will be extended for between 2 and 6 months.

Lower Tariffs Mean Lower Profits and Returns

Earlier Bhartis returns grew handsomely despite tariff cuts due to the increase in
subscriber base and growing MOUs. However, it is estimated that the new tariffs to

generate lower EBITDA and ROCE. Based on our revised earnings estimates, it is
believed that the days of all-time high returns for the Indian telecom sector, including
Bharti, is now part of history. However, it is still expected that Bharti will earn much
higher returns than its cost of capital and other players in the industry.

Equity Research and Valuation- Dun & Bradstreet