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Private Telecom Project in India. Professor Campbell Harvey BA 456. Agenda. Background The Opportunity Telelink’s Projections Our Analysis What Happened Questions?. Background: India. Background: India. Largest Democracy Second largest country - population Per capita GDP $440 (1999) - PowerPoint PPT Presentation
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Professor Campbell HarveyProfessor Campbell Harvey
BA 456BA 456
Private Telecom ProjectPrivate Telecom Projectin Indiain India
Private Telecom ProjectPrivate Telecom Projectin Indiain India
Agenda• Background• The Opportunity• Telelink’s
Projections• Our Analysis• What Happened• Questions?
Background: India
Background: India
• Largest Democracy
• Second largest country - population
• Per capita GDP $440 (1999)
• Huge income disparity
• In the midst of economic liberalization
• Severe corruption
Background: Rajasthan
Background: Rajasthan
• Second Largest State in India– 10.6% of area; 5.8% of population
• Borders Pakistan;– militarily important– historically stable
• Rich in mineral resources– silver, gypsum, asbestos, feldspar, lead, zinc,
emeralds and garnets
Background: Rajasthan
• Major tourist attraction - $350 MM annually
• Rapidly growing industrial sector– Ericsson, Ford, Coke, Corning, etc.
• Presently 13th among Indian states in FDI
• CAGR of 5.2% - national average 6.9% (1995-98)
Background: Telecom Sector
• State owned monopoly
• Extremely low teledensity (2.2%)
• Insufficient infrastructure to meet growing demand
• Long wait lists for service hook up
• Sector liberalized– Telecom Policy 1994– New Telecom Policy 1999
• Opened to private investment– FDI of approx. $2 BN (till Sep. 2001)
• Targeted teledensity: 7% (2005); 15% (2010)
• 20% growth over last 5 years
Background: Telecom Sector
The Opportunity 2000Acquire a stake in Shyam Telelink, the basic services licensee in the state of Rajasthan
The Project
• Member of Shyam Telecom Group
The Project: Highlights
• Operation license valid until 2018• Currently the only competitor to state
owned provider• A network of convergence
– traditional voice telephony services – enhanced telephony services– internet access– cable TV services
The Project: Financials
• Peak funding requirement of Rs 7,929 MM (US$ 177 MM)– Proposed to be financed as:
Equity Rs 3,524 MM (US$ 80 MM)
Debt Rs 4,405 MM (US$ 97 MM)
The Project: Cash Flows
(click on the photo for the information)
The Project: Valuation
TV Cost of Equity
Rev. Multiple 18% 20% 22%
8 $500 $500 $500
9 $384 $384 $384
10 $296 $296 $296
Million US$
• IRR 38%
• Pre-money Valuation
Our Analysis: Cost of Equity
• ICCRC India– Assumptions:
• Risk Free Rate = 4%• US Market Risk Premium = 4%• Anchor to US
– ICCRC Cost of Capital for IndiaCost of Equity (ICCRC) 19.7%Adjustment (comp. Beta) 1.4%Adjusted Cost of Capital 21.1%
Our Analysis: Valuation
• IRR = 31%
• Pre-money ValuationTV Cost of Equity
Const. Growth 18.7% 19.7% 20.7% 21.7% 22.7%
2% $157 $133 $113 $95 $80
3% $160 $136 $115 $97 $82
4% $164 $138 $117 $99 $83
5% $168 $141 $119 $100 $84
6% $173 $145 $122 $102 $86
Million US$
What Happened
• A few months after the release of the IM– Hughes Telecom IPO
• Basic Services Licensee in Bombay and the State of Maharashtra
• Valued at US$ 116 MM (pre-money)
• Evinced a lot of foreign investor interest
What Happened
• Telelink valuation was way too high
• Talks with potential investors driven by Hughes Telecom valuation
• Management refused to lower valuation; decided to go it alone
Questions?