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Security Analysis and Business Valuation
Telecom Sector Bharti Airtel
Ver 1.0, Dated 06-June-2012
Project team Group 4
Manish Bhasin
Aryadipta Dash
Prince Yadav
Yogesh Yadav
Samdarsh Nayar
Guided by:
Professor Vivek Bhatia
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Acknowledgement
This project is done purely with an objective of enhancing the learning by leveraging the concepts taught
in classroom teaching. We thank professor for guiding on the topic and necessary support to do this
study project.
Project Team
DISCLAIMER
Many of the inputs here are taken from internet sources (secondary data) which may not be accurate.
Any further use of this report needs to be carefully validated by person using it.
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Table of ContentsAcknowledgement ........................................................................................................................................ 3
1. Economic Analysis ..................................................................................................................................... 6
1.1 World Economy ................................................................................................................................... 6
1.2 Indian Economy ................................................................................................................................... 6
1.2.1 Inflation and Interest Rate Scenario ............................................................................................ 7
1.2.2 Political environment/Economic Reforms ................................................................................... 8
1.3 African Economy ..................................................................................................................................... 8
2. Industry Analysis ....................................................................................................................................... 9
2.1 Indian Telecom Sector ........................................................................................................................ 9
2.2 Regulatory Environment ..................................................................................................................... 9
2.3 Porters five forces ............................................................................................................................ 10
2.3.1 Bargaining Power of Buyers ........................................................................................................... 10
2.3.2 Bargaining Power of Suppliers ....................................................................................................... 10
2.3.3 Threat of New Entrants .................................................................................................................. 11
2.3.4 Threat of Substitutes ...................................................................................................................... 11
2.3.5 Rivalry among competitors ............................................................................................................ 11
2.4 Expected industry returns ................................................................................................................. 11
2.5 African Telecom Sector ..................................................................................................................... 12
3. Company Analysis ................................................................................................................................... 13
3.1 Business Divisions ............................................................................................................................. 13
3.1.1 India and South Asia................................................................................................................... 13
3.1.2 Africa .......................................................................................................................................... 14
3.1.3 Partners ...................................................................................................................................... 14
3.2 Subsidiary Companies ....................................................................................................................... 14
3.3 Firm SWOT ........................................................................................................................................ 15
Strength .................................................................................................................................................. 15
Weakness ................................................................................................................................................ 15
Opportunity............................................................................................................................................. 15
Threat ...................................................................................................................................................... 15
4. Valuation ................................................................................................................................................. 16
5 Bibliography ............................................................................................................................................. 17
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1. Economic Analysis
1.1 World Economy
After almost four years of financial turmoil and instability in the global financial environment,
just when the world economy looked to be gaining a measure of stability and confidence, the
situation looks to be shaky once again with problems in the Euro-zone. The IMF projects that theglobal economic growth will decline from 4% in 2011 to 3.5% in 2012, before picking up to 4%
in 2013. The Euro zone shows sign of slipping into a recession again, though that is expected to
be offset by around 2% growth in the US and 6% in the emerging and developing economies.The economies of Africa, particularly sub-Saharan Africa, are demonstrating structural
improvement. Japan is on the road to normalcy after the twin disasters of the tsunami and the
Fukushima nuclear reactor accident. The global supply chains, disrupted by the disasters in Japan
and the floods in Thailand, have been restored. The financial condition of the large globalcorporations is extremely strong, and their cash holdings at an all-time high.
The worst-case scenarios for the global economy have not come to pass. That, in no small
measure, is due to the unprecedented stimulus provided by governments and central banks.
Europe has also reached a degree of consensus on fiscal reforms. The ECB has also put in placefirewalls to ward off a widespread economic contagion.
Clearly, the road ahead is not yet smooth. The bond, inter-bank and sovereign debt
markets in Europe remain jittery. The process of financial deleveraging still has a long way togo. Oil prices remain stubbornly high. Unemployment is proving extremely sticky and concerns
about inequality are growing. A major worry is the political gridlock in many major countries,that makes it difficult to strike the right trade-offs between growth and fiscal and monetaryrestraint
1.2 Indian Economy
The Indian economy was quick off the mark in recovering after the 2008 shocks. But the growthmomentum has slowed considerably over the past year. GDP growth in the third quarter of FY
2011-12 was 6.1%, down from 8.3% in the corresponding quarter of FY 2010-11. Some of the
key indicators are bearish. Gross fixed capital formation has contracted in recent months. Growthin industrial production in the April 2011-February 2012 period slid to 3.5%, compared to 8.1%
during the same period last year. Inflation, particularly in food items, remains high. There have
been major slippages on the fiscal side. The current account deficit, in the April-December 2011period widened to 4.0% of GDP, a clear warning sign. On a trade-weighted basis the Rupee
depreciated around 8% in the past year. Given the slippage in growth, RBIs decision to easemonetary policy was timely. Even so monetary policy will not be effective unless it is supported
by fiscal restraint. Indias economy is poised delicately. The extended pause in reforms, together
with some recent retrograde policy moves, have clouded business sentiment
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1.2.1 Inflation and Interest Rate Scenario
Inflation figures and projections paint a mixed picture. RBI report on Macroeconomic andmonetary developments (dated Apr 16, 2012) suggests that Inflation in India is likely to remain
high, at around the 7% mark, particularly due to high oil prices, sharp rupee depreciation andhigher freight rates and taxes (hike in excise duty to 12 per cent from 10 per cent). As per theRBI's "current assessment", Indian basket crude oil prices during the year could average around
the current levels of about USD 120 per barrel but both upside and downside risks to this
projection remain large. India imports about 80 per cent of its crude oil requirements.
The central bank said demand moderation, reflected in the dampening of the pricing power ofproducers, has also played a role in moderating inflation in the last one year. Although inflation
has eased considerably as compared to last couple of years, there are significant upside risks and
the current and projected levels still do not permit.
The Reserve Bank cut the repo rate (its main policy rate) for the first time in nearly three years inApril 2012 by a steeper-than-expected 50 basis points to 8 %. At the time, the central bank
warned that further rate cuts could be difficult because of persistent threats to inflation from food
and fuel priceany significant easing of monetary policy to boost growth in the economy.However India's economic growth rate slipped to 5.3 per cent in the fourth quarter of 2011-12,
the lowest in nearly nine years, following poor performance of the manufacturing and farm
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sectors. Slowing growth has put pressure on RBI to reduce interest rates however, a rate cut, if it
happens, however, is unlikely to kick-start economic growth all on its own and large economicreforms would be required to bring back India on the high growth trajectory
1.2.2 Political environment/Economic Reforms
The slowing growth, high inflation, high fiscal deficit and the highest ever trade account deficit
is raising a lot of concerns on the India growth story. The government is struggling to cope upwith its coalition partners when it comes to bringing in reforms like FDI in multi-brand retail,
insurance and finance sector reforms, GST etc. And the large number of scams un-earthed in the
recent past has brought the entire government machinery and decision making to a complete halt.
Policy paralysis is the term being used for future plans not getting approved to bring growth
back on track, improve infrastructure and implement welfare policies. Indian markets have been
the worst performers amongst all big emerging economies which is clearly a warning sign and
suggests that there are internal issues that have to be dealt with and not just an offshoot of theglobal economic turmoil.
1.3 African Economy
Owing to the high growth potential shown by African economies (even though they may nothave reached the level of BRIC countries in terms of growth), for the sake of this valuation
exercise, the growth rate has been assumed to be same as the growth rate in the Indian market.
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2. Industry Analysis
2.1 Indian Telecom Sector
The telecom sector, undeniably plays a critical role in the economic growth of the country and in
its journey towards inclusive growth. Even as the sectors direct contribution is just around 2% to
2.5% of GDP, the manner in which it impacts the lives of over 919 million Indians, is beyondquantification. Regrettably, the sector is going through a phase of uncertain regulatory
environment, post the cancellation of licenses by the Honble Supreme Court in February 2012,
which were awarded in 2008. Furthermore, the proposed policy changes towards spectrumauctioning, pricing and re-farming, by the regulator, bode ill for the sector.
As per Telecom Regulatory Authority of India (TRAI) data, the total telecom subscribers in
India (GSM + CDMA + Wire-line) at the end of March 2012 rose by 7.85 mn subscribers to951.34 mn as compared to February 2012. The total wireless subscriber base (GSM + CDMA) in
the metros and 'A' circle as at the end of March 2012 stood at 427.78 mn as compared to 425.21
mn during February 2012, while the total subscriber base in the 'B' and 'C' category circles stood
at 372.26 mn and 119.13 mn respectively, up 3.75 mn M-o-M and 1.69 mn M-o-M respectively.As per the TRAI's data, India's total tele-density increased to 78.66% at the end of March 2012.
as against 78.10% as at the end of February 2012, while the wireless tele density in the country
as at the end of March 2012 rose to 76%, as against 75.42% at the end of February 2012. Theurban wireless tele-density increased to 162.82%, while the rural wireless tele-density at the end
of March 2012 increased to 38.33%. As per the TRAI's report, the number of actual activesubscribers, based on the Visitor Location Register (VLR) at the end of March 2012, was 683.02mn, as against the total wireless subscriber base as on that date of 919.17 mn. Broadband
subscriber base increased marginally from 13.54 mn in February 2012 to 13.79 mn in March
2012.
2.2 Regulatory EnvironmentSupreme Court order on quashing of licenses granted in January 2008
The Honble Supreme Court, vide its judgment dated February 02, 2012 quashed the PressRelease dated January 10, 2008 issued by DoT and consequent grant of licenses and allocation of
related spectrum. This directive which was originally to have come into effect after four months
from February 02, 2012 has now been further extended till September 07, 2012. The Supreme
Court has also directed TRAI to give fresh recommendations for grant of license and allocationof spectrum in 2G band in 22 Service Areas, as was done for 3G band, by auction by August 31,
2012.
Press Statement by Telecom Minister on Telecom Policy
The Telecom Minister released a press statement on February 15, 2012. The statement noted thatRecommendations of TRAI on Spectrum Management and Licensing Framework of May 11,
2010 along with its further recommendations of February 08, 2011, clarification of May 03, 2011and response dated November 03, 2011 were considered by the Telecom Commission. Key
highlights of the statement are
All future licenses will be Unified Licenses and spectrum will be delinked from the license.
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Uniform license fee across all telecom licenses and service areas which will progressively be
made equal to 8% of the Adjusted Gross Revenue (AGR) in two yearly steps starting from 2012-13, subject to a minimum presumptive AGR.
To bring IP-I Service Providers under licensing regime.
Validity of existing UAS, CMTS and Basic services licenses may be extended for another 10
years at one time. On extension, the UAS licensee will be required to pay a fee of ` 2 crore forMetro and A Circles, ` 1 crore for Bcircles and ` 0.5 crore for C circles.
Need for re-farming of spectrum is accepted in-principle.
Prescribed limit of spectrum assigned will be 2X8MHz/ 2X5MHz for GSM/CDMAtechnologies respectively for all service areas other than in Delhi and Mumbai where it will be
2X10MHz / 2X6.25 MHz.
Intra-service area merger of CMTS/UAS licenses will be allowed if the market share by bothsubscriber base and Adjusted Gross Revenue of the resultant entity is upto 35%. If it is above
35% & upto 60%, transparent criteria will be prescribed/adopted after receipt of TRAIs
recommendations. The total spectrum held by the resultant entity shall not exceed 25% of the
spectrum assigned, by way of auction or otherwise.
Sharing of 2G spectrum (800/900/1800 MHz bands) will be permitted between two spectrumholders in the same service area, with the prior permission of the licensor, for a period of 5 years
and can be renewed for a further one term of five years, on terms to be prescribed. Spectrumusage charges will be levied on both the operators individually but on the total spectrum held by
both the operators together.
Spectrum sharing will not be permitted among licensees having 3G spectrum.
2.3 Porters five forces
2.3.1 Bargaining Power of Buyers
- Many players in the market offering almost similar services. Lack of service differentiationamong service providers allows the buyers to choose among different competitors
- Mobile number portability provides almost 0 switching cost giving immense power to the buyer
- Highly competitive pricing. To increase usage of existing infrastructure, spectrum, licenses etc,
companies are wooing customers with attractive price points to take advantage of high price
sensitivity of the customer, especially in non-Metro locations.
2.3.2 Bargaining Power of Suppliers
- A number of competitors vying to supply equipment and network management services to theTelecom operators (e.g. Nokia-Siemens, Ericsson, Alcatel Lucent, Motorola, Cisco and so on)
- Emergence of Chinese vendors has worsened the competition among suppliers leading to lower
price points and competitive offerings.
- An ecosystem exists for sharing of Tower infrastructure among different operators. Co-
dependence.
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- Medium cost of switching as changing h/w infrastructure can impact deployment architecture.
2.3.3 Threat of New Entrants
- Strong entry barriers. High infrastructure cost and License Cost. Though some arrangements of
spectrum sharing now coming into place
- Strong brand pull of existing players like Vodafone, Airtel and Idea makes it difficult for new
players to gain a firm footing easily.
- New connection cost is low and also number portability provides almost 0 switching cost. New
players could make use of this to gain subscribers by throwing attractive offers.
- Stringent Govt Policy for Spectrum and License allocation
2.3.4 Threat of Substitutes
- No major threat from any substitutes (like Satellite phone).
- Upgrade of technology is a concern though like 2G-> 3G -> 4G
2.3.5 Rivalry among competitors
- Hyper-competition, especially in the wireless market to gain customer share. Price wars and
competing for new and better services
- Huge Exit Barriers
- 5-6 players in each region, with big players present in majority of region.
- Innovations are replicated fast and all use network elements from fixed vendors
2.4 Expected industry returns
After the spectacular performance for more than a decade, subscriber growth has been shrinkingin the last few months, with net subscriber addition declining from 23 million in November 2010to just 3 million in November 2011. Researchers believe (CARE research) that subscriber growthwill be sluggish in the next couple of years, due to factors like saturation in urban areas, expected rise
in tariff, increased uncertainty in the sector leading to reduced expansion plans by the operators etc.With the uncertainty surrounding the cancellation of 122 licences by the Supreme Court, it isbelieved that tariffs will reverse the trend inching-up marginally and as a result AverageRevenue per User (ARPU) will see a marginal improvement over the next 2-3 years. Overall, thesector will see marginal improvement in operating profitability in the next 2-3 years
The Indian wireless subscriber base was growing at the rate of 40-45% per annum till 2011-12happened. And with the global and local factors likely to persist for a couple of years, the growth is
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likely to remain stagnant for 2 more years before a possible bounce-back. But it is still unlikely thatthe growth of 40-50% can be achieved and our estimate is a modest 10-20 % for the next 5 yearsand a stable 6.5% thereafter (Please see attached excelsheet in next chapter for details)
2.5 African Telecom Sector
Year 2011 continued to experience growth in African telecom market. The total customer basegrew 17% over the 12-month period. The total telecom customer base stood at 205 Mn as at end
of March 2011. Though a few countries have very high penetration, due to higher GDP percapita and relatively smaller population or multisim environment, penetration in outer markets
where the Company operates is still low. Of 16 African countries where Airtel operates, only 7
countries (Congo B, Gabon, Ghana, Kenya, Nigeria, Seychelles and Sierra Leone) have crossed
50% SIM penetration mark. The competitive intensity in each of the sixteen countries variesfrom 2 to 10 players. There have been no major competition launches during the year.
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3. Company Analysis
Business DescriptionBharti Airtel is one of the worlds leading providers of telecommunication services withpresence in 19 countries including India & South Asia and Africa. The Company served an
aggregate of 220.9 Mn customers as on March 31, 2011. The Company is the largest wireless
service provider in India, based on the number of customers as of March 31, 2011. The Companyoffers an integrated suite of telecom solutions to its enterprise customers, in addition to providing
long distance connectivity both nationally and internationally. The Company also offers Digital
TV and IPTV Services. All these services are rendered under a unified brand airtel eitherdirectly or through subsidiary companies.
The Company also deploys, owns and manages passive infrastructure pertaining to telecom
operations under its subsidiary Bharti Infratel Limited. Bharti Infratel owns 42% of Indus
Towers Limited. Bharti Infratel and Indus Towers are the largest passive infrastructure serviceproviders for telecom services in India
Listings
Bombay Stock Exchange Limited (BSE)National Stock Exchange of India Limited (NSE)
Customer Base (status as on March 31, 2012)
India & South Asia:
- 188,008,000 GSM mobile- 3,270,000 Telemedia customers and- 7,228,000 Digital TV ServicesAfrica:
- 53,140,000 GSM mobile customers.3.1 Business Divisions
3.1.1 India and South Asia
The operations of Bharti Airtel in India and South Asia are divided into two distinct Customer
Business Units (CBU) with clear focus on B2C (Business to Customer) and B2B (Business to
Business) segments. The B2C organization consists of Consumer Business and MarketOperations. The B2B business unit focuses on serving large corporates and carriers through
Bharti Airtels wide portfolio of telecommunication solutions
B2C ServicesMobile Services (India & South Asia): They offer mobile services using GSM technology in
South East Asia across India, Sri Lanka and Bangladesh, serving a total of 188 million customers
in these geographies.
Digital TV ServicesAirtel digital TV has 7.2 million customers on its Direct-To-Home (DTH)
platform. They also offer High Definition (HD) Set Top Boxes and Digital TV Recorders with
3D capabilities delivering superior customer experience.
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B2B Services
Airtel BusinessAirtel Enterprise Services has recently changed its identity to airtel business.Airtel business offers wide portfolio of services that include voice, data, network integration,
data center & managed services, enterprise mobile applications and digital media. It is Indias
leading and most trusted provider of communication and ICT services to large Enterprise,
Government, Small & Medium businesses and carrier customers.Passive Infrastructure ServicesBharti Infratel provides passive infrastructure services on a
non-discriminatory basis to all telecom operators in India. It deploys, owns and manages passive
infrastructure in 11 circles of India. Bharti Infratel also holds 42% share in Indus Towers (a JointVenture between Bharti Infratel, Vodafone and Idea Cellular). Indus Towers operates in 15
circles (4 circles common with Bharti Infratel, 11 circles on exclusive basis).
3.1.2 Africa
Mobile ServicesThey offer mobile services in 17 countries across Africa, namely: Nigeria,
Burkina Faso, Chad, Congo B, Democratic Republic of Congo, Gabon, Madagascar, Niger,Ghana, Kenya, Malawi, Seychelles, Sierra Leone, Tanzania, Uganda, Zambia and Rwanda. This
makes Airtels footprint across Africa, the largest amongst all telecommunication service
providers in the continent. They continue to grow as the most loved brand and currently serve53.1 million customers across these geographies. They offer wide range of services to like post-
paid and pre-paid, roaming, One-Network, Airtel Money, internet services, content, media &
entertainment and other non-voice services. They have accelerated the rollout of 3G services bylaunching the services in 5 more countries this quarter; namely, Ghana, Sierra Leone, Kenya,
Nigeria and Tanzania. The company is now offering 3G services in 7 countries.
3.1.3 Partners
Strategic Equity Partners - They have a strategic alliance with SingTel, which has enabled
them to further enhance and expand Their telecommunications networks in India to providequality service to Their customers. The investment made by SingTel in Bharti is one of their
largest investments made in the world outside Singapore.Equipment and Technology Partners - They have long term strategic partnerships in all areas
including network equipment, information technology and call center technology building uponthe unique outsourcing business models They pioneered. Their business models have enabled
them to partner with global leaders who share Their drive for co-creating innovative and tailor-
made solutions for the markets They operate in. For 2G/2.5G & 3G network equipments, Theyhave partnered with Ericsson, Nokia Siemens Networks (NSN) and Huawei for the markets in
India, Africa, Sri Lanka and Bangladesh.
3.2 Subsidiary Companies
As on March 31, 2011, Bharti Airtel has 113 subsidiary companies, in different countries across
the globe. These subsidiaries can be broadly classified into the following categories- Telecommunication Service Companies- Infrastructure Sharing companies- Mobile commerce service companies- DTH services- Investment companies
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3.3 Firm SWOT
Strength
- Operations in 23 circle in country. Maximum subscriber base way ahead of competitors- Highest no of towers by Airtel making it easier to launch 3G/4G services using the same
passive infrastructure making it cost competitive
- Strong brand pull- Strategic partnership (e.g. with SingTel that enables it to expand rapidly and get investment)
and others like technology, networks and infrastructure partnerships
- Quick to introduce technologies like 3G and Airtel Money and gaining first mover advantageWeakness
- Still majority of revenue from domestic market, need to globalize moreOpportunity
- Large untapped landscape Huge scope for growth in Rural India as well as Africa- New technologies like 3G/4G opening up new avenues for growth using VAS- Indian telecom industry is one of the fastest growing telecom market in the world and Airtel
is already market leader. Positioned for growth
Threat
- Regulatory environment- Increased competition may reduce market share and/or revenue- 2G spectrum re-allocation- Change in Govt policy on FDI in telecom sector, may allow big global players to enter Indian
market.- Number portability has enable competitors to switch customers at low cost.
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4. Valuation
Valuation_Airtel.xlsx
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5 Bibliography
1. Bharti Airtel Annual Reports (2011, 2010, 2009, 2008, 2007)2. Bharti Airtel Quarterly Report (Q4 2012)3. Idea Cellular Annual Report (2012)4. Reliance Communications Quarterly Report (Q4 2012)5. www.moneycontrol.com6. www.nse.co.in7. www.economictimes.com8. www.tradingeconomics.com9. Investment Analysis and Portfolio ManagementReilly and Brown, 8th edition
http://www.moneycontrol.com/http://www.moneycontrol.com/http://www.nse.co.in/http://www.nse.co.in/http://www.economictimes.com/http://www.economictimes.com/http://www.tradingeconomics.com/http://www.tradingeconomics.com/http://www.tradingeconomics.com/http://www.economictimes.com/http://www.nse.co.in/http://www.moneycontrol.com/