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SECURITY ANALYSIS PROJECT
REPORT
ON
EQUITY ANALYSIS AND VALUATION OF INDIAN TELECOM INDUSTRY (Based on past five year data)
SUBMITTED TO:
Prof. Kaushik Bhattacharjee
IBS Hyderabad
SUBMITTED BY:
Group‐6, SEC. A
Eshan Raka (09bshyd021), Mohit Dubey (09bshyd0464)
Pranjal Gupta (09bshyd0571), Shadan Parveen (09bshyd1083)
Yuvraj Mittal (09bshyd1007)
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ACKNOWLEDGEMENT
The satisfaction and joy that accompanies the successful completion of a task is incomplete
without mentioning the name of the person who extended his help and support in making it a
success.
We are greatly indebted to Mr. Kaushik Bhattarcherjee (Faculty of Security Analysis) for
devoting his valuable time and efforts towards our project. We thank him for being a constant
source of knowledge, inspiration and help during this period of making project.
Group No. 6 (Security Analysis)
Eshan Raka 09bshyd0271
Mohit Dubey 09bshyd0464
Pranjal Gupta 09bshyd0571
Shadan Parveen 09bshyd1083
Yuvraj Mittal 09bshyd1007)
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PREFACE
The telecom industry is one of the fastest growing industries in India. India has nearly 200
million telephone lines making it the third largest network in the world after China and USA.
With a growth rate of 45%, Indian telecom industry has the highest growth rate in the world.
The first wind of reforms in telecommunications sector began to flow in 1980s when the private
sector was allowed in telecommunications equipment manufacturing. In 1985, Department of
Telecommunications (DOT) was established. It was an exclusive provider of domestic and long-
distance service that would be its own regulator (separate from the postal system). In 1986, two
wholly government-owned companies were created: the Videsh Sanchar Nigam Limited (VSNL)
for international telecommunications and Mahanagar Telephone Nigam Limited (MTNL) for
service in metropolitan areas.
In 1990s, telecommunications sector benefited from the general opening up of the economy.
Also, examples of telecom revolution in many other countries, which resulted in better quality of
service and lower tariffs, led Indian policy makers to initiate a change process finally resulting in
opening up of telecom services sector for the private sector. National Telecom Policy (NTP)
1994 was the first attempt to give a comprehensive roadmap for the Indian telecommunications
sector. In 1997, Telecom Regulatory Authority of India (TRAI) was created. TRAI was formed
to act as a regulator to facilitate the growth of the telecom sector. New National Telecom Policy
was adopted in 1999 and cellular services were also launched in the same year.
Telecommunication sector in India can be divided into two segments: Fixed Service Provider
(FSPs), and Cellular Services. Fixed line services consist of basic services, national or domestic
long distance and international long distance services. The state operators (BSNL and MTNL),
account for almost 90 per cent of revenues from basic services. Private sector services are
presently available in selective urban areas, and collectively account for less than 5 per cent of
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subscriptions. However, private services focus on the business/corporate sector, and offer
reliable, high- end services, such as leased lines, ISDN, closed user group and
videoconferencing.
Cellular services can be further divided into two categories: Global System for Mobile
Communications (GSM) and Code Division Multiple Access (CDMA). The GSM sector is
dominated by Airtel, Vodfone-Hutch, and Idea Cellular, while the CDMA sector is dominated by
Reliance and Tata Indicom. Opening up of international and domestic long distance telephony
services are the major growth drivers for cellular industry. Cellular operators get substantial
revenue from these services, and compensate them for reduction in tariffs on airtime, which
along with rental was the main source of revenue. The reduction in tariffs for airtime, national
long distance, international long distance, and handset prices has driven demand.
In this project we have undergone a detailed analysis of Indian Telecom industry by using
Fundamental and Technical tools. In order to better understand the performance of the industry
we have made comparative analysis of six major players Bharti Airtel, Vodafone, Reliance, Tata,
, Idea, BSNL.
The project report is divided into 5 chapters. The first two chapters include Executive Summery
& objective of the research. The third chapter deals with analysis of automobile Industry which
entails fundamental, technical analysis and basis of valuation of Indian Telecom Industry. The
fourth chapter deals with Conclusion & Recommendations and the last chapter includes
Bibliography.
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TABLE OF CONTENTS:
S.NO. PARTICULARS PAGE NO.
Chapter 1. Executive Summary of the
Project
6.
Chapter 2. Objective 7.
Chapter 3. Analysis of Indian Telecom
Industry
Fundamental Analysis 9.
a. Economy
9.
b. Industry 16.
c. Company
- Financial & Non-Financial
30.
33.
Technical Analysis and
Valuations
38.
a. MACD 38.
b. Exponential moving
average
39.
c. Herfindahl’s Index 45.
d. Valuation and Tools 47.
Chapter 4. Conclusions and
Recommendations
53.
Chapter 5. Bibliography 56.
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EXECUTIVE SUMMARY
The field of equity research is very vast and one has to look into various aspects of the
functioning of the company to get to any conclusion about the possible performance of the
company in the market. Investors like warren buffet made a fortune out of investments in the
stock market, which is quiet impossible without proper research about the companies. The field
of equity research is full of challenges. It is your door to fame, fortune and, above all,
professional challenge.
This project on “Equity Valuation and Analysis of Telecom Sector” uses Fundamental and
Technical tools to make it more authentic n meaningful. An E.I.C approach has been followed
under Fundamental Analysis which covered effect of Recession, the impact of government,
FDI’s, GDP etc. on Telecom Industry.
The Industry Analysis has been done with the help of five forces model, SWOT analysis,
industry life cycle.
For Company Analysis as a part of Fundamental tool we have undergone with the comparative
analysis of Airtel, Reliance, Idea. The focus is restricted to these three only because they are
actively traded in the Indian stock markets and are Market leaders. The fundamental aspect
consists financial and Non-Financial analysis of both the company.
In the Technical and Valuation aspect we have considered Share price analysis, moving average,
moving average crossover, Bollinger bands and M.A.C.D. of all the companies.
The valuation of these company’s has been carried out using tools and concepts learnt in the
class such as FCFE ( Free cash flow to equity holders).
At the end conclusion and recommendations have been specified in the form of ‘Buy, sell or
Hold’ options so as to make the research work more meaningful and purposeful.
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Objective of the Project
The objective of this project is deeply analyze our Indian Telecom Industry for investment
purpose by monitoring the growth rate and performance on the basis of historical data.
The main objectives of the Project study are:
• To analyze the telecom industry and find the future growth opportunities
• To carry out the company analysis of the selected companies and to suggest whether they
are a viable investment option
• Analyze the impact of qualitative factors on industry’s and company’s prospects
• Comparative analysis of tough competitors
• The valuation of the companies using tools and concepts learnt in the class such as FCFE
( Free cash flow to equity holders) and DDM (Dividend discount model)
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ANALYSIS OF TELECOM INDUSTRY
Over a period of more than two decades the Indian Automobile industry has been driving its own
growth through phases. With comparatively higher rate of economic growth rate index against
that of great global powers, India has become a hub of domestic and exports business.
The automobile sector has been contributing its share to the shining economic performance of
India in the recent years.
To understand this industry for the purpose of investment we need to analyze it by following two
approaches:
1). Fundamental Analysis (E.I.C Approach)
a. Economy
b. Industry
c. Company
2).Technical Analysis
a. MACD
b. Exponential moving average
c. Herfindahl’s Index
d. Valuation and Tools
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FUNDAMENTAL ANALYSIS
a) ECONOMY
Economic analysis is the analysis of forces operating the overall economy a country. Economic
analysis is a process whereby strengths and weaknesses of an economy are analyzed. Economic
analysis is important in order to understand exact condition of an economy.
GDP and TELECOM Industry
In absolute terms, India is 16th in the world in terms of nominal factory output. The service
sector is growing rapidly in the past few years. This is the pie- chart showing contributions of
different sectors in Indian economy.
The per capita Income is near about Rs.38,000 reflecting improvement in the living standards of
an average Indian.
Today, Telecom sector in India is one of the key sectors of the economy in terms of the
employment.
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Directly and indirectly it employs more than 10 million people and if we add the number of
people employed in the tower building and other ancillary industry then the number goes even
higher.
As the world economy slips into recession hitting the demand hard and the banking sector takes
conservative approach towards lending to corporate sector, the GDP growth has downgraded it to
7.1 per cent for 2008-09 and predicted it to be 6.5 per cent for FY 2009-10 Mr. Montek Singh
(Planning Commission of India). Following is the graph showing a trend of Indian GDP trend in
past 3 years.
The number of telephone subscribers in India increased from 509.03 Million at the end of Sep-09
to 562.16 Million at the end of Dec-09, registering a growth of 10.4%. The overall Teledensity in
India has reached 47.88 as on 31st December 2009.
Subscription in Urban Areas grew from 357.22 Million at the end of Sep-09 to 387.63 Million at
the end of Dec-09, taking the urban Teledensity from 102.79 to 110.96. Rural subscription
increased from 151.81 Million to 174.53 Million leading to increase in Rural Teledensity from
18.46 to 21.16, during this period.
Gross Revenue (GR) and Adjusted Gross Revenue (AGR) of Telecom Sector for the QE Dec-09
has been Rs 39,756.64 Crore and Rs.29, 125.67 Crore respectively. There has been an increase
of 2.32% and 0.04%, as compared to previous quarter, in GR & AGR respectively.
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Contribution in Indian GDP is near about 2.1% . The Telecom subscriber base is also expected to
grow at a CAGR of 12.5 percent and would cross 770 million by 2013.
Recession
Indian telecom sector, which has so far remained untouched by the slump in the global economy,
could see the growth rates slowing down by the end of the year. Thanks to households
postponing spending, the growth rate of mobile handsets could fall by as much as 50 per cent and
also see a decline in new subscriber additions compared with 10 million new subscribers a month
at present.
According to Mr Prashant Singhal, telecom industry leader at Ernst & Young, the handset sales
growth in 2009 is expected to be in the region of 13-15 per cent, down from 26 per cent last year.
Yes, the Indian telecom industry has been impacted to some extent by the current global
slowdown. In the current economic environment, many corporates are re-negotiating the rates
they pay to telecom operators. Though subscriber numbers are still growing at well over 10
million a month, revenues are not rising commensurately. Also, it will be a challenging market
for mid- to high-end handset makers this year. In high-end phones, sales will be defined more by
need rather than desire of the user.”
While most operators claim that the telecom growth story is intact for another 3-4 years, they
privately admit that the liquidity crunch may have an impact in 2010. “Most of the growth in
mobile usage is coming from non-urban areas driven by a large population of employed
youngsters. However, if the liquidity crunch continues then these youngsters may not find
employment easily, which in turn will impact their expenditure on communications services,”
says a Mumbai-based multinational GSM operator.
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Inflation:
Despite of negative inflation these days (-.21% on 22-Aug-09) we saw an increasing trend of
sales in telecom sector. A moderate amount of inflation is important for the proper growth of an
economy like India because it attracts more private investment. The fall in wholesale prices from
a year earlier is mainly due to a statistical base effect and doesn’t suggest contraction in demand,
the Reserve Bank of India said few week back, while revising its inflation forecast for the FY
through March to around 5% from 4%.
FDI’s:
The government has taken many proactive initiatives to facilitate the rapid growth of the Indian
telecom industry.
In the area of telecom equipment manufacturing and provision of IT-enabled services, 100 per
cent FDI is permitted.
No cap on the number of access providers in any service area. In 2008, 122 new Unified Access
Service (UAS) licenses were granted to 17 companies in 22 services areas of the country.
Revised subscriber based criteria for allocation of Global System of Mobile Communication
(GSM) and Code Division Multiple Access (CDMA) spectra were issued in January 2008.
To provide infrastructure support for mobile services a scheme has been launched to provide
support for setting up and managing 7,436 infrastructure sites spread over 500 districts in 27
states. As on December 31, 2009, about 6,956 towers had been set up under the scheme.
According to the Consolidated Foreign Direct Investment (FDI) Policy document, the FDI limit
in telecom services is 74 per cent subject to the following conditions:
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This is applicable in case of Basic, Cellular, Unified Access Services, National/ International
Long Distance, V-Sat, Public Mobile Radio Trunked Services (PMRTS), Global Mobile
Personal Communications Services (GMPCS) and other value added Services.
Both direct and indirect foreign investment in the licensee company shall be counted for the
purpose of FDI ceiling. Foreign Investment shall include investment by Foreign Institutional
Investors (FIIs), Non-resident Indians (NRIs), Foreign Currency Convertible Bonds (FCCBs),
American Depository Receipts (ADRs), Global Depository Receipts
EXPORTS
As a result of Government policy, progress has been achieved in the manufacturing of telecom
equipment in the country. There is a significant telecom equipment-manufacturing base in the
country and there has been steady growth of the manufacturing sector during the past few years.
The figures for production and export of telecom equipment are shown in table given below:
Rising demand for a wide range of telecom equipment, particularly in the area of mobile
telecommunication, has provided excellent opportunities to domestic and foreign investors in the
manufacturing sector. The last two years saw many renowned telecom companies setting up their
manufacturing base in India. Ericsson set up GSM Radio Base Station Manufacturing facility in
Jaipur. Elcoteq set up handset manufacturing facilities in Bangalore. Nokia and Nokia Siemens
Networks have set up their manufacturing plant in Chennai. LG Electronics set up plant of
manufacturing GSM mobile phones near Pune. Ericsson launched their R&D Centre in Chennai.
Flextronics set up an SEZ in Chennai. Other major companies like Foxconn, Aspcom, Solectron
etc have decided to set up their manufacturing bases in India.
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(Rs. in crore)
Year Production Export
2002-03 14400 402
2003-04 14000 250
2004-05 16090 400
2005-06 17833 1500
2006-07 23656 1898
2007-08 41270 8131
2008-09 48800 11000
2009-10 50000
(projected @ 18%)
13500
(projected @ 25%)
The Government has already set up Telecom Equipment and Services Export Promotion Council
and Telecom Testing and Security Certification Centre (TETC). A large number of companies
like Alcatel, Cisco have also shown interest in setting up their R&D centers in India. With above
initiatives India is expected to be a manufacturing hub for the telecom equipment.
Current Scenario of Telecom Industry in Economy
According to a report published by Gartner Inc in June 2009, the total mobile services revenue in
India is projected to grow at a compound annual growth rate (CAGR) of 12.5 per cent from
2009-2013 to exceed US$ 30 billion. The India mobile subscriber base is set to exceed 771
million connections by 2013, growing at a CAGR of 14.3 per cent in the same period from 452
million in 2009. This growth is poised to continue through the forecast period, and India is
expected to remain the world’s second largest wireless market after China in terms of mobile
connections. Mobile market penetration is projected to increase from 38.7 per cent in 2009 to
63.5 per cent in 2013.
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In March 2010, Bharti Airtel bought the African operations of Kuwait-based Zain Telecom for
US$ 10.7 billion, driving the Indian player into the league of top ten telecom players globally.
The Reserve Bank has liberalized the investment norms for Indian telecom companies by
allowing them to invest in international submarine cable consortia through the automatic route.
In April 2010, RBI issued a notification stating "As a measure of further liberalization, it has
now been decided... to allow Indian companies to participate in a consortium with other
international operators to construct and maintain submarine cable systems on co-ownership basis
under the automatic route." The notification further added, "Accordingly, banks may allow
remittances by Indian companies for overseas direct investment."
Rural Telephony
According to the Economic Survey 2009-10, rural tele-density has increased from 1.2 per cent
in March 2002 to 15.1 per cent in March 2009 and further to 21.2 per cent at the end of
December 2009. Rural telephone connections have gone up from 12.3 million in March 2004 to
123.5 million in March 2009 and further to 174.6 million in December 2009. The share of
private sector players in the total telephone connections has steadily increased from around 14
per cent in 2005 to 31 per cent as on December 31, 2009. During 2008-09, the growth rate of
rural telephones was 61.5 per cent as against 36.7 per cent for urban telephones. The private
sector has contributed significantly to the growth of rural telephony by providing 81.5 per cent of
the rural phones as on December 31, 2009. It is proposed to achieve rural tele-density of 25 per
cent by means of 200 million rural connections by the end of the Eleventh Five Year Plan.
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b.) INDUSTRY ANALYSIS (Telecom)
The Communications Industry Analysis of India suggests that the industry has registered
phenomenal growth since, the 1990s. The Government of India came out of its old monopoly-
market concept to open-market policy regime. This resulted economic renaissance in India and
different Indian industries grew to record heights in record time. The success of India
telecommunication industry is also mention worthy and its contribution towards the overall
health of Indian economy is substantially high.
The Indian Communications Industry Analysis indicates that although, this industry has matured
tremendously over the last fifteen years but huge scope of growth still waits to be explored. The
urban India is more or less well connected with basic telephone services but the semi-rural area
needs immediate attention.
The most important and unexplored area is the rural- India and huge scope of growth is lying still
untapped. The Government of India is now more focused on faster development of rural-
telephony in rural parts of India. The latest telecommunication policy offers host of fiscal
incentives and tax rebates to attract investors, both domestic and foreign investors.
Telecom Regulatory Authority of India or the TRAI regulates the telecommunication industry of
India. It has earned good reputation for transparency and competence. Three types of operators
function in this industry. With 110.01 million connections, the Indian telecommunication
industry is the fifth largest and fastest growing telecommunication industry in the world. The
subscriber base of the Indian telecommunication industry has grown by 40% in the year 2005
and is projected to touch 250 million by the end of the financial year 2007. In the last 3 years,
two out of every three new telephone connections were wireless and today it accounts for about
55% of the total telephone subscription in India, as compared to only 40% in 2003. The wireless
subscriber growth in India is expected to add 2.5 million new subscribers in every month of the
financial year 2007-2008. The wireless subscriber base in India, rose from 33.69 million
subscription in 2004 to 62.57 million subscription in the financial year 2004 -2005. The wireless
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technologies those are currently operating in the Indian telecommunication industry are Global
System for Mobile Communications (GSM) and Code Division Multiple Access (CDMA). The
Indian telecommunication industry now has 9 GSM and 5 CDMA service providers serving in 19
circles and 4 metro cities and connecting more than 2000 towns across the length and breadth of
India.
The main service providers in the Indian telecommunication service are as follows -
• State owned companies like - VSNL, BSNL and MTNL.
• Private Indian companies like - Reliance Infocomm and Tata Teleservices.
• Foreign companies like - Hutchison-Essar, Bharti Tele-Ventures, Escotel, Idea Cellular,
BPL Mobile, and Spice Communications.
Further, the Indian Communications Industry Analysis suggests that the products and services
offered by this industry is not confined to basic land line connections but it also includes
facilities like Internet, broadband (both wireless and fixed), cable TV, SMS, Internet Protocol
TV (IPTV), soft switches etc.
The analysis of the tenth plan of the Indian communication industry is as follows -
• Creating world class telecommunication infrastructure to meet the requirements of IT,
ITES, media and other IT based industry
• Easy and affordable access to basic telecommunication services across India
• Affordable and effective basic telecommunication facilities to each and every Indians
• Facilitation of world class service to all uncovered and rural areas of India
• Establishing a modern and efficient telecommunication infrastructure to meet the
requirements of modern industrial nation
• Continual modernization of the Indian telecommunication industry and provide an equal
opportunity for all the telecommunication
• service providers operating in India
• Strengthening R&D in telecommunication
• Efficient and transparent spectrum management
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• Enabling efficient protection of the defense and security systems of the country
• Facilitating the Indian telecommunication companies to be at par with other global
players
• Facilitate world class services at affordable prices
• Institutionalize the Department Of Telecommunication, Government of India and help it
function as a corporate body
• To make telephone available on demand
• To reach tele-density of 9.91 by 31st March 2007
• Facilitate reliable media to all telephone exchanges
• Facilitate high-speed data and multimedia connections using technologies like ISDN to
all towns with population strength of two lakh or more.
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Segmentation of Telecom Industry
From the above data it is implicit that the five major players in the industry are Airtel, Vodafone,
BSNL, Rcom, Idea. As they hold the major market share and are the major influencing
companies in the Telecom Industry in India.
Industrial Analysis of any industry can be done based on the following headings:
1. Five Forces Model
2. Industrial Life Cycle
3. SWOT Analysis
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Five Forces Analysis:
It uses concepts developed in Industrial Organization economics to derive five forces that
determine the competitive intensity and therefore attractiveness of a market. Porter referred to
these forces as the micro- environment, to contrast it with the more general term macro-
environment. 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.
an-Telecom-I
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1. SUBSTITUTE TO PRODUCT
Telecom sectors offers a wide range of services in India, such as wireline, CDMA mobile, GSM
mobile, internet, broadband, carrier, MPLS-VPN, VSAT, VoIP, IN, etc.
As we can see that use of internet in our country is on growing rate. There are many tools which
can be accessed through internet like video conferencing other important tool is talking through
internet for eg. Google talk, rediff bol, yahoo messenger. Important thing is that internet is
cheaper medium of communication and one can have many facilities if he/she is connected to the
world through the internet.
2. THREAT TO NEW ENTRANTS
The Indian telecom sector offers unprecedented opportunities for foreign companies in various
areas, such as 3G, virtual private network, international long distance calls, value added services,
etc.
The market is witnessing M&A activities that are leading to consolidations in the industry. This
trend has assisted companies in expanding their reach in the Indian telecom market to offer better
services to customers.
The Indian telecom industry has always allured foreign investors. In fact, the cumulative FDI
inflow, from August 1991 to March 2007, in the telecommunication sector amounted to US$
3,892.19 million. This makes telecommunication the third-largest sector to attract FDI in India in
the post liberalization era.
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3. Bargaining Power of Suppliers:
As far as telecom industry is concerned, it is service based industry which is intangible, so in this
case there are less suppliers or we can say the role of suppliers are almost negligible in the case
of telecom industry.
• Mobile hand set suppliers: - There can be many suppliers for handset, some of
them are Nokia, Sony Ericsson, Motorola, and Siemens etc.
Many big telecom giants have their own handset manufacturing (back ward
integration) like Reliance Classic, Tata Indicom or they have collaboration with
some known companies like Reliance communication have tie ups with Samsung
and LG for their CDMA
services.
• Some other suppliers for this industry can be the Optical fibre
, Aluminum suppliers (aluminum is required for the tower) but their bargaining
power is limited.
• Other important parameters can be the software assistance where suppliers can
have the edge some of the main software solution provider are TCS, Infosys,
Wipro, Satyam etc. Again one thing is noticeable that big giants like Reliance and
Tata have their own units for software solution and companies like Vodafone,
Spice are taking
services from above stated companies. So here software providers have
bargaining power because suppose Vodafone can’t go to Reliance info for their
software solution so here suppliers can have edge over the companies
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4. BARGAINING POWER OF CONSUMERS :
Bargaining power is limited in this area as no buyer is a bulk buyer and it is such a heavy
investment industry. Many corporate deals still have some bargaining power as they still can
manipulate prices for their CUG networks.
5. RIVALRY AMONG EXISTING COMPETITORS
Competition in Indian Telecom Industry
Major Players
There are three types of players in telecom services:
• State owned companies (BSNL and MTNL).
• Private Indian owned companies (Reliance Infocomm, TataTeleservices.
• Foreign invested companies (Vodafone, Bharti Tele-Ventures, Idea
Cellular, Spice Communications).
With the liberated market scenario new firms are coming up which has increased competition.
Also number of providers has reduced profits and market share of all intensifying the
competition.
Easy routes of Joint ventures, mergers and acquisitions also effecting competition. For eg.
Liberty entering in broadband sector with joint ventute with Israel company, Runcomm.
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SWOT Analysis
• Strengths
At 110.01 million connections ' Indian Telecom Industry' is the fifth largest and fastest
growing in the world.
Telecom Regulatory Authority of India (TRAI) released it’s Nov 2009 telecom subscription data.
Indian Telecom Industry reported a 3.3% month-to-month growth in Nov 09.
• 54.3 crore people in India with a Telephone connection
• Tele-density at 46.32
• 1.76 new wireless connections in Nov 09
• Broadband Subscription at 75.5 lakhs
Indian Telecom Industry in India has reported robust growth in 2009 despite global economic
slowdown thanks to the affordable tariff options and attractive offers from different mobile
service providers.
Total Tele-Density Wireless Wireline
30th Nov 2008 37.413 32.34 33.608 3.805
30th Nov 2009 54.320 46.32 50.604 3.716
Change 45.19% 50.57% -2.34%
16.9 crore new phone connections have been added in last 12 months period – a 45.19% growth.
Wireless segment reported 50.57% growth in the period but Wireline connections decreased by
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2.34% in the period a major setback to BSNL and MTNL which holds majority of Wireline
connections in India.
Aircel, Tata Teleservices and Idea reported highest growth in the last 12 months period.
In Nov 2009 Tata Teleservices added more number of connections (18.84%) followed by Bharti
Airtel (15.85), Vodaphone (15.74%) and Reliance Communications (15.7%) a clear signal that
subscribers are more inclined to attractive tariff plans.
Reliance made a major improvement in Nov 09 (15.7%) compared to Oct 09 (12.56%) due to the
Simply Reliance attractive tariff structure. BSNL also advanced in Nov 09 may be due to the
introduction of its 3G services in some cities.
One thing is very clear from last few months data – customers are looking for attractive tariff
plans and cheap call rates, they cannot be fooled with just some simple freebies like extra talk
time or an extended validity offer. December month data may give more clear picture as Uninor
started its operation in India in Dec 09 with a very simple packages with lowest call rates.
The ' Indian Telecom Industry ' services is not
confined to basic telephone but it also extends to internet, broadband (both wireless and fixed),
cable TV, SMS, IPTV, soft switches etc .The wireless technologies currently in use ' Indian
Telecom Industry ' are Global System for MobileCommunications (GSM) and Code Division
Multiple Access (CDMA). Operators providing mobile services in 19telecommunication circles
and 4 metro cities, covering more than 2000 towns across the country. And the numbers are still
growing for ' Indian Telecom
Industry '. ' Telecom Industry in India ' is regulated by 'Telecom RegulatoryAuthority of India'
(TRAI). It has earned good reputation for transparency and
competence. Apart from mobile telephony services, other value-added services are also gaining
importance.
It is the third largest sector to attract FDI in India in the Post-liberalisation era.
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• Weakness
o Slow pace of the reform process .
o It would be difficult to make in-roads into the semi-rural and rural areas because of the
lack of infrastructure. The service providers have to incur a huge initial fixed cost to
make inroads into this market. Achieving break- even under these circumstances may
prove to be difficult.
o The sector requires players with huge financial resources due to the above mentioned
constraint. Upfront entry fees and bank guarantees represent a sizeable share of initial
investments. While the criteria are important, it tends to support the existing big and older
players. Financing these
requirements require a little more liberal approach from the policy side.
o Problem of limited spectrum availability and the issue of interconnection charges
between the private and state operators.
Broadband experience is very bad. Tata Indicom took 15 days to get connection in
Bangalore. As compared to US, Indian net fare is too high.
o The Indian Telecom sector has one the highest levies and duties imposed
on it. The total regulatory charges are between 17 ~ 26% exclusive of goods and service
tax.
o This high incidence of levies and duties means a low return on capital ,thus adversely
impacting availability of funds for network expansion
o The return on capital expenditure for mobile services is very low in India at 7.8%
o Clubbing low tariffs, falling ARPU’s and high levies and duties means lower
funds with players to reinvest in a constantly funds demanding nature of business .
o No base of suppliers to source components.
o The major challenge being the ability of an operator to adequately scale
operations, retain talent and to satisfy growing subscriber demands.
o Penetration is a roadblock here and even amongst those in metros and large cities who
own PCs, only a small minority have Apple’s iTunes on their systems. The other catch is
slow internet speeds which can frustrate users attempting to download iTunes.
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Opportunities
The telecoms trends in India will have a great impact on everything from the humble PC,
internet, broadband (both wireless and fixed), cable, handset features, talking SMS, IPTV, soft
switches, and managed services to the local manufacturing and supply chain. Indian customers
are embracing mobile technology in a big way (an average of four million subscribers added
every month for the past six months itself). They prefer wireless services compared to wire-line
services. In fact, many customers are returning their wire-line phones to their service providers
as mobile provides a more attractive and competitive solution.
The main drivers for this trend are quick service delivery for mobile connections, affordable
pricing plans in the form of pre-paid cards and increased purchasing power among the 18 to 40
years age group as well as sizeable middle class – a prime market for this service.
Small and medium businesses in India are on track to spend more than $6.4 billion this year on
telecom equipment and services, about seven percent more than they did last year. Small
businesses account for the bulk (about 80 percent) of the telecom spending among Indian SMBs.
This is due to their sheer numbers as SBs account for more than 99 percent of all SMBs in India.
With the rural India growth story unfolding, the telecom sector is likely to seetremendous growth
in India's rural and semi-urban areas in the years to come.
According to the Geneva-based International Telecommunication Union (ITU),
factors like India's current mobile telephone penetration rate of about 20 per cent
and market liberalisation policies are likely to offer 'great potential' for the growth
of telecom companies in India. Forthcoming services such as 3G and WiMax willfurther
augment the growth rate. 3G capabilities present operators with opportunities to increase
revenues from new domains, to strengthen their brand, foster deep-rooted customer loyalty and
improve operational efficiency .In a new trend, global consumer electronics and mobile phone
vendors are going green in India.
Page | 28
Threats
• Increase in competition from different players like virgin group
• The pricing of iPhone 3G sales in India proved to be a real dampener and
kept customers from queuing up to buy the handset. Bharti and Vodafone
have invested good amount to advertise their respective bundled schemes of
iPhone 3G. But all these has resulted in not benefiting the involved players but the
grey marketers who have suddenly witnessed surge in sales since iPhone 3G
launch in India.
• The industry needs to add capacity in tunes of 150 million lines to achieve
the target of 250 million subscribers by 2012 . The major portion of these requirements
would be catered to by importing the required telecom equipment.
• The telecom infrastructure equipment, majority of which is imported annually
into the country at 5 percent customs duty. Whereas, duties are levied (10 - 30 percent)
on inputs that go into the manufacturing of this equipment, except ICs at zero percent,
making domestic production costlier than the imported equipment.
• The hike in VAT on cell phones from 4 to 12.5 percent in the current budget will
promote the gray market for handsets. � In the years ahead, cost efficiency will be the
primary challenge together with tremendous revenue opportunities that exist in the
Indian telco market.
• Another significant challenge is going to be how today’s communications
provider will evolve to become a convergent service provider and offer service bundles to
their subscribers that might include entertainment, infotainment, content, mobile
transaction, advertisements and sponsorships on top of the data apart from voice services.
The multi-dimensional convergence in the marketplace means that operators in India
need to adapt
the infrastructure and organisation for convergence. More and more communication and
content providers are embracing convergence of all kinds, whether it is network
convergence, service bundle offers, pre- paid/post-paid convergence, or even system
consolidation.
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3.) Industrial Life Cycle
The industrial life cycle is a term used for classifying industry vitality over time. Industry life
cycle classification generally groups industries into one of four stages: pioneer, growth, maturity
and decline. In the pioneer phase, the product has not been widely accepted or adopted. Business
strategies are developing, and there is high risk of failure. However, successful companies can
grow at extraordinary rates. The Indian Telecom sector has passed this stage quite successfully.
In the growth phase, the product market has been established and there is at least some historical
guide to ground demand estimates. The industry is growing rapidly, often at an accelerating rate
of sales and earnings growth. Indian telecom Industry is booming with a growth rate of around
45 % annually.
.
The growth rate of the Telecom industry in India is greater than the GDP growth rate of the
economy, so the telecom sector can be very well be said to be in
the growth phase.
As the product matures, growth slows as penetration reaches practical limits. Companies began
to focus on market share rather than growth. Industry demand tends to follow the overall
economy, but the scope of growth of the automobile sector is very much possible in India due to
the increasing income of the middle class and their income as well as standard of living.
Page | 30
c. COMPANY ANALYSIS
The company analysis shows the longterm strenght of the company that what is the financial
Position of the company in the market where it stand among its competitors and who are the key
drivers of the company, what is the future plans of the company, what are the policies of
government towards the company and how the stake of the company divested among different
groups of people.
Profile of Airtel
Airtel’s PAT was, Rs 62,442.00m in March 08 and after that increased by approx by 35%
Y.O.Y by 2010. It’s EPS (PAT/No. of Eq shares) was Rs 32.9m in March 08, it also increaseD in
the same pace. From the above position we can say that that Airtel is having a good earning and
bright future ahead.
In FY08, Bharti’s sales jumped by 44% compared with FY07 and are expected to grow
strongly in coming years. As we can see that the PAT in year 08 was Rs 62,442.00m and
the expected PAT Rs 92,062.30m, the change of 47% and this further reduced to 34% in
the year 10, it might be because of the slow in demand and the stagnant growth in the
urban area. But Airtel is expected to add subscribers at the rate of more than 6m
customers every quarter. So the further years would be beneficial for Airtel and its
investors.
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Profile of Reliance Communication
The Reliance – Anil Dhirubhai Ambani Group is among India’s top three private sector business
houses on all major financial parameters, with a market capitalisation of Rs.325,000 crores (US$
81 billion), net assets in excess of Rs.115,000 crores (US$ 29 billion), and net worth to the tune
of Rs.55,000 crores (US$ 14 billion)
Across different companies, the group has a customer base of over 100 million, the largest in
India, and a shareholder base of over 12 million, among the largest in the world.
Through its products and services, the Reliance - ADA Group touches the life of 1 in 10 Indians
every single day. It has a business presence that extends to over 20000 towns and 4.5 lakhs
villages in India, and 5 continents across the world.
RGL owns the worlds largest private undersea cable system[4] spanning 65,000 km seamlessly
integrated with Reliance Communications over 110,000 km of domestic optic fiber provides a
robust Global Service Delivery Platform connecting 40 key business markets in India, the
Middle East, Asia, Europe, and the U.S.
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Profile of Idea
IDEA Cellular is a publicly listed company, having listed on the Bombay Stock Exchange (BSE)
and the National Stock Exchange (NSE) in March 2007.
IDEA Cellular is a leading GSM mobile services operator in India with 67 million subscribers,
under brand IDEA. It is a pan India integrated GSM operator covering the entire telephony
landscape of the country, and has NLD and ILD operations.
A frontrunner in introducing revolutionary tariff plans, IDEA Cellular has the distinction of
offering the most customer friendly and competitive Pre Paid offerings, for the first time in India,
in an increasingly segmented market. From basic voice & Short Message Service (SMS) services
to high-end value added & GPRS services such as Blackberry, Datacard, Mobile TV, Games etc
- IDEA is seen as an innovative, customer focused brand.
IDEA offers affordable and world-class mobile services to varied segments of mobile users. Be it
high end users, or low-end, price sensitive consumers - IDEA's tariff plans are designed to suit
every pocket.
In a period marked by economic downturn and increased competitive and price pressure, Idea
was able to maintain its strong growth momentum. Annual revenues of 99,622 mn show a
growth of 47.9% compared to the last year. This revenue growth of 47.9%, on the back of
the FY08 revenue growth of 53.6%, places Idea as the fastest growing major operator in one of
the largest, fastest growing, and most competitive telecom markets in the world.
*due to change in subscribers recognition criteria.
In the newly launched service areas of Mumbai and Bihar, Idea has acquired a 4.0 % share of the
combined market, with a net adds market share of 16.6%, during last 6 months.
Total Minutes on the Network at 44,224 mn grew by 9.9% on a QoQ basis. The Average
Realised Rate per Minute, which had moved up from 62p to 64p in the previous quarter, settled
at 63p.
Page | 33
Financial Analysis
1. Financial Statements
RATIO ANALYSIS
CURRENT RATIO:
A liquidity ratio measures a company's ability to pay short-term obligations.
The Current Ratio formula is:
0.7 0.61 0.49 0.460.97 0.76 0.66 0.81.08 1.25
1.94
5.13
2.25 2.47 2.462 2.43
1 2 3 4 5
current ratioairtel current ratio idea Current Ratio relience cr bsnl cr
Page | 34
Also known as "liquidity ratio", "cash asset ratio" and "cash ratio".
• Here the graph shows that Airtel is not having good solvency as the current ratio
should be around 1, whereas in Airtel the Current ratio is below 1 in all 5 years.
• Idea was having good liquidity position in 2006 but went negative in 2007,and
again in the year 2008 it went below, in the year 2009 also Idea’s current ratio
was near to 1.
• Reliance showed a positive trend throughout and was consistently above 1 all
through the period.
• BSNL also showed good liquidity position as its current ratio always exceeded 1.
EARNINGS PER SHARE APPROACH:
24.65
40.45
32.9
3.19 3.23 3.96
23.13
12.49.36
1.154.44
14.43
1 2 3
EPSairtel eps EPS(Rs) reliance eps bsnl eps
Page | 35
EPS measures the profit available to the equity shareholders per share, that is, the amount that
theycan get on every share held.
Earnings per Share
• As per the graph Airtel is giving good returns to its shareholders as from 2006 to 2007
showed an increase in EPS whereas in 2008 there was a slight fall in EPS.
• Idea was also consistent in its EPS all through the period but the returns to shareholders
were very less
• Reliance also gave a good return to its shareholders in the year 2006 but there was a
continous fall in EPS in the year 2007 and 2008
• BSNL showed increasing trend in EPS from 2006 to 2008
DIVIDEND YIELD APPROACH:
6.09
12.13
0 00 0 0 0
4.73
1.52 1.22
1 2 3 4
dividend yieldairtel dy idea dividend yield reiliance dy
Page | 36
A financial ratio that shows how much a company pays out in dividends each year relative to its
share price. In the absence of any capital gains, the dividend yield is the return on investment for
a stock. Dividend yield is calculated as follows:
As per the graph Airtel is paying dividends in the year 2006 and 2007 but no dividend in the later
years.
Whereas Reliance is paying dividends till 2008, whereas IDEA and BSNL are not paying
dividends in any of the year.
PRICE EARNING APPROACH:
A valuation ratio of a company's current share price compared to its per-share earnings.
12.65 15.47
25.11
35.88
20.5215.53
25.95
48.74
7.55
40.9944.8
1 2 3 4
price earningAIRTEL PE idea pe relience Price Earning (P/E)
Page | 37
Calculated as:
DEBT EQUITY RATIO
A high debt to equity ratio suggests that a company has financed its growth mostly
via debt. A measure of a company's financial leverage calculated by dividing its total
liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is
using to finance its assets.
Note:On the X axis:
1= year 2006
2= year 2007 so on
0.2 0.3 0.38 0.540.550.79
1.63 1.55
0.41 0.57 0.390
2.84 2.82 2.71
1 2 3 4 5
debt equityairtel debt equity idea de reliance de bsnl de
Page | 38
TECHNICAL ANALYSIS
Here we have used the following two indicators:
MACD:
Introduction
Developed by Gerald Appel in the late seventies, Moving Average Convergence-Divergence
(MACD) is one of the simplest and most effective momentum indicators available. MACD turns
two trend-following indicators, moving averages, into a momentum oscillator by subtracting the
longer moving average from the shorter moving average. As a result, MACD offers the best of
both worlds: trend following and momentum. MACD fluctuates above and below the zero line as
the moving averages converge, cross and diverge. Traders can look for signal line crossovers,
centerline crossovers and divergences to generate signals. Because MACD is unbounded, it is
not particularly useful for identifying overbought and oversold levels.
Calculation:
MACD: (12-day EMA - 26-day EMA)
Signal Line: 9-day EMA of MACD
MACD Histogram: MACD - Signal Line
Standard MACD is the 12-day Exponential Moving Average (EMA) less the 26-day EMA.
Closing prices are used for these moving averages. A 9-day EMA of MACD is plotted along side
to act as a signal line to identify turns in the indicator. The MACD-Histogram represents the
difference between MACD and its 9-day EMA, the signal line. The histogram is positive
whenMACD is above its 9-day EMA and negative when MACD is below its 9-day EMA.
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Standard MACD is the 12-day Exponential Moving Average (EMA) less the 26-day EMA.
Closing prices are used for these moving averages. A 9-day EMA of MACD is plotted along side
to act as a signal line to identify turns in the indicator. The MACD-Histogram represents the
difference between MACD and its 9-day EMA, the signal line. The histogram is positive when
MACD is above its 9-day EMA and negative when MACD is below its 9-day EMA.
MOVERAGE AVERAGES:
Introduction
Moving averages smooth the price data to form a trend following indicator. They do not predict
price direction, but rather define the current direction with a lag. Moving averages lag because
they are based on past prices. Despite this lag, moving averages help smooth price action and
filter out the noise. They also form the building blocks for many other technical indicators and
overlays, such as Bollinger Bands, MACD and the McClellan Oscillator. The two most popular
types of moving averages are the Simple Moving Average (SMA) and the Exponential Moving
Average (EMA). These moving averages can be used to identify the direction of the trend or
define potential support and resistance levels.
SMA Calculation
A simple moving average is formed by computing the average price of a security over a specific
number of periods. Most moving averages are based on closing prices. A 5-day simple moving
average is the five day sum of closing prices divided by five. As its name implies, a moving
average is an average that moves. Old data is dropped as new data comes available. This causes
the average to move along the time scale. Below is an example of a 5-day moving average
evolving over three days.
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Daily Closing Prices: 11,12,13,14,15,16,17
First day of 5-day SMA: (11 + 12 + 13 + 14 + 15) / 5 = 13
Second day of 5-day SMA: (12 + 13 + 14 + 15 + 16) / 5 = 14
Third day of 5-day SMA: (13 + 14 + 15 + 16 + 17) / 5 = 15
The first day of the moving average simply covers the last five days. The second day of the
moving average drops the first data point (11) and adds the new data point (16). The third day of
the moving average continues by dropping the first data point (12) and adding the new data point
(17). In the example above, prices gradually increase from 11 to 17 over a total of seven days.
Notice that the moving average also rises from 13 to 15 over a three day calculation period. Also
notice that each moving average value is just below the last price. For example, the moving
average for day one equals 13 and the last price is 15. Prices the prior four days were lower and
this causes the moving average to lag.
EMA Calculation
Exponential moving averages reduce the lag by applying more weight to recent prices. The
weighting applied to the most recent price depends on the number of periods in the moving
average. There are three steps to calculating an exponential moving average. First, calculate the
simple moving average. An exponential moving average (EMA) has to start somewhere so a
simple moving average is used as the previous period's EMA in the first calculation. Second,
calculate the weighting multiplier. Third, calculate the exponential moving average. The formula
below is for a 10-day EMA.
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SMA: 10 period sum / 10
Multiplier: (2 / (Time periods + 1) ) = (2 / (10 + 1) ) = 0.1818 (18.18%)
EMA: {Close - EMA(previous day)} x multiplier + EMA(previous day).
A 10-period exponential moving average applies an 18.18% weighting to the most recent price.
A 10-period EMA can also be called an 18.18% EMA. A 20-period EMA applies a 9.52%
weighing to the most recent price (2/(20+1) = .0952). Notice that the weighting for the shorter
time period is more than the weighting for the longer time period. In fact, the weighting drops by
half every time the moving average period doubles.
.
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RELIANCE COMMUNICATION
We can clearly see from the chart that the 5 days Exponential Moving Average (EMP shown in
orange) has crossed the 20 days EMP (green). It also looks like 20 days EMP is about to cross
the 50 days EMP (red). This is very bearish signal.
Again MACD is giving a bearish indication revealing further downside in the days to come.
Thus we can easily forecast a bearish long term trend in the stock.
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IDEA CELLULAR
There is a bullish crossover in the chart in mid April 2010 where a fast moving EMA had crossed
the slow moving EMA. The MACD indicator is showing a weakness in the Bullish trend.
Page | 44
BHARTI AIRTEL
Its quite evident that the 5-day EMA has crossed the 20-day EMA which has further crossed the
50-day EMA from the downside to give a bullish signal in July 2010. MACD is not showing any
clear signal in this case.
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Herfindahl Index for Telecom Sector
The Herfindahl index (HI), also known as the concentration index, measures industry
concentration by summing the squared market shares of the firms in the industry. It is commonly
used to support antitrust claims. The index can be large or small, but decreases are indicative of a
loss in pricing power and/or increased competition while increases suggest the opposite.
These are the latest statistics in the telecom sector:
• Bharti Airtel has 24.3% customer market share and 33.8% revenue market share.
• Vodafone India has 18.8% customer market share and 20.7% revenue market share.
• Idea Cellular has 11.2% subscribers market share and 12.1% revenue market share
• BSNL has subscriber share of 12.7% and mere 10.2% of revenue share
• Reliance Communications is the worst performer with 18.9% customer market share and
pathetic 11.5% revenue market share
• Tata Teleservices has a 11.9%market share
Source: Company’s website
Thus we see that these 6 major players constitute 97.8% of the market share.
The index is calculated as follows.
(Company 1 market share)^2 + (Company 2 market share)^2 + (Company 3 market share)^2 +
(Company 4 market share)^2 + (Company 5 market share)^2 + (Company 6 market share)^2
The calculation looks like this: (0.243)^2+ (0..188)^2 + (0.112)^2 + (0.127)^2 + (0.189)^2+
(0.119)^2 = 0.325
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The Herfindahl index for the telecom industry is 0.325. In general, a Herfindahl index below 0.1
signifies low concentration, while an index above 0.18 signifies high concentration. If all
companies in an industry have equal market share, the reciprocal of the index is is equal to the
number of companies in the industry.
Thus we conclude that as of present there is a stiff competition between the various players and
the situation is far from cartel. This has led to a serious tariff war among them which is
eventually profitable for the consumers. Even after the allocation of 3G spectrum the industry
will be slightly favorable for those who own share of band in metros. Thus we may be seeing
company’s like Bharti airtel, Vodafone , Reliance who have won major circles capturing more
market in near future.
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Valuation of Companies
Valuing companies becomes important in today’s market scenario as the stock prices and
speculation’s of the investor’s change from timt to time. There are in general two approaches to
value the stock they are:
Present Value of Cash Flows:
1. Present value of dividends (DDM)
2. Present value of free cash flow to equity (FCFE)
3. Present value of free operating cash flow to the firm (FCFF)
Relative Valuation Techniques
1. Price/earning ratio (P/E)
2. Price/cash flow ratio (P/CF)
3. Price/book value ratio (P/BV)
4. Price/sales ratio (P/S)
The technique we would be following is the FCFE approach according to which the intrinsic
value of the company is calculated on the basis of cash flow generated for the equity holders.
If the intrinsic value estimate exceeds the stock’s current market price, the stock should be
purchased.
Page | 48
Methodology
Free Cash Flow to Equity
Free cash flow to Equity (FCFE) reflects the amount of cash free for distribution to both debt and
equity shareholders. Firstly, the PBT (profit before tax) is calculated based on the historical data.
A projected Net Income for the next two years are computed less tax. Then the non cash items
such as depreciation are added and the capital expenditure is deducted and finally adjustments
for working capital are also done. The final gross figure is the free cash flow to the firm.
FCFE = Net Income + Depreciation Expense - Capital Expenditures – Changes in workin Capital
+ New Debt issues
WACC
Weighted average cost of capital (WACC) is the average of debt and equity capital costs that all
publicly traded companies with debt and equity stakeholders incur as a cost of operating. We
provide the details behind our WACC calculations:
Cost of Equity
The cost of equity calculation is based on the capital asset pricing model methodology. Though
there are many other more complicated approaches for arriving at a firm’s cost of equity, we do
not feel their additional complexity offers commensurate accuracy. CAPM is simple, close
enough approach, and is easy to implement consistently across all companies that is analyzed.
• The market value of equity is used when calculating the
debt to total market capital ratio that is used in the cost of
equity calculation.
• The equity risk premium is based on a last five year mean
average market return of SENSEX.
Page | 49
• Beta was extracted from Prowess
Cost of Debt
� The cost of debt capital is equal to a business’s long-term marginal borrowing rate.
� The risk-free rate (RFR) is approximated by the 10-year Indexed Indian T-Bill.
Miscellaneous
� The terminal rate is an adjusted rate based on the economic activity, sector growth and
the tax regime for the sector. Subsequently, this rate is extracted from various research
papers available online.
� Except for Reserve and surplus, all other items in Sources of funds in BS is assumed
to be same. The allocation of funds or Assets is calculated on percentage of total
liabilities. � The projected P&L is based on percentage of sales approach till the EBIT.
� Tax rate is based on the current tax paid. The break up of tax is grossed and clubbed
into one and divided by PBT (profit before tax) to get the effective tax rate.
Assumptions:
Valuing a company involves complex set of variables and projection which are difficult to
predict with certainty. That is why different equity research firms come up with different
valuations of the same company. Our effort has been to consider all the parameters we know and
have learnt while gathering information to evaluate.
• The growth rates chosen for the company have been different according to their nature of
operations i.e a mature and big company have been assigned lesser growth rate as
compared to a growing company which still has a lot to offer.
• First three year financial performance has been projected using the average growth rate of
last 5 years and that mentioned in research papers and journals.
• Then the company has been assumed to grow till perpetuity with a growth rate slightly
lower than its earlier years.
• Also as there has been a major change in this sector, the effect of sale of 3G spectrum on
companies business may not be properly included in our calculations
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Bharti Airtel:
Bharti Airtel (BHARTI) : This company has been in the market for a very long time and it
dominates the current scenario.The growth rates taken for the company are discussed
below for the various parameters. Medium term growth is being driven by the deployment of
cash generated in the 2G business for expansion in to other regions and businesses. The
saturation in revenues seen for three quarters could be reversed if BHARTI wins a few 3G blocks
and uses this capacity to support the 2G business.
The growth scenario for the company is relatively dimmer as compared to younger companies
such as idea or Aircel.
The growth in sales is projected to be 15% over the next few years and thereafter 10% till
perpetuity. These assumptions are however not fullproof as the exact market demand of the 3G
spectrum is still uncertain.
Recommendation: Buy
Current Market price : 320.9
Calculated / intrinsic share price: 380.98
Particulars 2010 2011 2012 2013 2014
Sales 35,609.54 40950.97 47093.62 54157.659 62281.308
Net Income 9,295.34 11619.18 14523.97 18154.961 22693.701
Add: Depreciation 3,890.08 4095.097 4709.362 5415.7659 6228.1308
Less: Capex -6,298.75 4,552.41 6,145.75 8,296.76 11,200.63
Less: Increase in WC 314.59 1,347.01 1,731.73 2,222.22 2,846.84
Page | 51
(excludingCash)
Add: Increase in net
Borrowings -577.80 -222.62 -158.06 -112.22 -79.68
FCF 18,591.78 9,592.23 11,197.79 12,939.52 147,946.86
PV 18,591.78 8749.693 9317.06 9820.6046 102423.36
WACC 9.63%
Terminal Growth Rate 10%
Terminal Value
147,946.86
Weight of debt 0.73
Weight of equity 0.27
Rf 4.84%
Rm 15.00%
Beta 0.74
Kd 6.33%
ke 23.68%
Valueofthefirm(byFCFmethod) 148,902.50
Less:SecuredDebt 39.43
Less:UnsecuredDebt 4,999.49
add:cash 816.74
EquityValue 144,680.32
No.ofsharesoutstanding 3797530096
SharePrice 380.9853092
Page | 52
Price Performance
1M 3M 6M 12M
Bharti Airtel 10.5 -6.1 -23.6 -2.3
RCOM -1.7 -4.2 -29.9 7.8
Idea 17.8 7.6 -12.7 -6.3
Valuation Parameters:
Exhibit 1: Performance Highlights
EPS (Rs) P/E (x) EV/EBITDA (x)
CMP TP FY09 FY10E FY11 FY09 FY10E FY11E FY09 FY10E
FY11E
Airtel 297 337 22.3 24.0 18.4 13.3 12.4 16.1 7.9 7.0 7.3
RCOM 191 172 29.3 22.8 6.5 6.5 8.4 29.6 7.8 8.2 10.2
Idea 66 60 2.8 2.9 2.5 23.3 22.9 26.6 8.9 7.9 7.5
TTML 22 19 (0.9) (1.7) (4.1) (24.2) (12.9) (5.3) 15.2 13.3 20.2
Page | 53
Recommendation and Conclusion:
We have made the following observation of the three stocks on the basis of our Technical
Analysis.
OBSERVATION TABLE:
Stocks Exponential Moving
Average (EMA)
Moving Average Convergence
And Divergence (MACD)
Bharti Airtel BUY NIL
Idea Cellular BUY WEAK BUY
Reliance Communication SELL SELL
There are some more fundamental observation regarding the three stocks:
Bharti Airtel:
Long term growth largely driven by investment into 3G technology and through the
revenues generated by the African Telecom giant Zain
(acquired earlier by Bharti Airtel).
Medium Term revenue will be predominantly driven by the current services offered by
the company and VAS offered in the metros (where Airtel already enjoys a great
presence) and its ability to increase the wallet share per customer (High ARPU) and its
ability to penetrate the rural market where Idea remains a tough competitor.
Page | 54
However, in Short term there is a liability recorded on the balance sheet of Bharti Airtel
to the tune of the debt raised in order to finance the Bharti-Zain deal. This will affect the
cash flows adversely in the short term as Interest cost will lead to a huge cash outflow.
Idea Cellular:
In the long term the company banks on the products based on 3G spectrum.
Its strong presence in the rural markets (15%) which is less competitive gives it a strong
edge vis-à-vis its competitors to explore the bottom of the pyramid.
Its CAPEX are expected to decline as its investments in the major circles are almost
complete. This will reduce the cash outflow in the future.
Moreover, it has a customer base comprising of High ARPU users and a established
presence in 7 circles.
Reliance Communication:
RCOM lags behind its peers in key Quality of Service (QoS)metrics. Poor QoS is
likely to lead to lower ARPUs
The capital productivity across the business, measured through
sales/grossinvestments,has been lower than that of its peers. This has led to higher net
debt/equity of 0.49, as at end Dec09, than its peers.
Additionally, capex needs may lead to a further rise in net debt. Concurrently,
3Gauctions and repayment of FCCBs in FY12 fare likely to require additional funds.
However, RCOM may free its tied up cash by divesting stake in Reliance Infratel
(RITL) and Globalcom. Value unlocking in these asset‐intensive businesses,which are
likely to have lower returns, may improve the return on investment and trigger
are‐rating for the stock.
Page | 55
Based on the above we make the following recommendation:
RECOMMENDATION:
Stocks Rating
Bharti Airtel LONG TERM BUY
Idea Cellular LONG TERM BUY
Reliance Communication LONG TERM SELL
Page | 56
Biblioghraphy:
WWW.BSEINDIA.COM WWW.YAHOOFINANCE.COM WWW.GOOGLE.CO.IN WWW.MONEYCONTROL.COM WWW.RBI.ORG.IN INDIAN CENTRAL STATISTICAL ORGANIZAION ONLINE DATABASES : CAPITALINE, PROWESS TEXT MATERIAL : INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT, REILLY/ BROWN, 8 EDITION
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