By Group

Subject: Technical Analysis & Mergers & Acquisitions

Faculty: Mr. Farzan Ghadially
NMIMS PTMBA FIN DIV B TRIM 8
 Increasing Opportunities

 Data revenues – 8.5% of service revenue against world

avg of 16.5%
◦ Content Services – Music/Video etc
◦ Applications – m Commerce/PVR Ticketing
 Tele-density – From 2% in 2000 to 44.87% in Oct 2009
 TEMA target of $100 bn for equipments in next 3 yrs
 IT & ITES Industry – $35 bn with CAGR of 35%
 Broadband services --- 3G, Wimax,etc
 Increasing Mobile Subscriber Base
500
450
400
350
300
Million

250
200
150
100
50
0
2006 2007 2008 2009

Year Ended December 2006 2007 2008 2009-Oct

Mobile Subs 149 235 330 488
4
 LOWEST MOBILE TARIFFS IN INDIA

0.25
0.23
0.22

0.2 0.19

0.17
0.16

0.15
USD

0.11 0.11 0.11

0.1 0.09

0.05 0.05
0.05 0.04
0.03
0.02

0
Hong Kong
Philippines

Thailand
Malayasia
Argentina
Belgium

Taiwan

Pakistan
France

China
Brazil

India
Italy

UK

5
Source: Merrill Lynch Global Matrix - Q1 2007
 HIGHEST MINUTES OF USAGE
461

320 323 326

315

179
159

84

Russia M alaysia A ustralia Korea Singapore China Thailand India

6
Source: Merrill Lynch Global Matrix – Q1 2007
1113

884

634

469
407 375 342
328
205

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

 Connecting India to the world
ENABLERS
 Unified Licensing
 Telecom Technologies -
Internet/Wimax/VOIP
 Reduced License Fees in Long
Distance Sector
 Outsourcing Network Management to
Global Manufacturers
 India - Telecom Equipment
Manufacturing Base
 FDI Relaxation in Telecom (26% to
&74%) - $2.67 bn Aug,06
 Emergence of IT & ITES Sector
 Telecom has attracted significant FDI
and technology which has resulted in
huge benefits to the Indian Telecom
Growth
CHALLENGES
• Regulatory Policies
– Lack of level playing field
• Penetration Level
– Across the world and within India
– Seamless Roaming
• Infrastructure Program
– Manufacture telecom equipment
in India
– Passive Infrastructure Sharing
• VoIP
• Value Added Services
– Unutilized software capability
• Digital Divide
– Non Availability of technology,
equipment, network access for
millions of poor
 VAS Outlook

 Telecom companies are offering more VAS to turn

consumers into customers.

 The mobile VAS market in India is expected to grow at a

rate of 16.83%.  

 Mobile VAS currently contributed 9-12% of an operator’s

revenue, which is expected to reach 18-22% by 2010.
Market Share
 VAS Classification
 Entertainment services
include ring tones, caller
tunes, music, videos,
animation clips, gaming,
chatting, contests and
voting, email, matrimony,
match scores, and
astrological predictions.
 Information services
comprise news alerts, traffic
alerts, bank alerts, job
search, location based
services and different alerts
for events, fares and prices. 
 Mobile commerce includes
mobile banking, involving bill
payments and bank
transactions via a mobile
phone.
 Growth Drivers for VAS in India
 For one thing, the Indian economy is currently booming and has a high
GDP rate.

 Out of the 525.65 million mobile subscribers in India 8-10% of the

total mobile subscribers are expected to be GPRS subscribers as well.

 Almost 63 million urban Indians accessed Internet using their phone

in February, 2009.

 16 million urban Indians access Internet on their phone almost on a

daily basis.

 45 million urban Indians mentioned voting in reality TV shows, the

most popular SMS contest/vote type followed by voting in news polls
(31.64 million).
Growth Drivers for VAS in India

 Another important factor is the availability of mobile

phones and data plans at much cheaper rates.

 The ever growing presence of youth segment in the overall

demographics and availability of feature rich handsets
at low prices are also expected to drive uptake of VAS in
the country.
 VAS Road Ahead…..

 The Indian telecom industry is growing at an unprecedented rate,

with the second largest mobile subscriber base in the world after
China.

 The Indian urban landscape of potential mobile subscribers has

pretty much reached saturation, but rural India is still relatively
untouched in terms of using VAS, constituting only 15% of the
country’s entire VAS consumption.

 Faster Internet connectivity may become the most desirable VAS in

coming years.

 India still lacks the infrastructure for the development of a

faster mobile Internet network.
 VAS Road Ahead…..

 There are numerous VAS players, mostly smaller content

providers, who provide their services to cellular operators.

 The future is expected to see an amalgamation of content

providers in the VAS industry and the emergence of a few
strong large players.
 VAS Road Ahead…..

 Mobile commerce is also one of the fastest emerging VAS in

India. Vodafone and Citibank recently started the ‘Tap and
Pay service’ mobile phone as a Citibank credit card. Mobile
commerce has the most potential to become a popular VAS
in India. However, it’s also the most problematic, with
security concerns that need to be overcome.

 The intervention of private players in providing the 2G/3G

network will definitely boost the usage of the Internet and
related VAS services, which are currently limited to
browsing.

 With the advent of faster Internet, we’ll soon be able to

enjoy live streaming of music videos, television broadcast
on mobiles, video calls, and video conferencing.
 DEMOGRAPHICS

 Services such as music, playing games, surfing Internet for

reading news, sports, stocks are more popular amongst men

 Women prefer using their mobile phones for checking emails,

downloading ring tones, wallpapers, browsing Internet through
search engines for food services.

 It is the younger group .i.e. between 20-25 age group of mobile

users who like downloading games and ring tones most.
 Current Position & Scope of growth for
Onmobile

 Digital music (including CRBT and ring tones)

constitutes 35% of VAS revenue

Category Penetration Numbers VAS Annual VAS Key Players

(million) Revenue (RsRevenue
/ mo)
CRBT 25% 65 m Rs 30 cr Rs 350 cr OnMobile
BhartiTele
Hungama

IVR / Voice Portal 15% 30 m Rs 10 cr Rs 125 cr OnMobile

One97
Cellebrum
 Challenges & Suggestions
 Revenue challenge: 70:30 more skewed towards telecom operators
-Moving towards advertising to reduce reliance on telecom companies for
revenue

 User Awareness: telecom companies don’t try to market vas more but
concentrate on increasing subscriber base.
-VAS companies should start marketing VAS services themselves.

 Feature rich phones at low prices is still being developed to tap the low
end market
-Handset manufacturer and VAS companies are coming together to
design embedded applications

 Innovation in providing local content for rural market is necessary.

Substantial investments to create local content (IVR etc.)
 Introduction
OnMobile is a well capitalized VAS specialist

• Business: Telecom VAS, Mobile Marketing

• Founded in: Year 2000
• Co‐founders: Arvind Rao & Mouli Raman
• Headquarters: Bangalore, India
• Global offices: Mumbai, Delhi, Singapore, Sydney, Jakarta, Paris, London,
Kuala Lumpur, Dhaka, Johannesburg, Dubai
• Employees: 1200 +
• Listed on: Bombay Stock Exchange (BSE) & National Stock Exchange
(NSE)
• Market Cap: Approx. $491.70 million (at current exchange rate)
• Incubated by: Infosys (NASDAQ: INFY, 25bn$)
• Key Investors: Argo Global Capital, ICICI, Goldman Sachs, Deutsche Bank,
BVP,Ward Ferry

In the year 2008, OnMobile delivered approx. $350mn of VAS revenue to

operators
 History & Milestone
January 2000 Company formed in US as Onscan, Inc.
Series A shares to INFY as spinout consideration
November 2001 Launched Orange, Mumbai……..1st customer, Voice Portal
2003 India business takes off, Hutch, Bharti, IDEA launched
2004 Tata launched, CRBT product launched
2005 BSNL, MTNL launched, Optus & SingTel (intl) launched
2007 Acquired Voxmobili (France) $35M. Launched Mobilink, Ufone,
Indosat and Banglalink
2008 IPO in India @ $630M market cap. Launched Maxis
Acquired Telisma
 Business
Target Products
Markets •Telecom Value added services, Media
•Telecom operators, wireless and
Portals/interactivity
landline
•M-Commerce, M-advertising
•Media companies (print, TV, radio,
•Direct Marketing via mobiles and landlines
internet)
•On-Device portal, USSD/WAP services,
•Corporate and merchants
Phone backup
•Advertisers

Target Business
Customers Model
•India - primary base for R&D, •Revenue Share
anchor market •Long-term Managed Services
•Opportunistic intl., direct + indirect contracts
via partnerships
 MANAGEMENT

Arvind Rao – Chairman, CEO and Co – Founder, OnMobile

Mouli Raman, CTO & Co-Founder

Rajesh Moorti, CFO

Sandhya Gupta, Head – M&A, Investment & Strategy

Sanjay Bhambri, Head – Sales & Business Development – APAC & MEA

Sidharth Sharma – Head Accounts – Indian Public Telecom Operators

 Board of Directors
Arvind Rao Sridar Iyengar

Chairman, CEO and Co-founder, Compensation Committee Chairman

OnMobile
MBA Finance, Wharton School of the
University of Pennsylvania ,MS,
University of Wisconsin-Madison
B.Tech, IIT, Mumbai, India
Fellow of The Institute of Chartered
Accountants, England & Wales
Executive Education Course, Stanford

Mouli Raman H.H.Haight

President & CEO, Argo Global Capital
CTO & Co-Founder Bachelor of
MBA, Harvard Business School
Technology, Regional Engineering
BS, University of California-Berkeley
College, Allahabad

Naresh Malhotra Jayanth Varma

Audit Committee Chairman

Director, Chartered Accountant
 Track Record
Market reach: 687 million mobile subscribers in 22 countries
Unique users: 56 million /month
VAS call volume: 10 billion /month
 OnMobile’s
Products &Customers
5 Major Product Lines
Customer Base
Product Innovation
 Competitive Edge
• Breadth of product lines in VAS
• Product innovation
• First-mover advantage in India, emerging markets
• Operating scale, billing capability
• Business model: license model & revenue sharing
• India based cost structure
• Proven track record, results, customer relationships
• Quality of management team
• Unique capabilities of minimizing churns
 Key Highlights as of Q2 09-10
Products
•Onmobile included in the Top 5 customer list – a positive development in
international diversification strategy

•MSearch launched in four major Telecom Operators in India

•Launched cross Operator * to Copy in Four major Telecom Operators in India

•Launched MRadio in two Operators outside India with positive results from the
consumers

•Launched AdRBT trial in a leading Telco in India. Encouraging results

 Key Highlights as of Q2 09-10
 Signed Vodafone Global agreement to deploy our
products in emerging markets operating Companies.

 Signed with two more operators in India to provide

Voice Portal and RBT services.

 Signed our first RBT customer in Europe and in final

stages of deployment.

 Signed contracts with four Operators in Bangladesh for

IVR, Phone back-up and Subscription products.

 Signed new customers in Asia Pacific, Europe and Latin

America
Increase in
Forecasted Performance of OnMobile
subscriber base
& more focus on
VAS due to Particulars FY09 A FY10 E FY11 E FY12 E
competitive
voice Net Sales 406.30 547.10 781.70 898.1
tariffs/Exclusive
deal with Growth 34.6% 42.8% 14.89% FY10 – Manpower
Vodafone & costs, new product
Telefonica EBIDTA 127.40 166.37 263.30 315.41 launches,post
deployment
EBIDTA Margin % 31.30 30.41 33.70 35.12 expenses
FY11 onwards-
Depreciation 44.00 56.30 68.70 79.12 scale
economies,content
Interest* 0.00 0.00 0.00 0.00 agreements
Increasing costs Other Income 31.80 30.00 32.60 31.56
in servers &
electronic cards Reported PAT 85.20 98.04 157.20 185.20
due to expansion Investments in
FDs & liquid MF
EPS (Rs) 14.70 18.90 27.20 32.02

Valuation

PE 27.01 21.01 14.59 12.39

EV to EBIDTA 15.82 11.19 7.65 6.38

 Estimated P&L – Net4India
NET 4 INDIA LIMITED
ESTIMATED PROFIT & LOSS ACCOUNT FOR THE YEARS 09-10,10-11 & 11-12
   
    in Rs.'000
   
  2007-08 2008-09 2009-10(E) 2010-11(E) 2011-12(E)
   
 
Income from Sales and Services
1,351,639 1,606,723 1,847,731. 2,069,459.0 2,235,015.8
33 9 2
Growth   18.87% 15% 12% 8%

Cost of Sales and Services 1127663.4

795,699 980,577 27 1,303,759.2 1,419,235.0
3 5
Growth   23.23 15.00 15.62 8.86

Gross Profit
555,940 626,146 720,067.91 765,699.86 815,780.77
GPM(%)   38.97 38.97 37.00 36.50

Operating Expenses 238120.9 283614.9 339058.70 413891.82 458178.24

1 1
Growth   19.11 19.55 22.07 10.70

Operating Profit before interest, depreciation

and amortization 317,819 342,531 381,009.21 351,808.05 357,602.53
OPM(%)   21.32 20.62 17.00 16.00

Interest/Finance/Depreciation/Amortization 201346.1 233562.1 268596.51 248335.09 257026.82

charges 8 8
   
Operating Profit after interest, depreciation and
amortization 116,473 108,969 112,412.70 103,472.95 100,575.71
Other Income 24670.95 21765.73 25030.59 22764.05 20115.14
Profit before tax 141143.5 130734.6 137443.28 126237.00 120690.85
9 4
Provision for Taxation
46,335 46,693 40,834.86 43,458.64 42,465.30
Net Profit after tax
94,809 84,042 83,147.91 82,778.36 78,225.55
PAT Margin(%)   5.23 4.50 4.00 3.50

No Of Shares
 Diversification- To enable presence over some segments of the
telecom value chain
 Fall in voice revenues will lead operators to focus more on VAS
services – probability of change in revenue share to operators
advantage
 Possibility of Inhouse applications development by operators
 Competition in the VAS industry may reduce margins
 Acquiring NET4INDIA will enhance valuations for ONMOBILE
going ahead.
 Leveraging the IP platform of NET4INDIA to launch innovative
solutions.
 Expand the service base from soft services like
MVAS to core infrastructure services for telecom
and IT and to become a complete telecom service
player.

 Get access to the latest infrastructure and

technology of Net4India for operating its MVAS
services
 Client concentration: Onmobile derives a
significant portion of its revenue from a few major
carrier customers, as these carrier customers
continue to dominate the market share of the
Indian
telecommunications industry.

 Geographic concentration: Onmobile derives a

significant portion of its revenue from India as its
top customers consist of the major
telecommunications operators in India.
 Product concentration: Onmobile currently depends on
music related services, including ringback tones, ringtone
downloads and music messaging applications, for
approximately 54% of its revenue

 Industry concentration: Onmobile is a leading provider

of telecommunications value added software products
and services in India with an expanding international
presence. Its products are primarily targeted at end-user
telecommunications subscribers and hence expose the
company to the risk of industry concentration.
 Mitigation of risk through inorganic route involves continually
seeking new growth and acquisition opportunities in its
existing line of business as well as related businesses to
expand its geographic presence and product offerings

 Onmobile endeavors to de-risk from these by ensuring that the

revenues from any one of Customer, Product or Geography is
below a threshold value. This is done with geographical
expansion and product innovation, through organic and
inorganic means , Acquiring net4India would significantly help
in mitigating the above risks the company envisages.
Cash Flow Projections – Net4India
In Crores 2010 2011 2012
Capex -10.1 -11.3 -11.7
Net Profit before Tax and Extraordinary items 13.74 12.62 12.07
Adjustments for : 0.00 0.00 0.00
Depreciation 17.50 18.50 18.45
Amortisation of intangible assets 0.82 0.82 0.82
Assets discarded/ (Profit)/Loss on sale of fixed assets 0.29 0.29 0.29

Preliminary expenses written off 0.01 0.01 0.01

Bad debts 0.02 0.02 0.02
Interest and finance charges 7.50 6.89 6.50
Interest income -0.41 -0.41 -0.41
Operating Profit before Working Capital Changes 39.47 38.74 37.75
Adjustments for :
Sundry Debtors -6.10 -6.45 -6.90
Inventories -10.50 -11.00 -9.78
Current Assets, Loans and Advances -1.90 -1.95 -1.80
Provision for retirement benefits 0.23 0.23 0.23
Current Liabilities 1.34 1.43 1.50
Cash generated from Operations 22.54 21.00 21.00
Direct Tax paid -5.12 -4.79 -4.62
Cash Flow from Operating Activities 17.42 16.22 16.38
Less Capex -10.1 -11.3 -11.4

FREE CASH FLOW TO FIRM 7.32 4.92 4.98

TERMINAL VALUE 76.62
81.59
DISCOUNTED FCF @ WACC of 11.5% 6.5656 3.95444 58.86

PRESENT VALUE OF SHARES 69.38

 Cash Flow Projections – Net4India

CALCULATIONS OF WACC & TERMINAL

VALUE

% RFR BETA MP
52 Cost of Equity 8 0.3 6 9.8 5.096
48.00 Cost of Debt 13 6.24
WACC 11.336 11.5Approx

TERMINAL FCF(steady state)/

VALUE = (WACC-Growthsteady
state)
0.77
76.62
 Offer for Net4India
Offered Price 90

PE based on 08- PE based on 09-PE based on 10-PE based on 11- PREMIUM TO EBIDTA
09 EPS 10 EPS 11 EPS 12 EPS DCF PRICE Margins

NET4INDIA 17.93 18.15 18.22 19.27 29.72038051 21

INDUSTRY 11.53 - - - -

TELECOM SERVICE 22.33 - - - 35

PROVIDERS

Rationale for Price of Rs 90

Premium of 2.55% to investment by M/S Madison India Capital HC(at

price of Rs 87.76)

Premium of 50% to the company with respect to PE

multiple of Industry

Almost 30% premium to the PV of share price of

NET4INDIA using DCF

The lesser OPM of NET4INDIA compared to blue chip integrated Telecom Companies
justifies the discount in PE multiple to the Telecom Service providers
 Telecom Valuations
Company Name BSE Ticker Year End Equity B.V. Sales Rs NP Rs NP Var Div% CPS P/E
Code Rs.Cr. Rs. Cr. Cr. % Rs. Ratio
INDUSTRY - Telecom-Service [285]
Bharti Airtel 532454 200903 1,898.42 72.8 34,014.29 7,531.38 22 20 28.1 16.1
Idea Cellular 532822 200903 3,100.09 36.4 9,857.08 821.54 -18 - 6.7 20.2
MTNL 500108 200903 630 191.4 4,456.00 285.53 -56 10 15.5 17
OnMobile Global 532944 200903 58.15 114.4 327.11 71.31 50 - 19.5 29.2
Rel. Comm. 532712 200903 1,032.01 250.4 13,610.58 1,342.68 -48 16 15.7 27.5
Tata Comm 500483 200903 285 238.5 3,749.43 308.69 3 45 25 35.4
Tulip Telecom 532691 200903 29 234.6 1,608.28 248.84 33 40 99.4 10.9
22.33
 Peer Group Valuation
Company Sales NP CPS EPS PE BV
Rs. Cr. Rs. Cr. Rs. Rs. RATIO
Apis India 56.34 1.63 66.4 51.6 1 -0.78
Aurionpro Sol. 56.79 17.01 15.5 11.2 19.8 1.54
Blue Star Info. 127.33 13.13 13.8 11.5 8.4 1.53
FCS Software 91.34 25.88 2.8 1.8 6.8 1.14
Genesys Intl. 83.18 32.42 22.9 21.4 6.9 3.1
GSS America 52.82 34.32 22 21.6 11.1 1.33
Kale Consultants 102.62 10.07 10.6 7.4 10.3 1.09
Linkson Intl. 78.28 0.3 4.2 4.1 15.6 4.18
Megasoft 123.83 13.46 6.8 3 8.1 0.33
Mindteck (India) 54.43 3.56 2 1.4 18.6 0.48
Net 4 India 97.9 5.95 9.1 3.6 23.9 3.04
R S Software (I) 149.57 6.32 15.7 8.3 5.7 1.95
Tera Software 81.63 10.49 11.1 8.7 4.8 0.99
Thinksoft Global 88.96 13.88 15.2 13.7 19 4.31
Zen Technologies 63.07 18.57 20.7 20.1 12.9 3.26

AVERAGE PE 11.53