Market Assessment and Business Model - for a mobile value added services operator

The mandate: Assess the Mobile VAS industry in India Assess the targets business Assess and comment on the targets business plan and five-year projections Develop a five-year business plan for the target, till the EBITDA level.

Our Approach: Discussions across key industry participants across target management, select competitors, and mobile telephone operators Analysis of growth drivers for the mobile telecom and mobile VAS industry in India; including an overview of the mobile VAS value chain Analysis and benchmarking of various revenue and cost heads of the business plan to discuss assumptions in the business plan Building a product wise model to develop a five year business plan Sensitivity modeling to ensure scenario analysis based on risk assessment across critical variables.

Challenges: Strict timelines for completion of the assignment given the criticality of the assignment (two weeks) Absence of targets performance precedence given less than two years of working Expectation of a thorough evaluation and analysis of key products offered and review of competitors Limited public information due to the nascent stage of the industry.

2008 KPMG India Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

Conducted a market assessment and developed a five year business model

Commented on the evolution and current status of the mobile VAS market
Industry Overview

Evolution of the Mobile VAS Market

The Mobile VAS industry has evolved over the years from basic P2P SMS to innovative CRBT. This trend is expected to continue in the future, leveraging new technology such as 3G, which could lead to significant market growth

DRAFT

Business Model Assessment Revenue Projections

The Target has estimated its revenues to increase to ~INR XX Company business model
4500 4000
Budget Forecast

DRAFT

4,1 71

67% 65% 2,994 2,01 3

INR Million

NEW, INNOVATIVE APPLICATIONS & SERVICES BASIC APPLICATIONS & SERVICES

Players continue to offer more innovative services Operators too focus on MVAS to stem falling ARPU

FUTURE HIGH END APPLICATIONS & SERVICES

Social Mobile NetworTV king Video MultiConfer- player encing gaming

bn by FYXX, growing at a XX% CAGR between FY0X-1X. During the same period, EBITDA has been projected to increase to ~INR XX bn. However, the Company model is simplistic in being based only on ARPS and Subscriber Numbers, and hence cannot be strictly
Proforma Case
Forecast

3500 3000 2500 2000 1500 1000 500 0 FY08 (B) Revenues 420 240 57%

2,774

1,504 977

70% 68% 67% 66% 64% 62% 60% 58% 56% 54% 52% 50%

Adjusted Estimates See Note*

Period FY09 FY10 FY11 Revenue (INR mn) 1,500 2,704 3,365 EBITDA (INR mn) 973 1,773 2,115 EBITDA Margin 65% 66% 63%

By aggregating across products, we built two scenarios of projected revenues and compared these to the existing business model. We drilled down the business plan into a series of granular assumptions which we benchmarked with industry and target information and assessed relative to the proposed strategy to assess the reasonableness of projections.
DRAFT

FY09(P)

FY1 0(P)

FY1 1(P)

EBITDA

EBITDA M argin

Potential Base Case

61 % 60% 1 ,921 1 ,229 749 1 45 ,1 2,242 70% 60%
3,500 3,000
Actual Forecast

INR Million

INR Million

MVAS Market Size

The Indian telecom market takes off A large number of MVAS players enter various segments across the value chain Wallpapers / Graphics Info Services P2P SMS

M Commerce Video TV

CRBT Contests / Games Ring Tones

Revenues from MVAS contribute to a mere X% of total mobile operator revenues

Launch of 3G to drive high end applications Consolidation in the industry Industry players explore operations across the value chain
Mobile VAS contribution to total operator revenues expected to increase to >XX%

2,500 2,000 1 ,500 1 ,000 500 -

Actual

67%

68% 2,643

3,100

80% 70% 62% 60% 1 ,925 50% 40% 30% 20% 1 0% 0%

compared with our bottom-up model Based on our analysis, the Targets FY0X revenues are likely to be in the range of ~INR XX XX bn, growing to ~INR XX bn by FY1X Upsides from new product launches and the Enterprise / International segments have not been factored fully into our analysis

49%

51% 1 ,133

50% 40% 30% 20%

2,500 2,000 1 ,500

49% 1 0 ,81 1 ,519 1,01 7

408 201

1 0% 0%

1 ,000 Business Model Assessment 408 201 EBITDA Projections 500 FY08 (A)

FY08 (A) Revenues

FY09(P)

FY1 0(P)

FY1 (P) 1 EBITDA M argin

EBITDA

As discussed earlier, our model is not comparable with the Company

EBITDA Bridge Company Business Model

Revenues EBITDA EBITDA M argin

FY09(P)

FY1 0(P)

FY1 (P) 1

4,500 4,000
The Potential Base Case considers: 3,500 Projected Indial / Outdial revenues based on monthly 3,000 subscriber growth, as per model assumptions (instead of basing these on historical trends) 2,500 E1 / circle ramp-up plans that are confirmed by management, but not necessarily supported by 2,000 documents 1 ,500
778 668 72 904 577 2,774 171 11 424 103 689

comparison is made only for roll-up financials Management had

2000
Source: Industry Discussions, KPMG Analysis

2003

2007

YEAR

estimated EBITDA to 1 ,000 Source: Company Financial Model, Company Management Information, KPMG analysis 6 152 *Note 1: To show partial model comparability, the adjusted estimates are recast from original estimates after removing revenues and costs for New Products and International, and assuming a static FY0X 500 increase from INR XX 413 estimate of Enterprise revenues, for FYXX-XX. This is to ensure comparability with our 2 analysis cases, which have these assumptions 240 Note 2: Costs for XX not factored into EBITDA 0 mn in FY0X(B) to INR XX
2008 KPMG India Pvt.Ltd., the Indian member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

INR Million

The Proforma Case considers: Historical revenue trends For Airtel Indials, the revenue has been calculated based on historical trends For others, the revenue has been calculated as per the model assumptions Committed E1 / circle ramp up plans

model, and a

mn in FY11 due to revenues from

2008 KPMG India Pvt.Ltd., the Indian member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

significant increases in Subscription, ARPU+, Call Management and

Source:

Business Model

Commented on services provided and strengths of a number of mobile VAS players operating in India
Competitor Overview

New Products Based on KPMG analysis, in the Potential Base Case, the EBITDA is likely to be lower, at INR XX mn in FY1X, primarily due to revenue accruals from subscription and ARPU+ We have, however, not considered any revenues accruing from new

EBITDA Bridge Potential Base Case

Outdial (Lower) Subscription (Higher) Higher ARPS across operators, with the exception of XX (due to low revenue share percentage)

3,500 3,000

INR Million

2,500 2,000 1 ,500 1 ,000

Lower ARPS certain operators (fewer number of successful calls, lower revenue per call, fewer available E1s) Partially offset by higher subscriber base for certain operators

53 691

13

1
ARPU+

10

1 420

33 1 ,187
Indial (Higher)

Industry Participation and Player Strengths

A large number of players operate in the enterprise and ringtone / content space. There is relatively lower competitor concentration in the voice and m-commerce domains. The most prominent players, in terms of offering breadth, are XX, XX, XX, and XX Our industry discussions indicate that the two key success factors for Mobile VAS players are their relationship and level of technical integration with operators, and their product innovation potential, which includes joint product development with operators
Name of Company XX XX XX XX XX XX XX XX XX XX XX XX XX XX XX XX XX XX XX XX XX XX XX XX 6D Note: Capability refers to a companys relative focus on the product, with respect to other offerings for the same company. Capability does not refer to relative offering strength vis--vis other players Source: Company Websites, Industry Reports, KPMG Analysis
Legend: Nascent Stage Low capability Medium capability Key capability Market leadership

DRAFT

325

Higher ARPS - all operators Higher subscriber base

Business Model Assessment Sensitivity Analysis

-

Lower estimate because no revenues are projected from XX and XX

547

DRAFT
1 ,925

500 0
201

395 -

Relative Focus by Product, for Key Mobile VAS Players

Subscription Services Content (ringtones, games etc) Voice Services Data Services Enterprise & Operator Services

The effect of sensitivity analysis varies by the product and variable assessed

Sensitivity Analysis Summary

Potential Base Case Value FYXX Revenue Impact Significance of Impact

products
mCommerce
Source: Target Management, KPMG Analysis

SMS

Variable Sensitized Subscription Penetration Rate Revenue Share Per User Earning Outdial Call Rate ARPU+ Call Rate (Vodafone, Airtel) Penetration Rate (Vodafone) Indial Unique User Penetration Revenue Share End User Price Others NDNC Registrations

Sensitized Value

2008 KPMG India Pvt.Ltd., the Indian member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. Highly sensitive

Key competitors

X-XX% XX-XX% XX-XX

Maximum 5-6% (Except XX) 15% 50% reduction

-11% -12% -20%

High High High

variables include all subscription-linked drivers (penetration, revenue share, per-user earning) and the call rate for XX Moderately sensitive variables include the Outdial call rate and Indial unique user

XX-XX

0.035

-9%

Medium

XX-XX X%

0.1 2%

15% -0.5%

High Low

XX-XX% XX% INR X

50% reduction 15% INR 4

-6.7% -3.2% -4.4%

Medium Low Low

As part of our findings we conducted sensitivities around key variables and quantified the effect of these sensitivities on projected revenues

penetration Low sensitivity variables are ARPU+ penetration rate, Indial revenue share and end user price, and the NDNC registration rate

X%

6-15%

-1.3%

Low

Note: See Appendix 5 for detailed sensitivity test results Source: Company Management Information, KPMG analysis

Legend:

Low Medium High

<5% >5%, <10% >10%

2008 KPMG India Pvt.Ltd., the Indian member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

2008 KPMG India Pvt.Ltd., the Indian member firm of KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

2008 KPMG India Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.