Telecom Sector: "Rural Penetration Drives Growth": Telecomsector

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Telecom Sector : “Rural Penetration drives Growth”

Executive Summary
India is one of the fastest growing wireless markets in the world. It is now the second-largest telecom market, just after China.
Despite the global economic slowdown, the Indian telecom industry continues to grow substantially, delivering strong returns
on investment, fuelled by the growth in the wireless industry. The wireless subscriber base grew at a CAGR of 61% over FY04-
FY09, while fixed-line subscribers dropped to 38 million in FY09 from 40.9 million in FY04. The subscriber base reached 392
million as of March 2009 with more than 10 million subscribers being added every month. However, India accounts for 7% of
the total subscribers in the Asia Pacific. Thus, low mobile penetration provides huge growth potential.
Moreover, the teledensity levels between the urban and rural areas vary widely, which suggests untapped potential in the rural
segment. Thus, we believe rural areas would be the next growth driver for the Indian telecom industry. However, operators would
face certain challenges such as high operating and maintenance costs and low ARPUs and MOU.
Further, the telecom industry saw 145% growth in foreign direct investment (FDI) to INR108 billion during April-January 2009,
compared with INR43.96 billion during the year-ago period (Source: DIPP). We expect the pace of investments to accelerate further
with the auction of 3G spectrum and the entry of new license holders. Moreover, buoyed by the rapid surge in the subscriber base,
domestic players are planning huge investments to expand coverage. This should bode well for the telecom industry.
However, a continued decline in tariffs and disruptive entry pricing by new players pose risks to our margin outlook. We expect
wireless Average Revenue Per User (ARPU) to fall further due to increased competition. Also, incremental subscribers are now
mainly from the rural areas with lower usage, which should reduce the elasticity of MOU with the decline in tariffs. We expect
increasing revenue from non-voice services to support revenue growth.
Intensifying competition and the regulatory uncertainty with respect to spectrum and 3G auctions are a few more challenges for
the Indian telecom industry, in our view.
Nevertheless, we believe that players with wide network coverage and strong balance sheets with comfortable leverage, providing
quality services, would survive in this highly competitive market. We also think that with so many players in the telecom industry,
consolidation would take place. Therefore, in the current scenario, incumbents, being integrated, should continue to become
stronger. These players should lead due their coverage, scale, and brand loyalty. As the incumbents have already rolled out their
network, their capex intensity would be much lower. Furthermore, passive infrastructure sharing and an opportunity to unlock
value from the tower business would prove advantageous for these players.
We initiate coverage on the telecom sector with a Neutral weighting, driven by slowing net adds and increasing competition,
though rural areas offer plenty of growth potential. Our top picks in the sector are Bharti Airtel Ltd, Idea Cellular Ltd, OnMobile
Global Ltd, and Tata Communications Ltd. We have a BUY recommendation on Bharti Airtel, a BUY AT DECLINES on
OnMobile Global (VAS Provider), and a SELL on Tata Communications; we initiate coverage on Idea with a BUY AT DECLINES
recommendation.
Bharti Airtel Ltd: The company continues to be a leader with strong earnings visibility in the current challenging environment.
In a scenario of tight liquidity, Bharti is financially very healthy and has a strong cash position. This should enable the company
to continue with its expansion plans. Unlocking of value in its passive infrastructure arm should further improve the company’s
valuations. We believe that Bharti will continue to be the market leader with a 24% market share by end-FY11. At a CMP of
INR794, the stock trades at a P/E of 16.6x its EPS of INR47.9 for FY10E and 14.5x its EPS of INR54.8 for FY11E. We continue
to maintain our “BUY” recommendation on Bharti with an upward revision in our DCF-based price target to INR880 (from
INR843) (INR440 post split).
OnMobile Global Ltd: Rapid subscriber growth in the telecom industry along with the increased penetration of VAS services
has enabled OnMobile Global to attain a strong position in the VAS market. At the same time, its technology platform and constant
innovation have been the differentiators for the company. Furthermore, its inorganic acquisitions, which have strengthened its
product offering and enhanced its technological expertise, have started to provide benefits. OnMobile Global also has cross-
operator presence, which gives it an opportunity to cross sell. The company is financially very strong and has negligible debt on
its balance sheet. At the CMP of INR318, the stock trades at a P/BV of 3.2x its adjusted book value of INR100.8 for FY10E and
2.6x its adjusted book value of INR121.8 for FY11E. On assigning a P/BV of 3.0x to FY11E adjusted book value of INR121.8,
we arrive at our price target of INR365. We maintain our “BUY AT DECLINES” recommendation on OnMobile Global.
Te l e c o m S e c t o r 1 2 M ay 2009
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Tata Communications Ltd: TCom’s business mix is progressively shifting towards enterprise data business, leading to steady
revenue growth and EBITDA margin expansion. Although DoT has decided to hold simultaneous auctions for 3G as well as WiMax
spectrum, there is still no clarity on the timing. Therefore, we believe that growth in this segment will depend on getting spectrum
in the 2.5GHz in the imminent BWA and 3G auctions. The core voice business also continues to face pricing pressure.
Another concern is the high debt level. The company has announced capex plans worth $500 million for FY10 and it will require
funds for the WiMax auctions. This would further increase its debt burden.
Given the economic slowdown, coupled with the uncertainties faced by the company and the high debt levels, we downgrade our
recommendation to “SELL” from “HOLD”.
On assigning the lower P/BV of 2.3 (which is consistent with the valuation of foreign peers) to FY11E book value of INR199,
we arrive at our price target of INR457. At present, the stock is trading at a price of INR551.
Idea Cellular Ltd: We believe Idea is well positioned in terms of spectrum holdings across the country. It has a strong position in
its incumbent circles and it has proven its execution capabilities in terms of roll-outs into new circles. Furthermore, fund infusion
from recent initiatives, such as the stake sale in Aditya Birla Telecom Ltd (ABTL) and the Spice deal with TMI, would result in
a well-funded balance sheet. However, the environment will likely become more difficult given the intensifying competition. We
expect Idea to face cost pressure owing to rapid expansion of network. This will likely further accelerate due to roll-outs in newer
circles, which should in turn exert significant pressure on profitability.
Nevertheless, since Idea has just started operations in most of the circles for which it received spectrum, its networks would not
be as congested as those of peers and therefore the quality of its services would be much better. With MNP being implemented
in the near term, we believe Idea will gain at the expense of saturated service providers. Further, the company’s aggressive roll-
outs should enable it to establish itself as a pan India player, placing it in a better position in the industry. At a CMP of INR61,
the stock trades at a P/E of 20.0x its EPS of INR3.0 for FY10E and 16.8x its EPS of INR3.6 for FY11E We initiate coverage on
Idea with a “BUY AT DECLINES” recommendation and a DCF-based price target of INR68.
Analyst
Deepti Chauhan
research@acm.co.in
Tel: (022) 2858 3408
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GLOBAL TELECOM INDUSTRY

Globally, mobile cellular subscribers grew at an impressive 20.6% CAGR over 2000-08. In
2000, mobile penetration stood at only 12%; by early 2008, it surpassed 50%. According to
International Telecommunications Union’s (ITU) estimates, mobile penetration reached about
61% by end-2008.
Worldwide Mobile Subscribers
4500 70
61
4000
60
3500 48
ITU estimates suggest 3000 41
50
that worldwide mobile 2500 34 40

In Mn
%
penetration has 2000 28 30
23
reached 61% by end 1500
16
19
20
2008. 1000 12
10
500
0 0
2000 2001 2002 2003 2004 2005 2006 2007 2008
Mobile Cellular Subscribers Mobile Penetration Rates
Source: International Telecommunications Union (ITU) World Indicators
Region-wise subscriber base

Asia Pacific is one of the most dynamic wireless markets, which has seen tremendous growth in
the past decade due to the surge in mobile telephony. The growth seen by various regions during
2000-2007 is as follows:
CAGR (2000-2007)
Africa 50.9
America 20.2
Asia 29.8
Europe 17.5
Rest 14.8
Total global mobile subscriber base 24.1
Source: ITU World Indicators Database.
Region wise Subscriber Break Up

Rest
1% Africa
8%
Europe
27%
America
Asian region-Largest 20%
market in terms of
Subscribers.
Asia
44%
Source: ITU World Indicators Database
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Country-wise break-up
India has emerged as the second-largest telecom market in the world after China, surpassing
the US. Much of the growth in the Asia Pacific market is spurred by the increase in demand in
countries such as India and China. China is the largest market in the Asia Pacific, accounting for
37% of the total subscribers, while India’s share is 7.0%. However, the Indian telecom sector
continues to grow substantially despite the global economic slowdown, mainly due to the impact
of economic reforms and policy measures of the government. Also, India’s low mobile penetration
provides huge growth potential.
Top 5 Countries by Subscribers

700
600
India is the second- 500

largest telecom market 400
In Mn
in the world after China,

300
surpassing the US.
200
100
0
2005 2006 2007 2008
China India USA Russia Brazil
Penetration levels in India vis-à-vis other emerging and developed markets

Penetration levels in India are still very low compared with other emerging and developing markets
and abysmal relative to developed countries, where penetration levels exceeding 100% are not
uncommon. India has the lowest penetration compared with other “BRIC” peers. Despite the
fact that India and China have similar levels of population, their teledensity levels differ widely.
Furthermore, India’s rural markets have huge untapped potential, given a low 13% teledensity.
Factors such as large population, high economic growth, low penetration, lower tariffs and
low handset cost, and increasing per capita spending, are an indication of the extensive room
India - Lowest
for growth for the Indian telecom industry.
penetration compared
Population (In Mn)* Teledensity
with other “BRIC” peers.
Brazil 191.9 78.5
Russia 140.7 162.5
India 1158.0 29.9**
China 1330.0 48.2
*Estimated as on July 2008. **Performance indicator report of TRAI for December quarter 2008.
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INDIAN TELECOM INDUSTRY: CURRENT TRENDS

Subscriber base
The Indian telecom market is characterized by low penetration and huge growth potential. The
wireless subscriber base grew at a 61% CAGR over FY04-FY09 while fixed-line subscribers
dropped to 38 million in FY09 from 40.9 million in FY04. Since wireless penetration is ~30%
at present, we see huge growth potential.
Wireless Subs Growth
450 130.6 140

400 120
350
95.0 100
300
Indian Telecom Market 250 67.3 80
In Mn
In Mn
–Low penetration and 200 60
huge growth potential. 150
41.8
40
100 22.6 21.4
50 20
0 0
FY04 FY05 FY06 FY07 FY08 FY09
Wireless Subs Net Adds
Source: TRAI
Rapid pace of monthly net adds

Net Adds
18
16 15.4 15.6
14 12.1 13.8
12
10.1 10.1 10.4 10.8
10
In Mn
9.2
8.3 8.2 8.8 8.6 8.9 10.3
More than 10 million
8.3
7.8 8.0 9.2
8 8.5 8.2
7.8
subscribers being 6 6.5
added each month.

5.2
4
2
0
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Source: TRAI
Indian wireless market share, March 2009

Wireless Market Share-March 09
BPL Mobile Sistema Shyam
Spice 0.6% 0.2%
MTNL 1.1%
Aircel 1.1% HFCL Infotel
4.7% 0.1%
Tata Teleservices Bharti Airtel
9.0% 24%
Idea
9.9%
Reliance
18.5%
BSNL
13.3%
Vodafone Essar
17.6%
Source: TRAI
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MOU growth not in line with the fall in tariffs

The Average Revenue Per User (ARPU) for GSM operators dropped to INR220/month in
December 2008 from INR316/month in December 2006, an average drop of 4.4%. Despite
this, GSM operators’ revenue grew an average 6.2% during the same period. This indicates that
subscriber growth and higher Minutes of Use (MOU) per subscriber have more than offset the
decline in ARPU. ARPU has been declining sharply as a result of intense competition among
operators, fall in tariffs, regulatory policies such as phasing out of Access Deficit Charge (ADC),
and reduction in termination charges. On the other hand, MOU has not increased in line with the
fall in tariffs, mainly due to low usage of incremental subscribers.
GSM-MOU vis-a-vis ARPU
600 350
500 300
250
400
Min in Bn
Rs per Month
200
MOU not increasing 300
150
in line with the fall in 200
100
tariffs. 100 50
0 0
Dec-06 Mar-07 Jun-07 Seo-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08
GSM MOU (Minutes in bn) Blended GSM ARPU (Rs per Month)
Source: TRAI
Rapid growth in investments

The boom in the domestic telecom market has been attracting huge investments, which will
likely accelerate with the launch of new services such as 3G and the entry of new players. The
telecom industry saw 145% growth in FDI to INR108 billion over April-January 2009, compared
with INR43.96 billion in the year-ago period (Source: DIPP). We expect the pace of investments
to accelerate further with the entry of new licence holders as well as the auction of 3G spectrum.
Telecom Industry Furthermore, buoyed by the rapid surge in the subscriber base, the domestic players too are
attracting huge planning huge investments for FY10.
investments.  Bharti Airtel is planning a capex of US$2.5 billion.
 Reliance Communication has committed to a capital investment of INR150 billion.
 Idea Cellular would spend about INR60 billion.
Industry appears to be moving towards consolidation

The Indian telecom industry saw numerous mergers and acquisitions in the past. Many foreign
players have already entered the industry by acquiring stakes in Indian players, who have acquired
licenses recently. The 3G auctions would also lead to many foreign players entering the sector.
However, as DOT has stipulated that for bidding for 3G spectrum an entity must hold a Universal
Access Service (UAS) license, many foreign players might tie up with existing UAS licensees,
which in turn could result in mergers.
Date Deal Stake Consideration
June 2008 Idea acquired Spice 40.8% INR21.8 bn
June 2008 Telecom Malaysia-Idea Cellular 15.0% INR72.9 bn
September 2008 Etilsat acquired Swan Telecom 45.0% $900 mn
October 2008 Telenor acquired Unitech wireless 67.3% INR61.2 bn
November 2008 NTT DoCoMo acquired Tata Teleservices 26.0% INR130.7 bn
Source: ACMIIL Research.
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INDIAN TELECOM INDUSTRY: FUTURE TRENDS

Subscriber growth
The rural subscriber base has been growing substantially due to greater focus of the telecom
service providers on rural operations. The rural subscribers accounted for almost 30% of the
total subscriber base as of December 2008. However, we see untapped potential in rural areas
(where almost 70% of the population resides), as rural teledensity is quite low at 12.6% vs. urban
teledensity of 81.3%.
Teledensity
90.0 81.3
80.0
70.0 63.7
60.0
Rural India: Growth %
50.0
38.0
47.2
driver for the telecom 40.0

26.2 26.2
33.0
industry. 30.0 21.3

18.2
20.0 12.9 12.6
9.1 9.3
7.0
10.0 1.9
5.8
1.7 1.7
0.0
Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08
Total Urban Rural
Source: TRAI
Quarterly rural subscriber additions have begun to exceed urban subscriber additions. Also,
growth in rural subscribers has exceeded that in urban subscribers. Going forward, with a shift
in focus towards rural areas, we believe rural subscriber growth will continue to outpace urban
subscriber growth.
Quarterly Additions Quarterly growth rate in subscribers
25.0 28.4%
30.0%
19.9
18.5 25.0%
20.0 17.7 17.3
16.0 19.0%
20.0% 16.6%
15.0 15.7%
14.4%
%
In Mn
10.1 15.0%
8.2 8.6 13.1 10.0% 10.6%
10.0
10.0% 7.9% 8.2%
8.5
5.0 3.8%
5.0%
0.0 0.0%
Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08
Rural Urban Rural Urban
Source: TRAI
Although rural areas would be the next growth driver, operators are expected to face certain
challenges:
 High network opex: Operation and maintenance costs of cell sites in rural areas are high
due to lower availability of electricity and thus operators are forced to depend on diesel for
Operators to face power supply. According to the FICCI-BDA wireless broadband report, cell site operating
challenges in rural costs in rural areas are estimated to be 25% higher at $1,410/month vs. $1,050/month in
areas. urban areas.
 Low ARPUs and MOU: Due to lower per capita income and low usage, ARPUs and MOU
are lower in rural areas than in urban areas.
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Apart from huge capex and opex requirements, other constraints in increasing penetration in
rural areas include acquisition of land, unavailability of cheap and fast backhaul connectivity,
lack of continuous power supply, and low literacy levels.
To increase rural penetration, TRAI has taken numerous initiatives such as recommending bringing
mobile services under the ambit of USOF and sharing of infrastructure to receive support from
USOF, and supporting backbone infrastructure through USOF.
Therefore, low penetration, coupled with factors such as increasing affordability, lower handset
prices and TRAI initiatives, suggests significant potential in rural areas. We believe that operators
will expand coverage in rural areas to gain the first-mover advantage. This in turn should help
improve rural teledensity.
Wireless subscriber base to reach 612 million by March 2012

To estimate the wireless subscriber base, we first determined the size of the population that can
afford mobile services from population estimates from the Census India Report (December 2006).
From these estimates, we reduced the population living below the poverty line (estimated at 20%)
to arrive at the population that can afford mobile services. Further, assuming that people below the
age of 15 years do not avail mobile services, we reduced this proportion as well to arrive at our
addressable population. From 2009 onwards, as coverage in the rural areas increase, we expect
the share of metros in net additions to decline as is being observed lately. This is also reflected
We expect wireless
in the high teledensity levels of metros such as Delhi and Mumbai. Therefore, we expect a shift
subscriber base to
in net additions from urban to rural areas. This should moderate the pace of subscriber growth
reach 612 million by to some extent from 2009 onwards.
March 2012. We forecast the wireless subscriber base to grow at a CAGR of 16.1% in the next three years,
reaching 612 million by March 2012. This implies an 84% and a 51% wireless penetration of
the addressable population and the total population, respectively, by 2012.
Wireless Subscriber Growth Pace of Net Adds to slow
140.0 131.5
700 100.0
84.4
600 77.6 120.0
72.5 80.0
66.2 94.5 88.0
500 100.0
60.0 75.0
400 44.6 80.0
57.0
In Mn
In Mn
%
300 60.0
40.0
200 40.0
20.0
100 20.0
0 0.0 0.0
FY08 FY09 FY10E FY11E FY12E FY08 FY09 FY10E FY11E FY12E
Subscriber Base Adressable market Penetration Net Adds
Source: ACMIIL Research
B and C Circles: Next growth drivers

The subscriber base additions suggest that B and C Circles would contribute to the next wave
of growth in the telecom industry. The net wireless subscriber additions in B and C circles have
begun to exceed those in metros and Circle A. In the March 2009 quarter, B and C Circles together
accounted for 52.9% of total net adds. We expect this trend to continue as the operators have
now shifted their focus to rural areas.
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B&C Circle-Next Driver for Growth

100%
9.9 10.4 10.7 10.9 11.3 11.8
80%
B and C Circles to drive 36.3 36.4 36.8 37.0 37.2 37.4
future growth. 60%
%
40%
36.0 36.0 35.7 35.6 35.3 35.0
20%
17.8 17.2 16.8 16.4 16.2 15.8
0%
Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09
Metros Circle A Circle B Circle C
Source: TRAI
Declining ARPUs to put pressure on margins
Most of the leading telecom operators’ ARPUs have been declining rapidly QoQ.
Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08
Telecom revenue (INR Bn) 312.9 330.6 357.7 353.1 372.0 394.1
Growth 8.0% 5.7% 8.2% -1.3% 5.3% 5.9%
No of subscribers (In Mn) 209.1 233.6 261.1 286.9 315.3 346.9
Growth 13.1% 11.7% 11.7% 9.9% 9.9% 10.0%
MOU-GSM (Min/Sub/month) 462 464 493 505 499 496
Growth -2.9% 0.4% 6.3% 2.4% -1.2% -0.6%
MOU-CDMA (Min/Sub/month) 413 375 365 354 332 370
Growth -10.6% -9.2% -2.7% -3.0% -6.2% 11.4%
ARPU-GSM (INR per month) 275 261 264 239 221 220
Growth -7.4% -5.1% 1.1% -9.5% -7.5% -0.5%
ARPU-CDMA (INR per month) 173 176 159 139 122 111
Growth -16.0% 1.7% -9.7% -12.6% -12.2% -9.0%
Source: TRAI.
The telecom industry is seeing adds of over 10 million subscribers every month, but the increasing
base is not resulting in an increase in usage, as reflected by MOU. On the revenue front, growth
is slowing down with a higher base and due to the consistent fall in ARPU.
Going forward, a shift in the operators’ focus towards low-usage rural subscribers would further
contribute to a fall in ARPU. Furthermore, the competitive pressure will likely heighten with new
operators rolling out services, which in turn would lead to downward pressure on tariffs. TRAI
Operators expected to
recently reduced the termination charges for all domestic calls to INR0.2/min from INR0.3/min
increase VAS revenues from April onwards, which should further aid the tariff decline, pressurizing ARPUs. This, along
to scale down margin with slow subscriber base growth, might result in slowing top-line growth, which, together with
pressures. increasing competition and higher capex to expand business, should put pressure on margins.
However, to scale down the effect, the wireless operators are looking to increase value added
service revenue similar to the developed markets, where operators have shifted focus towards
data revenue, which has led to an improvement in margins.
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Dec-07 Mar-08 Jun-08 Sep-08 Dec-08

Wireless data revenue % share
Shift towards data AT&T 19.9% 21.5% 22.9% 24.2% 26.6%
revenues to improve Sprint 19.0% 20.5% 21.4% 24.1% 25.9%
margins. Verizon 21.2% 22.8% 24.8% 25.7% 27.0%
EBIDTA margin
AT&T 35.3% 41.7% 41.2% 33.5% 35.8%
Sprint 28.7% 24.4% 25.7% 23.4% 21.6%
Verizon 43.6% 44.9% 45.6% 44.2% 47.2%
Source: Company Reports.
Higher spectrum charges

Current fee structure Revised fee structure
Spectrum Usage Spectrum Annual recurring charge Spectrum Annual recurring charge
2x4.4 MHz 2% of AGR 2x4.4 MHz 3% of AGR
Source: TRAI, DOT
The GSM operators were given an initial allotment of 4.4 Mhz for network roll-outs, which was
bundled along with the telecom license. However, the regulator has proposed a 1% increase in
usage charges for spectrum upto 8 Mhz and a 2% increase for spectrum up to and above 8 MHz.
While a final decision is pending, this will likely impact majority of the players, as most of them
have spectrum over 6.2 Mhz in most of the Circles (Annexure).
Future growth expected from non voice (data) revenue in highly penetrated areas
Circle-wise, penetration levels are high in metros and A Circles in terms of voice telephony. These
Circles are associated with high ARPUs. Therefore, with the voice telephony market nearing
maturity in these areas, ARPUs are declining at a much faster pace.
Teledensity - March 08
Himachal Pradesh 34.9%

Jammu & Kashmir 19.6%
Bihar 11.6%
Orissa 13.1%
Data revenue will offset Assam
North East
13.3%
16.6%
the loss from voice Punjab
Kerala 34.6%
43.8%
ARPU.
Uttar Pradesh (West & East) 14.9%
Madhya Pradesh 18.2%
Haryana 26.5%
Rajasthan 21.1%
Karnataka 29.6%
Andhra Pradesh 25.0%
Gujarat 30.0%
Maharashtra 19.5%
Delhi 96.0%
Mumbai 71.7%
Kolkatta (Includes West Bengal) 19.8%
Chennai (Includes Tamil Nadu) 38.3%
Source: TRAI and ACMIIL Research
As ARPUs decline and voice becomes commoditized, the challenge for the telecom industry would
be to retain customers, develop alternative revenue streams, and create a basis for differentiation
in high-churn markets. This would in turn result in mobile operators shifting towards non-voice
revenue, similar to the developed markets, where operators have shifted towards data revenue.
Te l e c o m S e c t o r 1 2 M ay 2009 10
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Trends in mobile data revenue ($) Dec-07 Mar-08 Jun-08 Sep-08 Dec-08
US
AT&T data ARPU 10.01 10.79 11.59 12.29 13.67
YoY growth (%) 39.3% 37.0% 32.3% 31.5% 36.6%
% to total ARPU 19.9% 21.5% 22.9% 24.2% 26.6%
Sprint data ARPU 11.00 11.50 11.98 13.50 14.50
YoY growth (%) 25.7% 24.3% 22.9% 35.0% 31.8%
% to total ARPU 19.0% 20.5% 21.4% 24.1% 25.9%
Verizon data ARPU 10.92 11.70 12.78 13.41 13.98
YoY growth (%) 36.0% 32.6% 29.7% 28.5% 28.1%
% to total ARPU 21.2% 22.8% 24.8% 25.7% 27.0%
India
Bharti Airtel data ARPU 0.62 0.64 0.64 0.62 0.58
YoY growth (%) -22.6% -15.6% -11.2% -7.3% -6.9%
% to total ARPU 9.3% 9.4% 9.7% 10.0% 9.5%
Source: Company websites.
We believe data revenue will continue to offset the loss from voice ARPU. Moreover, it is rising
as a percentage of wireless revenue. Globally, mobile data revenue growth is increasing and
the voice market has been seeing a decline. In India as well, a similar trend is being observed,
especially in the metros and urban areas, where mobile operators have shifted focus from customer
acquisition to promoting value-added services. They are also looking at data as the next growth
driver and a significant source of revenue. However, at present, data revenue contributes just 8-
10% to the operators’ overall revenue. Data revenue growth is led by SMS, with ring tones and
caller ring-back tones being the next largest driver. Furthermore, 3G, which is expected to be the
driving factor for high-end data services, should also help boost data revenue in India.
Infrastructure sharing
Recognizing the critical importance of infrastructure to offer wireless telecom services, TRAI has
been taking various initiatives to encourage infrastructure sharing. TRAI considered the passive
infrastructure sharing issue and recommended active infrastructure sharing and backhaul on a
Infrastructure Sharing suo-motu basis in April 2007. Passive infrastructure constitutes about 60% of the total cell site
to ensure faster roll out cost. Therefore, sharing would enable operators to reduce capex to a large extent.
of networks. Passive infrastructure sharing has provided a new business stream for telecom players and they
appear to be realizing the benefits. Large players with a pan-India footprint have hived off their
tower infrastructure units into companies to unlock value. For new players, who are expanding
network, passive infrastructure sharing entails lower capex and faster roll-out of services.
Towers Nos
Indus Towers 91,715
Bharti Infratel 26,289
Reliance Infratel 40,000
BSNL+MTNL 40,000
Tata +Quippo 18,000
Aircel 7,000
Essar 4,500
GTL 6,300
Source: Bharti Airtel Presentation (February 2009).
According to TRAI’s estimates, India would need about 350,000 towers by 2010 to cater to a
target subscriber base of 500 million. Due to strong demand for towers, given a rising subscriber
base, tower companies have set aggressive target roll-outs. Many independent tower companies
T E L E COM SE CTOR
have also announced aggressive tower roll-outs to capture the growth opportunity. By 2010,
Bharti Infratel plans to have 115,000 towers and Reliance plans to follow suit with 63,000
towers, GTL Infrastructure is also planning 25,000 towers. This is about 50% of the expected
350,000 towers.
Such aggressive tower roll-outs will likely result in oversupply in the short term. However, the
existing operators’ expansion plans and the entry of new players should create demand for towers.
We believe that most of the new players will lease towers to ensure faster roll-out of networks
rather than incur capex.
Further, with large number of independent tower companies and integrated telecom players in
the industry, we expect consolidation in the tower industry, signs of which are already visible.
Reliance Infratel Bharti Infratel Spice-Quippo telecom Quippo+Tata
July 2007 Dec-07 Feb-08 Jan-09
Number of towers 25,000 20,000 875 18,000
Stake sale 5% 2% 100%
Investments (INR Cr) 1,400 1,000 600
Total Valuation (INR Cr) 28,000 5,0000 600 13,000
Valuation per tower (INR Cr) 1.1 2.5 0.7 0.7
CHALLENGES FOR THE INDUSTRY

The two biggest external challenges are regulatory uncertainty and competition.
Regulatory uncertainty
Lack of a clear regulatory roadmap has been one of the major challenges for the Indian
telecom industry. Uncertainty about the policy and regulatory framework revolve around the
following:
 Final decision on spectrum allocation not taken yet
With TRAI and TEC increasing the subscriber base criteria, it has now become difficult for
the existing operators to get additional spectrum. For efficient and quality services, spectrum
availability is a must. As these norms for spectrum allocation are implemented, the existing
operators will have to increase their subscriber base to get additional spectrum. However, a final
decision hasn’t been taken yet.
The scarcity of spectrum is an industry-wide issue, which needs to be addressed. It may affect
smaller players more because huge capex is required to upgrade the network due to the spectrum
crunch.
Scarcity of spectrum is The extent to which an operator would be affected would depend on its capability to maintain
an industry-wide issue, the quality of its services, which becomes even more important in the wake of the introduction
which needs to be of Mobile Number Portability (MNP).
addressed. From a subscriber perspective, we believe net additions will not be affected much with the
spectrum crunch. The criteria for subscribing a mobile connection do not include determining
the amount of spectrum with a service provider. However, the existing subscribers may switch
over to other providers due to deterioration in QoS. With the launch of MNP, switching over to
another service provider would be easier.
Another impact would be increased competition between service providers. This may result in
aggressive pricing strategies to retain subscribers.
‘Spectrum scarcity’ is a fundamental problem. Not much spectrum is available for commercial
cellular services despite most service operators having already become eligible for additional
spectrum. Moreover, the Defence Ministry has delayed vacating of spectrum for a long time
now.
T E L E COM SE CTOR
 Delay in 3G auctions
India’s has been waiting for the launch of 3G services for a long time now. Although the government
Delay in 3G auctions has announced a comprehensive policy for 3G, it has been surrounded by controversies, leading
benefiting state owned to a series of amendments. Procedural delays and disagreements between the Finance Ministry,
companies. DoT, and TRAI on the reserve price for spectrum auctions have been delaying the schedule. The
government has not been able to lay down a clear roadmap for 3G auctions. Furthermore, the
delay in auctions is benefiting state-owned companies such as BSNL and MTNL, as spectrum
has been allocated to them, whereas private players will have to wait for the auctions to begin.
 Uncertainty about Defence vacating spectrum
The signing of an MOU between the DoT and the Defence Ministry for vacating spectrum has
been delayed. The Defence Ministry earlier agreed to release 10 MHz of spectrum for third
generation mobile services and another 5 MHz for existing GSM operators immediately after
signing the agreement. The DoT, on its part, agreed to lay an optical fiber cable for the armed
forces, connecting over 270 locations over three years.
However, with the Defence ministry now proposing new conditions in the MoU, the vacation of
spectrum has been delayed. These conditions include powers to take back the vacated spectrum
if DoT fails to roll out an alternative optical fiber cable network for the armed forces within the
stipulated period. It has also proposed that spectrum should be reverted to the armed forces in
case operators do not start using it within a specified time.
The DoT has so far not agreed to these conditions, which creates uncertainty about spectrum
availability for mobile operators. Thus, an increasing delay in signing of the MoU could put off
the 3G auctions further and also increase congestion in existing cellular networks.
 Uncertainty about introduction of MNP
In August 2008, DoT announced the guidelines for implementation of intra-circle MNP with a
timeline of mid-09 for metros and end-09 for the whole country. The DoT divided the country
into two geographic zones, each of which would be handled by a different MNP provider.
Each zone was further broken down into 11 service areas that represent cities within the zone.
Zone 1 will cover the northern and western regions, while Zone 2 will include the south and
east. The centralized operators for implementing MNP was finalized in March. Syniverse will
cover northern and western states, while MNP Interconnection Telecom Solutions India, a JV of
Telcordia, will cover the southern and eastern states. However, these centralized operators are
required to roll out MNP in metros and A-category Circles within six months of receiving the
licence, and extend it to the other circles in the next six months. Therefore, there is uncertainty
about the implementation of MNP across the country by December 2009.
Competition
To take advantage of the boom in the telecom sector, many new aspirants applied for licenses
in the past. The DOT received as many as 575 applications. However, letters of intent were
given to only those who applied before the due date. Apart from leading global telecom giants,
those with presence in real estate and infrastructure sectors applied for licenses to be a part of
Entry of new players- the growth story.
Not to pose any The DOT issued letters of intent to nine different companies. Of them, only two—Unitech and
significant threat to the STel—were completely new. Others were Tata Teleservices, Loop Telecom (owned by BPL),
existing operators. Spice Communication, Shyam Telelink, Swan Telecom, Datacom and Idea Cellular. These letters
of intent have now been converted into licenses.
With the issue of start-up spectrum allocated to the new licensees, the number of operators in
a particular Circle would be more than four. However, we believe that the entry of new players
would not pose any threat to existing operators, as the chances of them affecting the market in
the near term are low due to significant market and execution challenges. Apart from spectrum
constraints, these players would face financing risks and severe competition, as they are late
T E L E COM SE CTOR
entrants and are likely to enter simultaneously in an already crowded market. Moreover, room
for growth in urban areas (high ARPU subscribers) is not much, as penetration levels are very
high. This would further result in new entrants losing out on high ARPU subscribers.
New players’ status after acquiring licenses
Datacom Unitech Swan Telecom Shyam Telelink Loop S Tel
Investment committed INR120 Bn $2 bn $2.5 bn $5 bn $2.5 bn -
No of circles 22 22 13 22 21 6
Start-up Spectrum 17 21 13 22 13 6
Investors Still looking for a Telenor 67% stake @ Etilsat 45% stake @ $900 74% owned by Still looking for a Batelco picked up 49%
strategic partner INR6120 crore mn Sistema Teleservices strategic partner stake for $225 mn
Status check A n n o u n c e d Plans to roll out services It is stillunder negotiations Rollout plans seem Launch plans are Applied for licenses
investment of over by 3Q09. It hasalready for infrastructure sharing on track. It has plans unknown in all 22 circles, but
INR120 bn over the signed a tower-sharing deals and is looking to roll out to spend $5.5 bn over received spectrum in
next four years agreement with Tata. servicesby year-end the next five years only six
Source: ACMIIL Research
COMPARISON OF INDIAN PLAYERS WITH PEERS ON KEY OPERATING METRICS

ARPU ($) Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08
US 53.0 54.2 54.0 53.3 52.5 52.7 53.0
India 5.9 5.9 5.4 5.1 5.2 4.7 4.4
China 12.4 12.9 13.0 13.3 12.0 12.3 12.2
MOU (Min per sub) Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08
US - 734 - - - 751 -
India 471 476 462 464 493 505 499
China 422 440 447 475 481 496 493
Subscriber base (In Mn) 2004 2005 2006 2007 2008
US 184.8 213.0 241.8 255.4 270.4
India 52.2 90.1 166.1 233.6 346.9
China 334.8 393.4 461.1 547.3 641.2
Penetration Rates (%) 2004 2005 2006 2007 2008
US 62.6 71.4 80.3 83.5 89.0
India 4.8 8.2 14.8 20.0 30.3
China 25.6 29.9 34.8 41.2 48.2
Source: TRAI,China Mobille & CTIA
T E L E COM SE CTOR
ResultUpd at e
Bharti Airtel Limited
Key Data (INR) INTRODUCTION
CMP 794 Bharti Airtel Limited (Bharti) is India’s leading wireless operator with 93.9 million
Previous target Price 843 wireless subscribers as of March 2009. The company has four business units: mobile,
Revised Target Price 880 telemedia, enterprise services (which is subdivided into carriers (long-distance
services) and corporates) and passive infrastructure services. Bharti’s services are
Key Data
offered under the brand “Airtel”. With a subscriber market share of 24%, the company
Bloomberg Code BHARTI IN
has presence across India in all 22 service areas.
Reuters Code BRTI.BO INVESTMENT RATIONALE
BSE Code 532454  Indian telecom has been growing robustly; Bharti to continue to be the
NSE Code BHARTIARTL leader
Face Value (INR) 10.0 The Indian telecom industry is growing at a robust pace with wireless subscribers
Market Cap. (INR Bn.) 1507 contributing in a big way. The wireless subscriber base has reached 392 million as
52 Week High (INR) 899 of March 2009 with more than 10 million subscribers being added every month.
52 Week Low (INR) 484 We expect the wireless subscriber base to grow at a CAGR of 16.1% over 2009-11,
Avg. Daily Volume (6m) 700084 touching 612 million by March 2012. We believe that Bharti Airtel will maintain its
F&O leadership with pan-India network coverage. Although we believe that the pace of
net adds will decline due to increasing competition, we expect Bharti to maintain its
Market Lot 500
market share at ~24% by FY12.
Turnover (Rs Mn) 2310
 Expansion focused on subscriber growth and profitability
While Bharti’s approach for the wireless business is to take the population coverage
Shareholding %
to a progressively higher level, its strategy for the fixed line and broadband business
Promoters 67.2
is to be choosy and selectively expand coverage. This is because of significantly
Mutual Funds / Bank/ FI 3.2
higher capital costs and lower return ratios resulting from deeper penetration of the
Foreign Institutional Investors 20.7
Indian hinterland. The company has a selective strategy for this segment, as it intends
Insurance Companies 4.2
to focus on cities with high revenue potential.
Bodies Corporate/Individuals/others 4.7
 Potential unlocking of value from the tower business
Total 100.0
Bharti Infratel is Bharti’s majority-owned passive infrastructure subsidiary. Majority
of Bharti Infratel’s towers are located in Circle C. This Circle, being a high growth
Particulars FY09 FY10E FY11E
one, should help improve the tenancy for the tower company. Furthermore, Bharti
Net sales (INR 373,521 428,850 484,800
Mn) Infratel has a 42% stake in Indus, the largest tower company with a portfolio of 95,000
Operating Profit 149,727 170,423 189,147 towers; it is a JV between Vodafone, Idea, and Bharti. Therefore, we believe that
(INR Mn) Bharti is well placed to leverage the expected demand for towers from new telcos.
Net Profit (INR 78,590 90,959 104,006  Solid balance sheet
Mn)
Bharti has a well-funded balance sheet, as its net debt to equity is the lowest among
OPM (%) 40.1 39.7 39.0
peers. Furthermore, as it already has pan-India coverage, capex requirements are
NPM (%) 21.0 21.2 21.5
much lower vs. peers, who are still rolling out network. Bharti appears to be in a
EPS (INR) 41.4 47.9 54.8
much better position to fund its capex for the impending 3G auctions. Management
indicated that Bharti’s capex has peaked, and with the company covering 80% of the
population, we expect a reduction in capex.
KEY CONCERNS
 Intensifying competition: In the past, with the entry of new players in the GSM
space, some aggressive pricing plans and free minutes were offered by them,
which somewhat affected Bharti, as it faced pressure in terms of reduction in
market share although it maintained the pace of net adds. Going forward, with
the entry of more new players, a price war is likely, which could in turn increase
the churn rate.
T E L E COM SE CTOR
 Delay in 3G auctions: 3G spectrum auctions have been delayed for a long time now. Bharti
has already upgraded its network for 3G, but it is not in a position to offer 3G services.
Furthermore, the delay in auctions is benefiting state-owned companies such as BSNL and
MTNL, as spectrum has already been allocated to them.
VALUATIONS AND RECOMMENDATION
Bharti continues to be the leader with strong earnings visibility in the current challenging
environment. Despite a tight liquidity scenario, the company is financially very healthy and has
a strong cash position. This should enable it to continue with its expansion plans. We believe
unlocking of value in the passive infrastructure arm would further improve its valuation. We
believe that Bharti will continue to be the leader with a 24% market share by end-FY11. At a
CMP of INR794, the stock trades at a P/E of 16.6x its EPS of INR47.9 for FY10E and 14.5x its
EPS of INR54.8 for FY11E.We continue to maintain our “BUY” recommendation on Bharti with
an upward revision in our DCF-based price target to INR880 (INR440 post split), our previous
price target was INR843.
Assumptions
Risk Free rate 8%
Beta 0.9
Risk Premium 6%
Cost of equity 13.2%
Cost of Debt 9.0%
Terminal growth rate 4%
WACC 11.5%
INR Mn Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19
EBITDA 171,710 190,602 200,825 219,537 235,530 251,106 256,121 261,497 258,784 263,544
Tax 14,774 17,061 17,070 20,197 23,789 26,868 28,942 30,857 31,054 31,625
Capex 150,500 125,500 62,500 59,500 55,100 49,200 45,500 49,200 42,500 42,501
Change in NWC 14,851 -10,364 14,459 14,050 14,132 15,066 15,367 15,690 15,527 15,813
FCF 21,287 37,676 135,714 153,890 170,773 190,104 197,047 197,130 200,757 205,230
Source: ACMIIL estimates.
Valuations Amount (INR Mn)

PV of cash flows 764,017
PV of terminal value 958,731
Value 1,722,747
Net Debt (loan funds-Cash balance) 52,104
Value of Equity 1,670,644
No of Shares 1,898
Fair Value (INR per share) 880
Note: Due to limited information on Indus Towers, we are not making FY10 and FY11 projections
for Indus and thereafter consolidate 42% of Indus’ financials with Bharti Infratel.
T E L E COM SE CTOR
SEGMENT ANALYSIS
A) Mobile services
Bharti is the leader in the wireless segment. It provides mobile services under the GSM platform. With
almost 93.9 million mobile customers, which represent a 24% share of the wireless market, Bharti is
the largest service provider. This segment is the major revenue contributor with an 82% share.
 Market leader
Bharti continues to lead the market in terms of subscribers with an expanding coverage. The
company’s net adds have been accelerating rapidly. It has seen an increase of over 8 million in
quarterly net additions and its subscriber market share increased from 21.9% in June 2006 to
24.7% in December 2008. Although Bharti’s market share was under some pressure over January-
March due to RCom’s nation-wide GSM launch, the absolute net adds did not decline. Bharti’s
Aggressive network
market share was 24% as of March 2009.
coverage has enabled One of the most important advantages for any telecom operator is quick roll-out of coverage.
Bharti to maintain Bharti clearly has maintained its leadership due to its strategy of increasing coverage aggressively.
leadership. The company’s network is spread over 5,057 census towns and 401,882 non-census towns. Bharti
has expanded its population coverage from 46% in 2006 to 79% in 2009. Now, it plans to expand
this to 100% over the next two years.
Net adds continue at a rapid pace
9.0 24.6% 24.7% 25.0%

8.0 24.2% 24.5%
23.8% 23.7% 24.0%
7.0 23.6% 24.0%
23.4%
6.0 23.0% 23.5%
22.5% 23.0%
5.0
Im Mn
22.5%
%
22.1%
4.0 21.9%
22.0%
3.0 21.5%
2.0 21.0%
1.0 20.5%
0.0 20.0%
Mar-07
Mar-08
Mar-08
Sep-06
Sep-07
Sep-08
Dec-06
Dec-07
Dec-08
Jun-06
Jun-07
Jun-08
Net Adds Market Share

Source: TRAI
 Performance metrics: Bharti scores well over competitors

Bharti outpaces its competitors in terms of MOU and ARPU. Its focus on the mobile business to
capture a larger share of the voice market enables it have a higher subscriber base, which leads to higher
MOU than peers despite Bharti having a higher proportion of rural subscribers (28% share).
Particulars Mar-08 Jun-08 Sep-08 Dec-08 Mar-09
*Revenue per minute
Bharti outpaces its
Bharti 0.72 0.66 0.63 0.64 0.63
competitors in terms of
Reliance 0.74 0.66 0.64 0.61 0.60
MOU and ARPU.
Idea 0.70 0.65 0.62 0.64 0.63
*MOU
Bharti 507 534 526 505 485
Reliance 430 424 423 410 372
Idea 411 428 417 410 402
*ARPU
Bharti 357 350 331 324 305
Reliance 317 282 271 251 224
Idea 287 278 261 266 254
Source: Company reports and ACMIIL Research. *Revenue per minute- : Revenue from mobile services (voice) / MOU,
MOU: Minutes/Subscriber/MonthARPU: Revenue /Subscriber/Month
T E L E COM SE CTOR
Moreover, in most service areas, Bharti’s subscriber base has grown rapidly and is much higher
vs. the industry.
Circle-wise growth vis-à-vis the industry - GSM
GSM Metros Circle A Circle B Circle C
Industry Bharti Industry Bharti Industry Bharti Industry Bharti
Sep-07 9.8% 10.3% 14.8% 16.7% 13.4% 15.4% 12.8% 12.4%
Dec-07 8.7% 8.9% 13.0% 13.8% 11.6% 14.1% 13.4% 12.5%
Mar-08 7.5% 7.4% 12.1% 12.0% 12.0% 13.5% 17.4% 16.8%
Jun-08 6.7% 5.0% 9.7% 11.3% 11.6% 14.5% 12.8% 15.7%
Sep-08 8.2% 5.6% 9.1% 10.7% 10.6% 14.4% 12.9% 14.4%
Dec-08 7.8% 6.0% 10.0% 10.7% 10.9% 11.4% 14.3% 12.6%
Source: TRAI, ACMIIL Research.
 Geographical expansion outside India: Bharti plans to invest $200 million in Sri
Lanka
Bharti Airtel Lanka Pvt Ltd, Bharti’s subsidiary, plans to invest $200 million over the next five
years upto 2011-12 to offer mobile services in Sri Lanka. A major portion of the committed
investment will be made during the next 12 to 18 months. The company launched mobile services
in Sri Lanka in January 2009 under the Airtel brand on a state-of-the-art 3.5G network. It launched
a suite of innovative services in the country at attractive call rates. Bharti entered Sri Lanka as
the fifth operator and its commercial service offerings have received a positive response.
The Sri Lankan market is similar to India, enabling Bharti to utilize its India experience in this
market. The Sri Lankan mobile market has grown rapidly over the past few years with total
subscriber base growing at a CAGR of 49% over 2001-08. Mobile penetration is at ~50%,
providing huge growth potential. The fixed-line penetration is also low at 17%.
 We expect subscriber base to reach
Srilankan Mobile148Market-Rapid
million by FY12Growth
In the past few months, competition has intesified with the entry of new players. However, we
believe12that Bharti will continue to be the leader with its pan India network coverage. Although,
70
58.7% 61.0%
we believe
10 that the
55.2% pace of net adds would decline due to increasing competition, we
60expect
49.6%
Bharti to maintain its market share at ~24% by FY12. 47.5% 50
8 52.0%
Source: ACMIIL Research 40
Im Mn
39.5%
Despite6heightening competition, we expect Bharti’s mobile revenue to register38.8%
a revenue CAGR
%
30
of 21.9%4 over FY08-11, driven by a 29.4% subscriber CAGR.
20
Mobile segment: Performance (INR
2 10
Mn)
0 0
Mar-08
2001 Mar-09
2002 Mar-10E
2003 Mar-11E
2004 2005 2006 2007 2008
Subscriber Base (No) 62.0 Mobile
93.9 115.5 Y-o-Y
Subscribers 134.2Growth
Source: Telecommunications Regulatory Commission of India.
 We expect subscriber base to reach 148 million by FY12

In the past few months, competition has intesified with the entry of new players. However, we
Expect Bharti to believe that Bharti will continue to be the leader with its pan India network coverage. Although,
maintain market we believe that the pace of net adds would decline due to increasing competition, we expect
leadership with 24% Bharti to maintain its market share at ~24% by FY12.
market share.
T E L E COM SE CTOR
Subscriber Growth Net Adds
160 24.3% 35 31.9

24.2%
140 24.2%
24.2% 30
24.1% 24.9
120
24.1% 25 21.6
100 24.0%
24.0% 20 18.7
In Mn
In Mn
80
23.8% 23.9% 15
60 13.8
23.8% 10
40
20 23.7% 5
0 23.6% 0
FY08 FY09 FY10E FY11E FY12E
FY08 FY09 FY10E FY11E FY12E
Subscribers Subscriber Market Share
Source: Source: ACMIIL Research

Despite heightening competition, we expect Bharti’s mobile revenue to register a revenue CAGR
of 21.9% over FY08-11, driven by a 29.4% subscriber CAGR
Mobile segment: Performance (INR Mn)
Mar-08 Mar-09 Mar-10E Mar-11E
Subscriber Base (No) 62.0 93.9 115.5 134.2
Net Revenue 217,861 303,601 350,200 394,548
Growth 54.0% 39.4% 15.3% 12.7%
*ARPU 293 269 253 245
EBITDA 85,480 94,050 108,212 123,099
Growth 60.5% 10.0% 15.1% 13.8%
EBITDA Margin 39.2% 31.0% 30.9% 31.2%
Source: Company Annual Report and ACMIIL estimates.
*ARPU: Average revenue per user per month (Net Revenue / Number of Subscribers/12).
B) Telemedia (broadband and fixed line)

This segment provides fixed line and broadband services in 94 cities. Fixed line services are offered
only to homes and small and mid size businesses. Bharti has a subscriber base of 2.73 million
customers, of which 39% subscribe to broadband services (as of March 2009). The company has
Bharti will provide a selective strategy for this segment, as it intends to focus on cities with high revenue potential.
bundled services, The selective strategy could also be due to higher costs and lower return ratios involved; the
commonly known as objective is to go deeper than wider.
“Triple Play”—voice, To leverage its existing fixed line infrastructure, Bharti has started to offer IPTV and DTH services.
broadband and TV While IPTV will be initially limited to few cities, the company believes that DTH would become
services on one a mass product. Bharti will provide bundled services, commonly known as “Triple Play”—voice,
platform. broadband and TV services on one platform. Bharti launched DTH and IPTV services in October
2008 and January 2009, respectively.
Broadband and fixed line: Performance (INR Mn)
Net Revenue 28,484 33,517 38,311 43,598
Growth 26.9% 17.7% 14.3% 13.8%
EBITDA 11,407 14,208 15,707 17,962
Growth 103.6% 24.6% 10.6% 14.4%
EBITDA Margin 40.0% 42.4% 41.0% 41.2%
Source: Company Annual Report & ACMIIL Estimates
T E L E COM SE CTOR
C) Enterprise services - Carriers

The enterprise services - carriers segment offers national and international long-distance services.
Bharti has over 90,205kms of fiber on its national long-distance network. For international
connectivity to the East, it has a submarine cable landing station at Chennai Network I2i, which
provides a direct link from Chennai to Singapore. For international connectivity to the West,
Bharti, with 15 other global telecom operators, is a founding member of South-East Asia-Middle
East-Western Europe-4 (SEA-ME-WE-4) consortium.
The company’s NLD business largely depends on its mobile segment, as 90% of the NLD traffic
is captive in nature. In the past three quarters, Bharti has seen a fall in NLD traffic growth mainly
as operators such as Vodafone and Idea, who were customers earlier, have now built their own
NLD networks. Furthermore, Bharti increased its carriage charges in June 2008, which in turn
has boosted the carrier segment’s revenue and margins.
Impact of increase in carriage charges
80
70.4% 69.2%
60 56.3%
NLD business largely
dependent on its 45.4%
40 43.9% 43.2%
mobile services 32.2% 32.0%
%
segment. 21.9%
20 23.7%
0
Dec-07 Mar-08 Jun-08 Sep-08 Dec-08
Revenue Growth Ebidta Margins
Source: Company Data, ACMIIL Research
Bharti recently announced investments in new cable systems such as Asia America Gateway
(AAG), India, Middle East and Western Europe (IMEWE), Unity North, EIG (Europe India
Gateway) and Eastern Africa Submarine Cable System (EASSy). These submarine cables are
expected to go live by late-CY09. We believe that this would boost traffic growth for the carrier
segment.
Enterprise services – Carrier: Performance (INR Mn)
Net Revenue 43,170 67,937 74,951 81,697
Growth 23.7% 57.4% 10.3% 9.0%
EBITDA 14,310 30,174 32,679 35,130
Growth 4.0% 110.9% 8.3% 7.5%
EBITDA Margin 33.1% 44.4% 43.6% 43.0%
Source: Company reports and ACMIIL estimates.
D) Enterprise services - Corporates

This segment provides customized and integrated voice and data communication solutions to
corporate customers and SMEs through dedicated relationship management. Its revenue as well
as EBITDA margins are very volatile, as they are mainly a function of the project-based nature
of the business. Bharti has started to gain traction in this segment with a seemingly good initial
response.
T E L E COM SE CTOR
Enterprise services – Corporates: Performance (INR Mn)

Net Revenue 13,217 16,945 20,207 22,808
Growth 46.1% 28.2% 19.3% 12.9%
EBITDA 6,123 7,569 9,699 10,948
Growth 46.1% 23.6% 28.1% 12.9%
EBITDA Margin 46.3% 44.7% 48.0% 48.0%
E) Passive infrastructure services

This segment includes revenue from Bharti Infratel, Bharti’s tower subsidiary. It has ~27,548
towers in 11 circles. Bharti Infratel transferred 35,066 towers to Indus from January 2009.
Majority of Bharti Infratel’s towers are located in Circle C. This Circle, being a high growth
Expect tenancy to one, should help improve the tenancy for the tower company. It had a sharing factor of 1.34 as
of end-March 2009.
improve as majority
However, due to limited information for Indus Towers we have not done FY10 and FY11
towers are located in
projections for it and consolidated 42% of its financials with Bharti Infratel. Therefore, our
high growth circle.
estimates factor in the only Bharti Infratel’s financials, but exclude those of the Indus JV.
Passive infrastructure services: Performance (INR Mn)
Net Revenue 6,023 42,489 19,741* 24,530
Growth - 605.4% -53.5% 24.3%
EBITDA 2,236 15,022 7,844 10,089
Growth - 571.8% -47.8% 28.6%
EBITDA Margin 37.1% 35.4% 39.7% 41.1%
Source: Company reports and ACMIIL estimates. *Transfer of Towers to Indus Towers
FINANCIAL HIGHLIGHTS AND FINANCIALS

Revenue
We expect Bharti to register a revenue CAGR of 21.5% over FY08-11, driven by subscriber
leadership, wide coverage, and the first-mover advantage. We expect the mobile services segment
to be a major revenue contributor. Entry into DTH and IPTV and improved tenancy from passive
infrastructure services provide a new revenue stream for the company and should help improve
revenue further.
Further, we expect margins to decline due to an increase in network opex. This is mainly due to the
impact of the hive-off of the tower business, where the capex would be converted into opex.
Strong Revenue & Ebidta Growth
600 43.0%
42.3%
42.5%
500 42.0%
Expect Bharti to 400
41.5%
40.6%
register a revenue
41.0%
40.0% 40.5%
CAGR of 21.5% over 300
In Mn
40.0%
%
39.3%
FY08-11. 200
39.5%
39.0%
100 38.5%
38.0%
0 37.5%
FY08 Fy09 FY10E FY11E
Revenue Ebidta Ebidta Margins

Source: Company and ACMIIL Research
T E L E COM SE CTOR
Strong balance sheet

Bharti has a well-funded balance sheet as its net debt to equity is the lowest among peers. Further,
as the company already has pan-India coverage, its capex requirements are much lower than
peers, who are still rolling out network. The company appears to be in a much better position
to fund its capex for the impending 3G auctions. Management stated that its capex has peaked;
with the company covering 80% of the population, we expect a reduction in capex.
Net Debt to Equity
2 1.78
1.5
1.10
Well Funded Balance 1 0.82
sheet. 0.49
0.54 0.64
0.5 0.39
0.28 0.26 0.18
0.09
0.24 0.19 0.17 0.12
0
Jun-07 Mar-08 Jun-08 Sep-08 Dec-08
Bharti Reliance Idea
QUARTERLY HIGHLIGHTS FOR 4Q FY09

Bharti has been able to maintain its leadership in the Indian telecom industry based on its
strong operational and financial performance. The company’s consolidated total revenue for the
year ended March 31, 2009 was INR373 billion, a 38.3% growth from FY08. Its consolidated
EBITDA was INR151 billion, a 32.3% growth from INR114 billion last year. The company was
close to its EBITDA guidance of 40%. Bharti’s net profit grew 23% to INR79 billion in FY09.
It had 93.9 million mobile subscribers as of March 2009, an increase of 51.5% over FY08. The
company continues to be a leader with an increased mobile subscriber market share across India
at 24% as of March 2009.
Mobile segment
 Mobile services contributed the most with 84% share in total revenue during 4Q FY09.
 Of the 93.9 million mobile customers as of March 2009, post-paid customers accounted for
5.8% while pre-paid customers accounted for the remaining 94.2%. The company achieved
the highest-ever net addition of 31.9 million subscribers in FY09.
 It achieved its target to cover ~80% of the population by March 2009.
 According to management’s guidance, due to the permanent impact of the tower deal, the
mobile segment’s EBITDA margin for 4Q FY09 was 31.5%.
 During 4Q FY09, ARPU declined 5.9% QoQ to INR305. MoU declined by 4.0% QoQ to
485.
Telemedia (broadband and fixed line)
 During 4Q FY09, the telemedia segment’s revenue grew 12.4% YoY to INR8,585 million
and EBITDA grew by 8.1% to INR3,614 million. The EBITDA margin declined to 42.1%
as of March 2009 from 43.8% as of March 2008.
 Bharti launched its Triple Play service with Airtel digital TV providing Telephone, Broadband
and TV on a single line in January 2009. This service would initially be available to customers
in Delhi, Gurgaon, and Noida. The company believes that the launch of IPTV and DTH will
enable it to leverage its fixed line infrastructure.
 Bharti plans to continue with its strategy for this segment, with focus on cities with high
revenue potential, except for DTH, which is an all-India offering. Airtel digital TV is available
to customers through 31,000 retail points in more than 4,000 cities and towns.
T E L E COM SE CTOR
Enterprise Segment
 The enterprise business carriers segment registered 39.3% top-line growth for the quarter
ended March 2009 to INR7,889 million. Its EBITDA margin improved significantly to 45.1%
in 4Q FY09, from 32% in 4Q FY08, mainly due to the phasing out of ADC and the increase
in carriage charges.
 Bharti’s five submarine cables are scheduled to go live in the later part of the year. This would
boost traffic growth for the carrier segment, in our view.
 The enterprise-corporate segment registered muted top-line growth of 9.2% YoY during
the quarter ended March 2009 to INR4,120 million. Its EBITDA margin showed robust
improvement QoQ to 49.3% in 4Q FY09, from 42.9% in 3Q FY09. The volatility in revenue
during the quarter was mainly because of the project-based nature of the business.
Passive infrastructure services
 As of end-March 2009, Bharti had 27,548 towers in 11 circles, excluding the 35,066 towers
in 12 circles, for which the right of use has been assigned to Indus with effect from 1 January
2009. This segment recorded revenue of INR7,241 million and its EBITDA margin was
40.1% during 4Q FY09.
FINANCIAL HIGHLIGHTS FOR 4Q FY09
 During the quarter ended March 2009, Bharti’s revenue increased 30.4% to INR102,551
million. Revenue from mobile services accounted for 84% of the total for the quarter ended
March 2009.
 The company’s EBITDA during 4Q FY09 was INR40,737 million, up 25%. However, the
EBITDA margin declined to 39.7%, from 41.4% in 4Q FY08, mainly due to high network
operating costs, which increased from 12.3% of sales as of March 2008 to 19.4% by March
2009. The increase was mainly because of the roll-out of network in rural areas and rental
payments to Indus towers.
 Bharti’s net profit grew 7.8% in 4Q FY09 to INR20,477 million. The net profit margin was
stable at 20%. Bharti continues with its policy of charging foreign exchange fluctuation on
loans/liability for fixed assets directly to the profit and loss account instead of capitalizing/de-
capitalizing it. If the company had followed its earlier policy, the net profit would have been
higher by INR3549.5 million during the quarter.
 The company’s board proposed sub-division (share split) of existing equity shares of INR10
each into two equity shares of INR5 each during the quarter.
 Management has guided for a capex of $2.2 billion for FY10 on a standalone basis. It has
further stated that its capex has peaked; with the company covering 80% of the population,
we expect reduction in capex.
The revenue numbers declared by the company are higher than our estimates, but net profit
is below our forecast. This is mainly due to higher-than-expected interest cost and slightly
higher depreciation numbers.
INR Mn FY08 FY09 % Change FY09 E % Difference
Revenues 272,918.5 375,044.6 37.4 368,514.8 1.8
EBITDA 114,308.3 151,250.6 32.3 147,774.1 2.4
Net Profit 63,953.8 78,589.5 22.9 85,204.9 -7.8
EBITDA Margin 41.9% 40.3% -1.6 40.1% 0.2
NPM 23.4% 21.0% -2.5 23.1% -2.2
EPS 33.7 41.4 22.9 44.9 -7.8
Source: Company, ACMIIL Research.
T E L E COM SE CTOR
Key performance metrics

Metrics Unit Quarter ended
Mar-08 Jun-08 Sep-08 Dec-08 Mar-09
Subscribers Mn 61.99 69.38 77.48 85.65 93.92
QoQ Chng % 12.4% 11.9% 11.7% 10.5% 9.7%
ARPU INR per sub 357 350 331 324 305
QoQ Chng % -0.3% -2.0% -5.4% -2.1% -5.9%
MOU INR per sub 507 534 526 505 485
QoQ Chng % 7.0% 5.3% -1.5% -4.0% -4.0%
Non voice revenue % 9.4% 9.7% 10.0% 9.5% 9.3%
Population coverage % 71% 74% 77% 79% 81%
Churn rate % 4.3% 3.8% 3.2% 2.9% 3.2%
Market share % 23.7% 24.2% 24.6% 24.7% 24%
Source: Company.
INTERIM RESULTS (INR Mn)

Particulars 4QFY09 4QFY08 % Growth
Net Sales 102,551.4 78,636.6 30.4
Total Expenditure 62,219.5 46,742.6 33.1
Operating Profits 40,331.9 31,894.0 26.5
Other Income 405.1 663.0 -38.9
EBDIT 40,737.0 32,557.0 25.1
Depreciation 13,246.4 9,350.2 41.7
EBIT 27,490.6 23,206.8 18.5
Interest 3,986.9 3,044.9 30.9
PBT 23,503.7 20,161.9 16.6
Taxes 2,543.4 761.1 234.2
Profit before Minority Interest 20,960.3 19,400.8 8.0
Minority Interest 483.0 412.2 17.2
Net Profit 20,477.3 18,988.6 7.8
Equity Share Capital 18,982.4 18,979.1
EPS 10.8 10.0
CEPS 17.8 14.9
Profitability Ratios
Operating Profit Margin (%) 39.3 40.6
EBIDT Margin (%) 39.7 41.4
PAT Margin (%) 20.0 24.1
Source: Company.
T E L E COM SE CTOR
Earnings Summary (INR Mn)

Particulars FY08 FY09 FY10E FY11E
Net Sales 270,122.4 373,520.8 428,850.4 484,800.3
Total Expenditure 158,610.2 223,794.0 258,426.9 295,653.0
Operating Profits 111,512.2 149,726.8 170,423.5 189,147.3
Other income 2,796.1 1,523.8 1,286.6 1,454.4
EBDIT 114,308.3 151,250.6 171,710.1 190,601.7
Depreciation 35,914.1 46,727.7 49,746.6 52,358.4
EBIT 78,394.2 104,522.9 121,963.4 138,243.2
Interest 5,278.7 18,612.8 20,072.2 16,381.0
PBT 73,115.5 85,910.1 101,891.3 121,862.3
Taxes 8,161.5 5,468.3 9,170.2 15,842.1
Profit after tax 64,954.0 80,441.8 92,721.1 106,020.2
Minority Interest 1,000.2 1,852.3 1,761.7 2,014.4
Net Profits 63,953.8 78,589.5 90,959.4 104,005.8
Growth in sales (%) 45.8% 38.3% 14.8% 13.0%
Operating Profits Growth (%) 47.8% 34.3% 13.8% 11.0%
PAT Growth (%) 57.4% 22.9% 15.7% 14.3%
Operating Profit Margin (%) 41.3% 40.1% 39.7% 39.0%
Net Profit Margin (%) 23.7% 21.0% 21.2% 21.5%
Sources and Application of Funds (INR Mn)

Particulars FY08 FY09E FY10E FY11E
Sources of Funds
Share Capital 18,979.1 18,982.4 18,982.4 18,982.4
Reserves and Surplus 198,264.7 276,854.2 367,813.6 471,819.4
Total Shareholders Funds 217,243.8 295,836.6 386,796.0 490,801.8
Total Loan Funds 96,017.5 108,881.0 117,381.0 102,381.0
Minority Interest 10,142.2 11,994.5 13,756.2 15,770.6
Net Deferred Tax Liability 2,729.1 -293.0 -5,897.0 -7,115.6
Total Capital Employed 326,132.7 416,419.2 512,036.3 601,837.8
Application of Funds
Gross Block 423,224.1 563,395.1 713,895.1 839,395.1
Less: Accumulated Depreciation 97,729.7 144,457.4 194,204.0 246,562.4
Net Block 325,494.5 418,937.8 519,691.1 592,832.7
Capital Work in Progress 35,699.6 49,127.8 51,357.7 53,693.1
Investments 48,097.1 37,925.0 37,925.0 37,925.0
Net Current Assets -83,160.4 -89,571.4 -96,937.5 -82,613.0
Misc Expenses 2.0 0.0 0.0 0.0
Total Assets 326,132.7 416,419.2 512,036.3 601,837.8
T E L E COM SE CTOR
Cash Flow Statement (INR Mn)

Pre tax profits 73,115.5 85,910.1 101,891.3 121,862.3
Operating Profit before WC changes 118,174.4 140,635.9 170,061.1 189,609.0
Cash from Operations 123,244.0 140,358.0 170,138.0 162,183.8
Cash from Investment activities -184,826.9 -129,998.9 -150,500.0 -125,500.0
Cash from Finance 59,987.4 -5,749.3 -11,572.2 -31,381.0
Total cash generated -1,595.5 4,609.8 8,065.8 5,302.9
Cash at the beginning 8,520.8 7,034.1 11,644.0 19,709.8
Add: Cash acquired on acquisition of networki2i 108.8 0.0 0.0 0.0
Cash Balance 7,034.1 11,644.0 19,709.8 25,012.7
Key Ratios
EBIDTA Margin (%) 42.3% 40.5% 40.0% 39.3%
PAT Margin (%) 24.0% 21.5% 21.6% 21.9%
RONW (%) 38.5% 30.6% 26.6% 23.7%
ROCE (%) 20.9% 19.4% 18.3% 17.7%
Per Share Ratios
Earnings (Rs.) 33.7 41.4 47.9 54.8
Cash Earnings (Rs.) 64.5 82.6 95.3 108.8
Book Value (Rs.) 114.2 155.6 203.5 258.3
Valuation Ratios
P/E (x) - - 18.4 16.1
Cash P/E (x) - - 9.2 8.1
P/BV (x) - - 4.3 3.4
Capital Structure Ratios
Debt/Equity 0.4 0.4 0.3 0.2
Current Ratio 0.4 0.5 0.6 0.6
Turnover Ratios
Debtors Turnover (x) 12.8 10.4 8.8 8.7
Fixed Asset Turnover (x) 0.8 0.9 0.8 0.8
T E L E COM SE CTOR
ResultUpd at e
OnMobile Global Limited
CMP 318 OnMobile Global Ltd (OGL) provides value-added services and products in India
Previous Target Price 232 with an expanding international presence, particularly in emerging Asian markets.
Revised target Price 365 The company was formed in 2000 as a start-up by Infosys Technologies to develop
telecommunication software applications for the global mobile telecommunications
Key Data
industry. OGL offers products and services such as voice portals, ringback tones,
Bloomberg Code ONMB IN
mobile content aggregation and distribution, interactive media portals, mobile
Reuters Code ONMO.BO
advertising, and M-commerce. It also provides services such as telecom value added
BSE Code 532944
services, software development, software license fees, and other services.
NSE Code ONMOBILE
Face Value (INR) 10 INVESTMENT RATIONALE
Market Cap. (INR BN) 18  Need for alternate revenue streams: Subscriber growth in the Indian telecom
52 Week High (INR) 692 industry has been growing robustly with the subscriber base reaching 392 million
52 Week Low (INR) 185 as of March 2009. Although subscribers are increasing at a rapid pace, ARPU
Avg. Daily Volume (6m) 35596 continues to decline, making it a volume game. As ARPU declines and voice
becomes commoditized, the challenge for the industry would be to retain customers,
Shareholding % develop alternative revenue streams, and create a basis for differentiation in high-
Promoters 57.3 churn markets. Thus, mobile operators have started to shift their focus towards
MF’s/Banks/Insurance 4.3 non-voice revenue. In the wake of the recent industry trends, telecom operators are
FII’s 15.6 looking at MVAS as the next growth driver and a significant source for revenue.
Indian public/NRI/OCB’s 17.9 OGL, with its strong position in the Indian MVAS market, will likely benefit from
Bodies corporate 5.1 the robust growth in the telecom industry.
Total 100.0  Innovation: OGL has a proven track record of coming up with innovative products,
which places it far ahead of competitors. This has helped the company increase
Particulars (INR Mn) market penetration and drive strong revenue growth. Through organic and inorganic
FY09 FY10E FY11E growth strategies, it has launched various new products, which have generated
Sales 4,063.6 5,649.1 7,512.9 interest among customers.
Op Profit 1,273.8 1,755.8 2,373.2  Inorganic growth strategy: In addition to OGL’s innovative product launches and
Net Profit 852.0 950.5 1,212.2 client additions, its inorganic growth strategy has boosted its performance too. The
OPM (%) 31.3 31.1 31.6 acquisitions have strengthened its product portfolio (Voxmobili) and enhanced its
NPM (%) 21.0 16.8 16.1 underlying technology platforms (Telisma).
EPS (INR) 14.7 16.4 21.0
KEY CONCERNS
 Non-exclusive contracts with customers
Most of OGL’s contracts with customers are on a revenue sharing basis and it would
generate revenue only if end-users/subscribers use or subscribe to the services offered.
As a result, revenue is subject to uncertainties that are beyond its control, such as market
acceptance of its products, the pricing of services, product placement, and marketing
and promotion activities conducted by its customers. Also, most of the contracts with
customers are non-exclusive. Customers may purchase similar services from third
parties. Moreover, the contracts do not prevent them from significantly reducing the
level of marketing or promotion of OGL’s applications. Thus, these factors could lead
to OGL seeing a revenue loss.
 Constant innovation
Constant innovation has been a major advantage for OGL. Therefore, the company
would need to constantly develop new and innovative products and solutions. Inability
to innovate products and solutions acceptable to the market could affect its growth.
T E L E COM SE CTOR
VALUATION AND RECOMMENDATION

We expect OGL’s revenue to register a 36% CAGR and earnings to grow at a 19.3% CAGR
during FY09-11. Rapid subscriber growth in the telecom industry along with the increased
penetration of VAS services has enabled OGL to attain a strong position in the VAS market. At
the same time, its technology platform and constant innovation have been the differentiator for
the company. Further, its inorganic acquisitions, which have strengthened its product offering
and enhanced its technological expertise, have started to provide benefits. The company also
has cross-operator presence, which gives it an opportunity to cross sell. Furthermore, OGL is
financially very strong and has negligible debt on its balance sheet.
Since OGL has made huge investments in technology, we value the stock using price to book
value. Also, due to its various acquisitions, we adjust the book value for goodwill arising from
consolidation. At the CMP of INR318, the stock trades at a P/BV of 3.2x its adjusted book value
of INR100.8 for FY10E and 2.6x its adjusted book value of INR121.8 for FY11E. On assigning a
P/BV of 3x its FY11E adjusted book value of INR121.8, we arrive at our price target of INR365.
We maintain our “BUY AT DECLINES” recommendation on OGL.
MAJOR DEVELOPMENTS: INNOVATIVE PRODUCT LAUNCHES
OGL recognizes that constant innovation is critical. The company has a proven track record of
coming up with innovative products, which places it far ahead of competitors. This has helped
it increase market penetration and drive strong revenue growth. Through organic and inorganic
growth strategies, OGL continues to launch various new products, which have generated interest
among customers.
 After a trial phase, OGL launched AdRBT. The company has started deploying this service
with one operator across India. Management believes that this product has a lot of potential
Innovative product and expects AdRBT to contribute ~15-20% to domestic revenue. However, this may take
launches has enabled some time, as the product would need to be deployed across operators. Management has
OnMobile to gain strong indicated that the product will start contributing to the top line from FY10, but meaningful
position in the VAS contribution would begin only from FY11.
market.  With respect to phone back-up, OGL launched the product with two operators and has 150,000
unique users at present. The launch is in the initial phase. The company is facing certain
challenges for this launch; it has to customize different handsets and then allow the operator
to promote the product. OGL has tied up with various operators such as Airtel, BSNL, and
Idea to promote the product.
 OGL also launched OnMobile Developer Network; it has tied up with various application
developers, which have enabled it to launch various applications. Until last year, OGL used
its own platform for developing various applications. The OnMobile Developer Network
has enabled third party application developers to jointly develop applications with OGL.
The company has six partners so far. This platform will enhance the number of applications
OGL would offer.
 OGL also launched MRadio with two operators outside India and has received a positive
response from customers. This product has gained good traction and the company expects
MRadio to be next driver of the Vas market after Ringback tone (RBT).
MAJOR DEVELOPMENTS: CUSTOMER FRONT
 OGL continues to add new clients to its portfolio. It has launched cross operator “ *to Copy”
between two operators in India—Vodafone and Idea.
 During 4Q FY09, OGL tied up with two Indian operators to provide Voice Portal and RBT
services. Management indicated that with the signing of this agreement, the operator has
reached 100% of the subscriber base for providing these services.
T E L E COM SE CTOR
 The company has started deployment of RBT for its first customer in Europe. The customer
has a subscriber base of more than 10 million. OGL believes that this agreement is material,
as RBT is in a nascent stage in Europe and the company will be in position to gain the first-
mover advantage.
 OGL also signed a contract with an operator in Bangladesh (Grameen) to provide phone
back-up services.
 Global agreement with Vodafone: OGL and Vodafone have entered into an agreement to
deploy OGL’s Ringback Tones, Voice Portal and Speech-enabled Value Added Services in the
Strategy of going global Vodafone Group emerging markets operating companies. The agreement enables Vodafone
panning out. Operators and Partner Networks across the world to rapidly deploy OGL’s products that have
brought remarkable success for Vodafone in the fast growing Indian VAS market.
The company is in the process of deploying its services in Vodafone entities and it expects
the process to take around 3-4 years. While initially the agreement would focus only on the
emerging markets, the contract could later include all the entities under the Vodafone Group.
The company expects initial revenue contribution from this starting from second half of FY10.
Furthermore, with complete deployment across all entities, management believes that this
agreement would contribute a significant chunk to its revenue (~30%).
With these developments, OGL’s strategy of going global is beginning to pan out. Management
has indicated that the company would continue to expand in emerging markets followed by
SAARC nations. It has already expanded into many emerging nations such as Bangladesh and
Indonesia. OGL plans to gradually expand into developed countries. Management plans to deploy
its products with operators in the developed countries by end-FY10.
INORGANIC GROWTH STRATEGY: PERFORMING WELL

In addition to OGL’s innovative product launches and client additions, its inorganic growth
strategy has also boosted its performance. The share of international revenue rose from 17% in
FY08 to 23% in FY09. The acquisitions have strengthened its product portfolio (Voxmobili) and
Inorganic growth enhanced its underlying technology platforms (Telisma).
strategy boosting OGL launched its first product in association with Telisma. The service, “Music Search” (Gana
performance. Bolo), has been launched with Airtel in India. The product has received a positive response and
the company has added more than a million minutes.
OGL has also launched the phone-back service with two operators in India, BSNL and Bharti.
This product was a result of the acquisition of Voxmobili. The launch is in the initial phase.
Management indicated that it will continue with its inorganic growth strategy. However, the
company is being selective in its approach.
FINANCIALS AND FINANCIAL HIGHLIGHTS

Revenue
In line with the actual figures for FY09, we revise our FY10 estimates to factor in higher
international revenue. As the company continues with its strategy of going global and expanding
its footprint in emerging as well as developed countries, we believe that the share of international
revenue would increase. Further, in FY11, we expect OGL’s revenue to be INR7513 million. Over
FY09-11, we expect OGL to register a revenue CAGR of 36%, driven by increasing subscriber
base of its existing customers and launch of new and innovative products and services that have
generated interest in its customers. Further, we believe that the company’s initiatives to expand
into new geographies and enter into agreements with major operators, and its inorganic growth
strategy will continue to support revenue growth.
T E L E COM SE CTOR
Revenue Mix
6000 120%
97%
5000 100%
New customer 4000 80%

additions, product
launches across 3000 55% 60%
In Mn
61%
the regions likely to 39% 33%
2000 40%
continue to support
revenue growth. 1000 20%
0 0.0
FY07 FY08 FY09 FY10E FY11E
Domestic International Growth
Operating profit
Content cost increased in FY09 due to strategic alliances and higher payouts for the media and
the mobile marketing businesses. However, management indicated that the content cost would
be lower as a percentage of revenue in new regions, as according to the commercial agreements
with new entities, the content cost would be borne by the operator. Management expects the
content cost to stabilize at the current level. The content cost as a percentage of revenue is 12.6%.
We had earlier factored in content cost at 11% of sales for FY10. We therefore revise up our
content cost assumption.
We had projected employee cost at 25% of sales for FY09 and FY10. However, the employee
cost for FY09 was higher at 30% of sales. In line with FY09 figures, we revise our employee
cost assumption for FY10 to 30% of sales and expect it to remain so in FY11.
Given these revisions, we lower our FY10 operating profit margin assumption from 36.9% to
31.1%. For FY11, we expect the operating margin to be at 31.6%.
Net profit
We lower our FY10 net profit estimate to INR950 million (from INR1136.6 million) to factor
in higher depreciation expenses due to higher capex as well as tax expenses as guided by
management. Our revised FY10 net profit margin assumption is 16.8% vs. 21.5% earlier. For
FY11, we expect the net profit margin to be 16.1%. We expect OGL to register an earnings CAGR
of 19.3% during FY09-11.
Quarterly highlights for 4Q FY09

OGL’s operational and financial results for the March quarter and FY09 saw strong growth
momentum. Consolidated total revenue for the quarter ended March 2009 was INR1153.1
million, a growth of 67.6% YoY, vs. INR688 million in 4Q FY08. Net profit during the quarter
was INR240.2 million, an increase of over five times from INR45 million in the year-ago period.
For the full year ended March 2009, revenue grew 55.2% to INR4063.6 million while net profit
registered a 41.3% growth to INR852 million vs. FY08.
 Consolidated total revenue during 4Q FY09 saw a marginal decline sequentially to INR1153.1
million, from INR1157.2 million in 3Q FY09, mainly because the change in accounting
policy for Voxmobili from a licensing model to a revenue sharing one impacted the quarterly
revenue.
T E L E COM SE CTOR
 The telecom VAS revenue continues to be a major contributor to total revenue with ~90%
share. The software license revenue accounts for the rest. Ringback tone (RBT) and Voice
portal continue to be the major revenue drivers.
 OGL’s inorganic growth strategy has started to boost its revenue with the share of international
revenue having gone up from 15% as of March 2008 to 23% in March 2009. The international
revenue has grown robustly; revenue has more than doubled during the March quarter
compared with a growth of 50% in domestic revenue. The share of international revenue has
risen due to contributions from Voxmobili and Telisma.
 Concentration of revenue on the top five operators has reduced from 77% in FY08 to 70%
in FY09.
 Content fee and employee costs are the most important components for OGL. The content fee
cost has risen significantly from 9% of sales in 4Q FY08 to 16.2% in 4Q FY09 due to strategic
alliances and higher payouts for the media and mobile marketing businesses. The content
fee was at 12.3% of sales in 3Q FY09. On the other hand, the employee cost rose mainly
owing to consolidation with Voxmobili and Telisma. However, lower other expenditure due
to OGL’s cost reduction initiatives has offset the increase and therefore the operating profit
margin improved from 24.9% during 4Q FY08 to 33.4% in 4Q FY09.
 On a sequential basis, the content fee has increased from 12.3% of sales in 3Q FY09 to
16.2% in 4Q FY09, while the employee cost rose from 27.2% in 3Q FY09 to 29.3% of sales
in 4Q FY09. As a result, the operating margin declined from 35% in 3Q FY09 to 33.4% in
4Q FY09.
 The net profit grew 5x to INR240.2 million in 4Q FY09 from INR45 million in 4Q FY08.
The margin improved from 6.5% during 4Q FY08 to 20.8% in 4Q FY09. On a sequential
basis, the net profit declined 12.8% mainly due to higher cost.
 Management indicated that it will continue with its inorganic growth strategy to strengthen
its product portfolio and enhance its technological strength. However, the company is being
selective in its approach.
Comparison of actuals with our estimates
INR Mn FY08 FY09 % Change FY09E % Difference
Revenues 2,618.2 4,063.6 55.2 3,984.9 2.0
EBIDTA 1,123.0 1,591.4 41.7 1,572.3 1.2
Net Profit 603.1 852.0 41.3 829.0 2.8
EBITDA Margin 42.9 39.2 39.5
NPM 23.0 21.0 20.8
EPS 10.5 14.7 14.4
Source: Company, ACMIIL Research.
 OGL’s revenue exceeded our estimates by 2% mainly due to higher-than-projected FY09
international revenue.
 Operating profit was 1.5% lower than our estimate because we factored in lower content
and employee costs. The content cost rose due to strategic alliances and higher payouts for
the media and mobile marketing businesses. On the other hand, the employee cost increased
owing to consolidation with Voxmobili and Telisma. Our operating profit margin estimate
was 32.5% of sales whereas the actual margin was at 31.3%.
 Further, our estimate for other income was lower; as a result, our EBITDA estimate was
lower than the actual by 1.2%. Other income was higher due to the tax credit granted to the
company on R&D expenditure in Europe. Our EBITDA margin projection was 39.2% whereas
the actual EBITDA margin was at 39.5%.
 Net profit was marginally higher than our estimate by 2.8% at INR852 million. This was
mainly because tax expenses projected by us were higher than the actual figures.
T E L E COM SE CTOR
Interim Results INR Mn

Particulars (INR Mn) 4QFY09 4QFY08 % Chg 3QFY09 %Chg.
Net Sales 1,153.1 688.0 67.6 1,157.2 -0.4
Total Expenditure 767.4 517.0 751.9
Operating profits 385.7 171.0 125.6 405.3 -4.8
Other Income 66.5 30.0 79.7
EBIDT 452.2 201.0 485.0
Depreciation 123.8 84.0 116.2
EBIT 328.4 117.0 368.8
Interest 0.0 7.0 0.5
PBT 328.4 110.0 368.3
Tax 88.2 65.0 91.9
PAT 240.2 45.0 276.4
Minority Interest 0.0 0.0 1.0
Net Profits 240.2 45.0 433.8 275.4 -12.8
Equity Share capital 578.3 577.7 578.3
EPS (Rs.) 4.2 0.8 4.8
CEPS (Rs.) 6.3 2.2 6.8
Profitability
OPM (%) 33.4 24.9 35.0
EBITM (%) 28.5 17.0 31.9
PATM (%) 20.8 6.5 23.8
Source: Company.
T E L E COM SE CTOR

Net Sales 2,618.2 4,063.6 5,649.1 7,512.9
Other Income 74.7 317.6 226.0 300.5
EBDIT 1,123.0 1,591.4 1,981.8 2,673.7
Depreciation 255.6 439.7 621.4 939.1
EBIT 867.4 1,151.7 1,360.4 1,734.6
Interest 17.1 0.5 0.5 0.5
PBT 850.3 1,151.2 1,359.9 1,734.1
Taxes 247.2 299.2 409.3 522.0
Net Profits 603.1 852.0 950.5 1,212.2
Growth in sales (%) 96.9% 55.2% 39.0% 33.0%
PAT Growth (%) 76.0% 41.3% 11.6% 27.5%
Sources and Application of Funds (INR. mn)

Sources of Funds
Share Capital 574.1 578.3 578.3 578.3
Stock Options Outstanding 1.4 0.3 0.3 0.3
Deferred payment Liability 278.6 175.0 175.0 175.0
Net Deferred Tax Liability 39.3 67.2 90.3 119.7
Total Capital Employed 6428.9 7232.0 8205.6 9447.2
Gross Block 1,335.2 2,536.3 3,886.3 5,336.3
Less: Accumulated Depreciation 539.9 1,560.8 2,182.2 3,121.3
Net Block 795.3 975.5 1,704.1 2,215.0
Capital Work in Progress 113.4 71.5 102.0 152.0
Goodwill 1,367.9 2,107.8 2,107.8 2,107.8
Investments 3,193.7 86.7 86.7 86.7
Net Current Assets 958.5 3,990.4 4,205.0 4,885.7
Total Assets 6428.8 7232.0 8205.6 9447.2
T E L E COM SE CTOR

Pre tax profits 850.3 1,151.2 1,359.9 1,734.1
Operating Profit before WC Changes 1,159.8 1,626.5 2,081.8 2,766.7
Cash from operations 549.7 385.0 1,478.4 1,586.0
Cash from Investment activities -3,998.8 1,947.8 -1,380.5 -1,500.0
Cash from Finance 4,,663.9 -936.5 -0.5 -0.5
Total cash generated 1214.8 1,396.3 97.4 85.5
Add: Cash acquired on acquisition 32.4 0.0 0.0 0.0
Cash at the beginning 211.6 1,458.8 2,855.1 2,952.6
Cash Balance 1,458.8 2,855.1 2,952.6 3,038.1
Key ratios
Operating Profit Margin (%) 40.0 31.3 31.1 31.6
EBIT Margin (%) 33.1 28.3 24.1 23.1
PAT Margin (%) 23.0 21.0 16.8 16.1
RONW (%) 9.9 12.2 12.0 13.2
ROCE (%) 14.1 16.2 16.8 18.6
Per Share Ratios
Earnings (Rs.) 10.5 14.7 16.4 21.0
Cash Earnings (Rs.) 15.0 22.3 27.2 37.2
Book Value (Rs.) 106.4 120.9 137.3 158.3
Adjusted Book Value (Rs.) # 82.6 84.4 100.8 121.8
Valuation Ratios
P/E (x) - - 22.2 17.4
Cash P/E (x) - - 13.4 9.8
P/BV (x) - - 2.7 2.3
Adj P/BV (X) # - - 3.6 3.0
Quick Ratio 1.0 2.1 2.0 2.0
Turnover Ratios
Source: Company reports and ACMIIL estimates. #Adjusted for Goodwill on consolidation.
T E L E COM SE CTOR
U p d at e
Tata Communications Limited
CMP 551 Tata Communications (TCom), formerly known as VSNL, provides telecommunications
Previous Target Price 426 services to global carriers and corporates. It was incorporated in 1986. The company
Revised Target Price 457 was a monopoly provider of international long-distance services in India. It was listed
in February 2002, with the government having a 26% stake and the Tata Group holding
Key Data
45%. The Tata Group has since then raised its stake to 50.1%, with the government
Bloomberg Code TCOM IN
retaining 26%.
Reuters Code TATA.BO As markets deregulated, the company lost its monopoly position and became a part of
BSE Code 500483 a highly competitive market. Privatization of the International Long Distance (ILD)
NSE Code TATACOMM business coupled with constantly declining tariffs without corresponding growth in
Face Value (INR) 10 volumes led to a decline in revenue and margins. As a result, the company restructured
Market Cap. (INR bn.) 157 its business; it turned from a monopoly long-distance service provider to one of
52 Week High (INR) 594 the leading integrated communications solutions provider for small-medium size
52 Week Low (INR) 320 enterprises, service providers, and retail consumers. Moreover, TCom transformed
Avg. Daily Volume (6m) 51591 into a global player through a series of organic and inorganic growth strategies while
F&O maintaining its focus on wholesale voice services.
Market Lot 1050 INVESTMENT RATIONALE
Turnover (Rs Mn) 264  Play on volumes: High volumes and low tariffs characterize the voice market.
TCom’s acquisition of Teleglobe led to an improvement in the ILD minutes,
Shareholding %
as Teleglobe derives a substantial portion of its revenue from ILD services.
Promoters 76.2
However, traffic volume growth is being offset by pricing pressure due to increased
Mutual Funds / Financial 0.5 competition. We expect pricing pressure to continue and the company should
Institutions / Banks
register 13.9% volume growth over FY08-11.
 Alternatives to last mile connectivity: The company has started exploring
Bodies Corporate 10.7
alternative technologies such as WiMax to overcome issues in its large-scale
Individuals/NRI and Others 11.1
roll-out of broadband. It has installed 750 cell sites for its WiMax operations on
Total 100.0
3.3GHz and has gained 35,000 subscribers, with subscribers growing by more
INR Mn FY09E FY10E FY11E than 4,000/month. However, due to limited spectrum, TCom is awaiting BWA
Net sales 93,788.7 107,251.7 125,293.0 spectrum auctions.
Op Profit 11,676.7 13,996.3 18,104.3  Capex plans on track: TCom appears to be on track to meet its FY09 capex
Net Profit 1,220.8 1,611.3 2,356.9 guidance of US$600 million. The total capex planned for FY10 is US$500 million
OPM (%) 12.5 13.1 14.5 excluding that for the upcoming WiMax auctions. The company will fund its capex
NPM (%) 1.3 1.5 1.9 via borrowings and internal accruals.
EPS (INR) 4.3 5.7 8.3
KEY CONCERNS
 Lack of end-user relationship: One of the most important factors, which
restricts revenue growth for TCom is the lack of end-user relationship. Reliance
and Bharti benefit from a significant subscriber base, which is absent for TCom.
Tata Teleservices is the only telecom operator that continues to route its NLD and
ILD traffic through TCom’s network. Earlier, wireless service providers such as
Idea, Vodafone, and Bharti used to route their traffic via TCom. However, lately,
many service providers have acquired ILD and NLD licenses and are investing in
building their own network, reducing their dependence on TCom. Thus, lack of a
subscriber base is a major threat to TCom’s growth.
 Delay in WiMax auctions: TCom, so far, has been providing services in the 3.3
Ghz band. However, it has consciously decided to expand its WiMax services in the
2.3-2.5 Ghz post auctions and successful bidding for WiMax spectrum. However,
with no clarity on spectrum allocations in the near future, growth in this segment will
depend on getting spectrum in the 2.5GHz in the imminent BWA and 3G auctions.
T E L E COM SE CTOR
 High leverage: TCom’s debt level has been high over the past three years. Also, given its
huge capex plans and the imminent WiMax auctions, we expect the company to raise further
debt, which in turn would increase its debt burden.
TCom’s business mix is progressively shifting towards enterprise data business, leading to steady
revenue growth and EBITDA margin expansion. Although DoT has decided to hold simultaneous
auctions for 3G as well as WiMax spectrum, there is still no clarity on the timing. Therefore, we
believe that growth in this segment will depend on getting spectrum in the 2.5GHz in the imminent
BWA and 3G auctions. The core voice business also continues to face pricing pressure.
Another concern is the high debt level. The company has announced capex plans worth $500
million for FY10 and it will require funds for the WiMax auctions. This would further increase
its debt burden.
Given the economic slowdown, coupled with the uncertainties faced by the company and the
high debt levels, we downgrade our “HOLD” recommendation to “SELL”.
TCom would announce its March quarter and FY09 results by June 2009. The key points to
watch out for in the coming quarters are forward-looking statements from management on the
expected revenue contribution from the TGN Intra Asia cable, which went live recently, the
commencement of the TGN Eurasia cable in 3Q FY10, the start of the China venture along with
Neotel, and any developments with respect to WiMax spectrum auctions.
Since TCom is making huge investments, we value the stock using P/BV. Historically, the stock
has traded mainly in the range of 2.3-2.5x. Therefore, on assigning the lower P/BV of 2.3 (which
is consistent with the valuation of foreign peers) to FY11E book value of INR199, we arrive at
our price target of INR457. At present, the stock is trading at a price of INR551.
SEGMENTAL ANALYSIS
A) Wholesale voice
 This segment provides ILD and NLD services. TCom is among the top ten in the ILD
services market with a 16% share. Apart from ILD calls to and from India, TCom also carries
International traffic (outside India).
 The wholesale voice segment has been the major revenue contributor with approximately
60% share. This segment registered a 20.4% CAGR in total minutes during FY05-08. The
NLD segment has been the major contributor to volume growth, which registered a 71%
CAGR during FY05-08.
 During the first nine months of FY09, the wholesale voice segment saw good volume growth
with a 20% growth in total minutes to 26 billion minutes, as against 21.7 billion minutes in
the year-ago period.
 During 2001-08, the international voice business saw an average volume increase of 10-15%
while average prices declined by 5-10%. We expect volume growth of 14% CAGR during
FY08-11. We also expect TCom to maintain its net retention per minute within the traditional
range of 0.43-0.50.
 We expect this segment to see pricing pressure with volume growth. We estimate that TCom
would register 13.9% volume growth over FY08-11. We expect revenue to grow from
INR50464.6 million in FY08 to INR62640 million in FY11, an 8.5% CAGR. Further, with
synergies from Teleglobe, TCom would have higher traffic on VOIP, which should drive
network efficiencies and enable an increase in the share of global VOIP traffic. This should
lead to improvement in margins for the wholesale voice segment.
T E L E COM SE CTOR
Revenue projections for wholesale voice

Voice services FY08 FY09E FY10E FY11E
ILD Bn Min 24.4 27.4 29.8 32.6
Growth 23.9% 12.3% 8.8% 9.4%
NLD Bn Min 7.0 9.3 11.5 13.8
Wholesale voice
Growth 32.1% 32.9% 23.7% 20.0%
business expected Total Min in Bn 31.4 36.7 41.3 46.4
to witness pricing Growth 25.6% 16.9% 12.5% 12.3%
pressure. Revenues in Mn 50,464.6 54,683.0 58,646.0 62,640.0
Gross Rev per min 1.80 1.49 1.42 1.35
Net retention per min 0.43 0.43 0.43 0.43
Source: Company and ACMIIL Research.
B) Wholesale and enterprise data business

 TCom is one of the world’s largest providers of data services, primarily focused on
International Private Leased Circuit (IPLC) services and IP Transit services. As a Tier I ISP,
it also operates one of the largest IP networks in the world with presence across the globe.
From providing enterprise data services (to and from India), TCom has increased its reach by
acquisitions and diversifying its data offerings. Its product range has also expanded from IPLC
to a suite of services including ethernet, voice and security services, and managed messaging
and collaboration. The company caters to the broad segments of carriers and enterprise. On a
consolidated basis, the data business accounted for 40% of revenue as on December 2008.
 Global bandwidth demand is increasing at 60% with emerging markets growing at an even
higher rate. To capture this opportunity, TCom is planning a submarine network that would
cover the entire globe.
Addition of new  TCom has announced the completion of the main segment of its $250 million TGN-Intra
capacities expected to Asia cable system. The multi-terabit system spans 6,700km, which connects Singapore,
aid revenue growth of Hong Kong, Japan, Vietnam and the Philippines. The TGN-Intra Asia cable, when combined
the data business. with the Tata Indicom Cable System (TIC) and the TGN-Pacific cable system, will complete
TCom’s multi-Terabit capability from India to Asia and to the US. The company expects this
to be a major revenue driver for the enterprise data segment, as this cable would provide a
direct connection from India to the US, avoiding any landing points. Management expects
this cable to start contributing to the topline from the 1Q FY10.
 Further, construction work on the TGN Eurasia cable system appears to be on track and the
company expects this system to go live by end-3Q FY10.
 TCom continues with its strategy of moving up the value chain and is looking at providing
customized value-added services. ‘Telepresence’ is one such offering, where video-
conferencing services are offered to corporates on a pay-per-use basis at a facility owned by
TCom. The company plans to expand this business; it has 12 telepresence centers in different
cities such as Mumbai, Hyderabad, Chennai, Boston, London etc.
 We expect the enterprise data segment’s revenue to grow from INR30 049.6 million in FY08
to INR57359.2 million in FY11, a CAGR of 38.2%.
C) Retail broadband
 The company provides various other service offerings: Broadband for retail customers, Dial-
up Internet services and cyber cafes.
 TCom’s broadband and Internet subscriber base increased to 340,000 in December 2008, of
which broadband subscribers accounted for around 220,000. These subscribers are generating
ARPU of INR800/month and this base has been expanding at 4,000-5,000 subscribers per
month.
T E L E COM SE CTOR
 The company has installed 750 cell sites for its WiMAX operations on 3.3GHz and has
garnered 35,000 subscribers; its subscribers are growing at more than 4,000/month. However,
Retail Broadband due to limited spectrum, the company is awaiting BWA spectrum auctions. It intends to
segment growth roll out broadband wireless services in 2.3 and 2.5GHz. Although DoT has decided to hold
dependent on BWA simultaneous auctions for 3G as well as WiMAX spectrum, there is still no clarity on the
timing. Therefore, we believe that growth in this segment will depend on getting spectrum
auctions.
in the 2.5GHz in the imminent BWA and 3G auctions.
 Management believes that WiMax spectrum auctions should help improve its broadband
subscriber base. This in turn should lead to improved revenue visibility for the segment.
New initiatives
 TCom increased its stake in Neotel to 56% by acquiring a 30% stake from Transnet and
Eskom in January 2009; as a result, it has become a controlling shareholder. Neotel provides
wholesale voice and data services and customized solutions to the enterprise segment. The
company believes that it is now in a position to start operations more aggressively to capture
market share.
Percentage Holding Held By Further Holding
Shareholding Structure before acquisition of 30% in Neotel
100% in Neotel held as
30% Transtel (Transnet) and Esi-Tel (ESKOM)
19% Nexus Connexion
51% SEPCO 24.5% Communi Tel
24.5% two consortium
51%- Tata Africa Holding in which TCom holds 43.16%.
Shareholding Structure after acquisition of 30% in Neotel
30% TCom
19% Nexus Connexion
51% SEPCO 24.5% Communi Tel
24.5% two consortium
51%- Tata Africa Holdings in which TCom holds 43.16%.
 In China, TCom entered into a 50% JV with China Enterprise Communications Limited
(CEC). However, it is still in the process of achieving regulatory approvals. Management
reckons that this JV should start contributing to revenue from FY10.
FINANCIALS
Revenue mix moving towards data business
TCom derives majority of its revenue from its wholesale voice business (60%). Although the
segment continues to see volume growth, the pricing pressure has offset volume growth, which
led to flat revenue. Given the continued pricing pressure for this segment, TCom has adopted a
cautious strategy of moving towards the data business. In the data business as well, bandwidth
prices continue to decline, and therefore volume growth (with the increase in lit capacities) and
the shift towards value-added services should enable TCom to register an increase in revenue
from this segment. Finally, for the broadband segment, the growth in subscribers will depend on
BWA spectrum auctions. We expect the revenue mix to shift in favor of the data and broadband
business with the share of data business increasing from 36.4% as of FY08 to 45.8% in FY11E. We
expect TCom’s revenue to increase from INR82629.8 million in FY08 to INR125293 million in
FY11, a CAGR of 14.8%. During the nine months ended December 2008, the company registered
a revenue growth of 20.3% at INR73692 million vs. the year-ago period.
T E L E COM SE CTOR
Revenue Mix
5% 4% 4% 3%
100%
80% 34% 38% 38% 40%

Share of data business
increasing in the total 60%
%
revenues. 40%
61% 58% 58% 57%
20%
0%
Mar-08 Jun-08 Sep-08 Dec-08
Wholesale Voice Data Business Others
Source: Company
Margins and profitability

As the company has consciously decided to move up the value chain, from providing plain vanilla
capacity services to value added services, its margins have started to improve. Its operating profit
margin was 14.4% in 3Q FY09, as against 8.1% in 3Q FY08. We expect the operating margin to
improve to 14.5% in FY11 from 10.2% in FY08. During the first nine months ended December
2008, TCom’s net profit (including an exceptional expense of INR956 million for final settlement
with regard to the Flag Arbitration) increased almost 2.5x to INR418 million. The net profit
excluding exceptional items increased almost 4x to INR1374 million.
Capex plans appear to be on track

The company appears to be on track to meet its FY09 capex guidance of US$600 million. The
Capex plans and the total capex planned for FY10 is US$500 million excluding that for the upcoming WiMax auctions.
impending WiMAX TCom will fund its capex via borrowings and internal accruals. It had earlier announced an
auctions to increase investment plan of $430 million, which included an Internet Data Centre (US$180 million) and
debt burden. completion of a major part of the US$250 million Intra Asia cable system. Out of this, the IDC
is expected to be completed over the next two years.
T E L E COM SE CTOR

Net Sales 82,629.8 93,788.7 107,251.7 125,293.0
EBDIT 2,635.5 2,813.7 3,217.6 3,758.8
Depreciation 11,087.1 14,490.4 17,213.9 21,863.6
Amortization 7,844.1 9,707.1 11,832.1 14,373.1
EBIT 3,243.0 4,783.3 5,381.8 7,490.6
Interest 1,641.8 2,313.3 3,012.1 3,314.6
PBT 1,601.2 2,470.0 2,369.7 4,175.9
Exceptional item -112.0 -956.0 0.0 0.0
Profit from ordinary activities 1,489.2 1,514.0 2,369.7 4,175.9
Taxes 1,768.9 1,532.8 1,798.1 2,558.7
Profit before Minority Interest -279.7 -18.9 571.6 1,617.2
Less: Minority Interest -382.7 -1,239.7 -1,039.7 -739.7
Net Profits 103.0 1,220.8 1,611.3 2,356.9
Growth in sales (%) -4.0% 13.5% 14.4% 16.8%
Operating Profits Growth (%) -19.8% 38.2% 19.9% 29.4%
PAT Growth (%) -33.1% 1084.8% 32.0% 46.3%
Sources and Application of funds (INR Mn)

Sources of Funds
Share Capital 2,850.0 2,850.0 2,850.0 2,850.0
Total Loan Funds 33,888.8 46,688.8 55,189.0 60,689.0
Minority Interest 32.1 -1,207.6 -2,247.3 -2,987.0
Net Deferred Tax Liability 998.2 1,386.5 1,859.8 2,434.7
Total Capital Employed 86438.9 99608.4 109153.4 116845.6
Gross Block 89,000.8 114,200.8 139,200.8 159,700.8
Net Block 62,557.1 78,050.0 91,218.0 97,344.9
Goodwill 1,674.1 1,674.1 1,674.1 1,674.1
Investments 12,043.8 12,043.8 12,043.8 12,043.8
Net Current Assets -10,242.3 -14,162.9 -19,712.3 -20,508.8
Total Assets 86438.9 99608.4 109153.4 116845.6
T E L E COM SE CTOR

Pre tax profits 1,601.2 2,470.0 2,369.7 4,175.9
Operating Profit before WC 10,465.8 13,435.2 15,665.5 20,257.7
Cash from Investment Activities -19,135.7 -25,200.0 -25,000.0 -20,499.0
Cash from Finance 6,940.0 10,486.7 5,487.9 2,185.4
Total cash generated 655.8 -446.4 265.6 2097.1
Add: Exchange effects on cash 22.6 - - -
Cash at the beginning 2,205.6 2,884.1 2,437.7 2,703.3
Cash Balance 2,884.1 2,437.7 2,703.3 4,800.4
Key ratios
EBIT Margin (%) 3.9% 5.1% 5.0% 6.0%
PAT Margin (%) 0.1% 1.3% 1.5% 1.9%
RONW (%) 0.2% 2.3% 3.0% 4.2%
ROCE (%) 3.8% 4.8% 4.8% 6.3%
Per Share Ratios
Earnings (Rs.) 0.4 4.3 5.7 8.3
Cash Earnings (Rs.) 27.9 38.3 47.2 58.7
Book Value (Rs.) 180.8 185.1 190.7 199.0
Valuation Ratios
P/E (x) - 106.7 80.8 55.3
Cash P/E (x) - 11.9 9.7 7.8
P/BV (x) - 2.5 2.4 2.3
Debt/Equity 0.6 0.9 1.0 1.1
Quick Ratio 0.4 0.4 0.4 0.5
Turnover Ratios
T E L E COM SE CTOR
B U Y at D E C L I N E S
Idea Cellular Limited

CMP 61 Idea Cellular Limited (Idea), a GSM mobile service operator, has licenses to operate
Target Price 68 in all 22 service areas with commercial operations in 16 service areas. Idea acquired
Spice Communications, which gave it access to Karnataka and Punjab. With effect
Key Data
from October 16, 2008, Idea holds a 41.09% stake in Spice Communications, which is
Bloomberg Code IDEA IN
a JV with TMI and Green Acre. With aggressive and continued expansion, the company
Reuters Code IDEA.BO
has increased its market share from 9.2% in March 2008 to 11% in March 2009.
BSE Code 532822
NSE Code IDEA INVESTMENT RATIONALE
Face Value (INR) 10 We initiate coverage on Idea with a “BUY ON DECLINES” recommendation and a
Market Cap. (INR bn.) 200 price target of INR68, which is based on DCF valuation.
52 Week High (INR) 114  Pan India operations by FY10E: Idea’s subscriber base increased significantly
52 Week Low (INR) 34 due to aggressive expansion into circles, from 14.01 million in March 2007 to 43.02
Avg. Daily Volume (6m) 1328349 million as of March 2009. The company recently started commercial operations in
F&O Mumbai, Bihar, and Orissa Circles. It has also received start-up spectrum for the
Market Lot 5400 remaining Circles and has plans to begin operations in all Circles by end-December
Turnover (Rs Mn) 365 2009. With these launches, we believe that Idea will emerge as a pan-India operator
by FY10. With aggressive expansion and consolidation of Spice, we expect the
Shareholding % subscriber base to increase at a CAGR of 26.8% from 43.02 million as of March
Promoters 49.1 2009 to 69.2 million as of March 2011. We expect Idea’s market share to improve
Mutual Funds / Financial 6.3 from 11% as of March 2009 to ~12% by FY11.
Institutions / Banks
 Expansion to new Circles a challenge: Expanding to new Circles, for which Idea
has received spectrum, will be challenging, as it would be a late entrant, where a
Insurance Companies 1.5
minimum five operators already exist. Given such a competitive scenario, gaining
Bodies Corporate/Individuals/ 36.1
subscribers would be difficult.
others
 Pressure on margins: Idea has accelerated the roll-out of its network over the past
Total 100.0
12 months. It has adopted a strategy to rent higher proportion of its towers. This
INR Mn FY09 FY10E FY11E
strategy, though beneficial for a faster roll-out of network, would hurt EBITDA
Net sales 101,252 144,106 180,364
margins. We expect network costs to be high due to aggressive network expansion.
Op Profit 28,121 36,328 47,266
Furthermore, the consolidation of Spice will likely affect margins as Spice has
Net Profit 9,009 9,401 11,209
lower margins than Idea.
OPM (%) 27.8 25.2 26.2
 Idea had a net debt to equity of 1.10 as of March 2008. However, it received a total
NPM (%) 8.9 6.5 6.2
funding of INR73 billion from TMI and INR21 billion from Providence. Post this
EPS (INR) 2.9 3.0 3.6
infusion, its net debt to equity reduced to 0.26 in FY09. Idea’s leverage appears
to be in a comfortable position.
KEY CONCERNS
 Competition: Being a late entrant, Idea would face intense competition as it enters
new Circles. Expanding in these new Circles will be challenging, as it would be
a late entrant, where a minimum of five operators already exist. Given such a
competitive scenario, it would be difficult for the company to add subscribers.
 Slower net adds: Industry standards suggest that EBITDA breakeven in the
majority of Circles happens within 24 months (eight quarters) from the date of
launch of commercial services. However, slower net adds due to a higly competitive
market may delay the breakeven, which in turn could put pressure on margins and
affect profitability.
T E L E COM SE CTOR

We believe the company is well positioned in terms of spectrum holdings across the country. It
has a strong position in its incumbent Circles and has proven its execution capabilities in terms
of roll-out into new Circles. Fund infusion from recent initiatives, such as the stake sale in
Aditya Birla Telecom Ltd (ABTL) and the Spice deal with TMI, should result in a well-funded
balance sheet. However, the environment will likely become more difficult given the heightening
competition. Idea is expected to face cost pressure owing to rapid network expansion. This will
likely further accelerate due to roll-outs in new Circles, which should exert significant pressure
on profitability.
Since Idea has just started operations in most of the Circles for which it received spectrum, its
networks are not as congested as those of peers and therefore the quality of its services would
be much better. With MNP being implemented in the near term, we believe Idea will gain at the
expense of saturated service providers. Further, the company’s aggressive roll-outs should enable
it to establish itself as a pan India player, placing it in a better position in the industry. At a CMP
of INR61, the stock trades at a P/E of 20.0x its EPS of INR3.0 for FY10E and 16.8x its EPS of
INR3.6 for FY11E. We initiate coverage on Idea with a “BUY ON DECLINES” recommendation
and a DCF-based price target of INR68.
Assumptions
Risk Free rate 8%
Beta 1.0
Risk Premium 6%
Cost of equity 14.0%
Cost of Debt 9.0%
Terminal growth rate 4%
WACC 12.0%
INR Million Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19
EBITDA 36,548 47,446 45,026 47,151 51,144 55,177 58,737 62,574 69,875 76,728
Tax 1,201 1,432 1,351 1,415 1,534 1,655 1,762 1,877 2,096 2,302
Capex 55,000 45,000 31,000 27,000 25,000 20,000 17,500 14,300 11,000 9,800
Change in NWC 536 9,235 9,410 10,137 11,405 12,580 13,568 14,767 16,770 18,798
FCF -20,190 -8,221 3,265 8,599 13,205 20,941 25,907 31,629 40,009 45,828
Valuations Amount (INR Mn)

PV of cash flows 54,987
PV of terminal value 20,6076
Value 261,063
Net Debt (loan funds-Cash balance) 37,849
Value of Equity 223,213
No of Shares 3,301
Fair Value (INR per share) 68
Note: Due to limited information for Indus Towers, we do not make FY10/FY11 projections
for it and consolidate 16% of its financials with Idea. Therefore, our estimates factor in the
merger of Idea and Spice, but exclude the Indus JV.
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SEGMENTAL ANALYSIS
Mobile segment
Idea has a pan-India GSM license with commercial operations in 16 circles. It recently launched
commercial operations in Mumbai, Bihar, and Orissa Circles. Moreover, Idea received start-up
spectrum for the remaining Circles and plans to start operations in all Circles by end-December
2009. With these launches, the company should emerge as a pan India operator by FY10.
Circle-wise break-up for the company:
Particulars Status
Established Circles (11)
Incumbent Circles: Haryana, Maharashtra, UP (West), MP, All Circles are EBITDA positive with margins at 35-36%
Andhra pradesh, Gujarat, kerala, Delhi-8
New Circles: Himachal Pradesh, Rajasthan, UP (East)-3 UP east is the only Circle, which has achieved breakeven.
This could be because Idea received spectrum for 40% of
the Rajasthan area recently
JV with Spice Communications (2 Circles)
Punjab and Karnataka - 2 Acquired due to takeover of Spice. Both Circles are EBITDA
positive as of December 2008.
Idea should emerge as New Launches (9): Launched as well as yet to be launched
a pan India operator by Mumbai and Bihar-2 Operations launched in Mumbai in August 2008 and in Bihar
FY10. in October 2008. Both Circles are EBITDA negative.
Orissa-1 Received spectrum and has launched operations in April
2009
Circles Yet to be Launched (6)
Tamil Nadu Received spectrum and would launch operations during July-
Sept quarter (Early July).
Chennai, Kolkatta, West Bengal, North east, Assam, J&K Received spectrum and would launch services in December
2009.
Source: ACMIIL Research. # Note- Tamil Nadu and Chennai are grouped as one service area.
Idea’s operations have been divided into established Circles, new launches, the JV with Spice
Communications, and Indus Towers. For clarity, we have analyzed the mobile segment based
on these classifications.
I) Established Circles
 Incumbent Circles
Idea’s incumbent Circles comprise 8 Circles covering ~44% of the wireless subscriber base. The
company’s subscriber growth in the past one year in these Circles has been higher or at par with
the industry as it is the market leader in three Circles.
Mar 2008- Mar 2009 Idea Bharti Industry Idea’s M/S in GSM Idea’s Ranking
Established Circles
Maharashtra 4.0 1.5 3.7 34.9 1
Madhya Pradesh 3.6 3.1 3.4 33.7 1
Strong foothold in Kerala 4.0 4 3.6 35.8 1
incumbent circles. Haryana 3.8 4.4 3.9 24.1 2

Uttar Pradesh (West) 3.7 3.4 3.3 30.7 2
Andhra Pradesh 3.4 3.5 3.0 23.9 2
Gujarat 4.1 2.8 2.9 21.2 3
Delhi 2.0 1.8 2.5 18.5 3
Source: Company, COAI, and TRAI.
Idea has a market share of 19.7% in these incumbent Circles. Further, being the original licensee
in seven of the Circles—Andhra Pradesh, Gujarat and Maharashtra, Haryana, Kerala, Madhya
Pradesh and Uttar Pradesh (West)—the company has been able to reduce its capex, as it was
allocated spectrum in the 900 MHz frequency band. This has allowed it to provide network with
T E L E COM SE CTOR
a lower density of cell sites than required for services in the 1800MHz frequency band typically
made available to subsequent market entrants.
 New Circles: High growth Circles
Of the 11 established Circles, Idea launched operations in UP (East), Rajasthan, and Himachal
Pradesh during September-November 2006. These Circles have grown robustly since then.
Subscribers in these Circles rose almost five times from just 0.65 million as of March 2007 to 3.4
million as of March 2009. Within two years of launch, Idea has managed to increase its market
share to 6% as of March 2009.
This robust growth can be attributed to the aggressive expansion by the operator in these Circles,
which belong to the B and C group (high growth Circles).
Mar 2008- Mar 2009 Idea Bharti Industry Idea’s Market Share in GSM Industry Idea’s Ranking
New Circles
Himachal Pradesh 5.5 1.5 3.2 5.1 4
Rajasthan 3.4 5.0 4.4 7.7 4
Uttar Pradesh (East) 6.2 5.2 4.4 9.9 4
Source: Company, COAI, and TRAI
But break-even for new Circles has been delayed
According to management, on average, EBITDA breakeven in majority of the Circles takes place
within 24 months (eight quarters) from the date of launch of commercial services. After two
years from the launch of commercial operations the new Circles—except UP-East, Rajasthan and
Himachal Pradesh—have not yet achieved breakeven. Management stated that it received spectrum
Break-even for new from the government for 40% of Rajasthan, particularly the Western region, only recently, and
Circles has been thus there has been a delay in breakeven in this region. Furthermore, ambitious network expansion
delayed. plans and rental payments to Indus Towers have also contributed to the delay.
We believe that Idea will be able to achieve EBITDA breakeven for all these Circles within the
next two-three quarters. However, it would continue with its strategy to expand further into these
Circles. These measures, though positive for the long term, are expected to increase network
operating costs, suppressing margins for the new Circles.
Efficient operations in established Circles
Idea has been highly efficient in existing Circles. These have been the major contributor to the
company’s top line. With aggressive expansion in these Circles, Idea has been able to achieve
growth that is at par with the industry leaders. The table below shows the company’s growth and
operating margins in its 11 circles vs. the growth achieved by peers from their circles.
FY2009 Bharti (22 circles) Reliance (22 circles) Idea (11 circles)
Revenue Growth 38.3% 18.1% 45.6%
EBITDA Growth 32.3% 9.7% 29.1%
EBITDA Margin 40.5% 36.9% 29.9%
Subscriber as on March 2009 93.9 72.7 37.3
Market Share 24% 19% 17%
Source: Company.
Projections for established Circles
We expect the subscriber base in these Circles to register a CAGR of 23.5% during FY09-11.
The established Circles should continue to be major revenue contributors. Further, while the
incumbent circles have EBITDA margins of 36%, the new circles, except UP-east, have not
achieved breakeven. The new circles have therefore dragged down the EBITDA margins for the
established Circles. Also, ambitious network expansion plans and higher proportion of rented
towers should increase network costs, which should put pressure on margins.
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Established circles Mar-08 Mar-09 Mar-10E Mar-11E

Subscribers (Nos In Mn) 24.00 37.27 48.58 56.82
Established Circles Growth 71.3% 55.3% 30.3% 17.0%
should continue to Gross Revenue (INR Mn) 63,708 98,103 128,795 150,845
be major revenue Growth 46.3% 54.0% 31.3% 17.1%
contributors. EBITDA (INR Mn) 23,415 29,288 38,381 45,180
Growth 46.7% 25.1% 31.0% 17.7%
Ebitda Margin (%) 36.8% 29.9% 29.8% 30.0%
Source: Company and ACMIIL estimates.
II) New launches to continue to drag down margins
The new launches include Mumbai, Bihar and Orissa Circles; for the rest, spectrum has been
allocated, but they are yet to start commercial operations.
New Launches (9)- Launched as well as yet to be launched
Mumbai and Bihar-2 Operations were launched in Mumbai in August 2008 and in
Bihar in October 2008. Both are EBITDA negative.
Orissa-1 Received spectrum and has launched operations during
April 2009.
Circles Yet to be Launched (6)
Tamil Nadu Received spectrum and would launch operations during
July-Sept (Early July).
Chennai, Kolkatta, West Bengal, North east, Assam, J&K. Received spectrum and would launch services in December
2009.
Source: ACMIIL Research # Note- Tamil Nadu and Chennai are grouped as one service area.
Mumbai and Bihar to be margin dilutive initially
Idea had licenses to operate in the Mumbai and Bihar Circles, but it was unable to provide services
due to lack of spectrum allocation. However, it has been provided with start-up spectrum in these
Circles and has started operations during 3Q FY09.
Mumbai Circle: Highly competitive
 Mumbai is the highest ARPU-generating circle. This should enable Idea to improve its
realization. Further, rolling-out operations in the Mumbai Circle may advance with the existing
tower infrastructure offered by Indus Towers. This should help reduce the time for the roll-out.
Being in the Mumbai Circle would support Idea’s strong presence in Maharashtra, Gujarat,
and Delhi, which account for a substantial traffic flow from and to Mumbai.
 However, in the Mumbai Circle, Idea would be exposed to high competition as this Circle already
has players such as Bharti, Vodafone, BPL and Reliance. Further, being a metro, the Mumbai
Circle has very high penetration at 71.7%, which leaves very little room for growth.
Bihar Circle
 The penetration level in this Circle is 11.6% and it is not saturated with too many players.
There are mainly two GSM operators—Bharti and Reliance. This Circle presents untapped
growth potential.
 Bihar belongs to Circle C; based on industry trends, it is a high growth circle.
Subscriber growth March 08-March 09
Industry 3.4
Circle C 4.5
Bihar 5.3
Source: TRAI.
Commercial operations in Mumbai and Bihar have been successful so far, as the company has
garnered a market share of 3.9% in Mumbai within seven months of launch and 4.3% within
five months of launch in Bihar.
T E L E COM SE CTOR
New circles expected to be launched by December 2009

Idea has received spectrum for the remaining Circles and expects to launch operations by
December 2009. However, we believe that expanding in these new Circles would be challenging,
as the company would be a late entrant here, where a minimum of five operators already exist.
Given such a competitive scenario, adding subscribers would be difficult.
Projections for the new launches
Industry standards suggest that EBITDA breakeven in the majority of circles takes place within
24 months (eight quarters) of the date of launch of commercial services. Therefore, though these
Circles will contribute to the top line, the EBITDA losses will drag down the margins. Moreover,
we believe that in a highly competitive market breakeven may be delayed further.
New Launches Mar-09 Mar-10E Mar-11E
Subscribers (Nos In Mn) 5.7 8.4 10.6
Growth - 46.2% 26.3%
New launches to drag
Gross Revenue (INR Mn) 1,520 11,239 21,785
down margins for Idea. Growth - 639.4% 93.8%
EBITDA (INR Mn) -1,785 -4,351 -1,417
Growth - 143.8% -67.4%
Source: Company and ACMIIL estimates.
III) JVs
A) Spice Communications
Idea acquired 41.09% stake in Spice Communications in October 2008. This acquisition has
enabled it to enter the service areas of Punjab and Karnataka. Being an incumbent in these
Circles, Spice holds spectrum in the 900Mhz, which results in lower operating cost. Despite high
penetration levels, these Circles are characterized by high usage and high ARPUs.
Spice acquisition to Idea Spice
give Idea access to Subscribers 38.9 4.1
high usage and high ARPU 254 267
ARPU circles. MOU 402 467
Source: Idea Cellular Quarterly Report (March 2009).
However, the acquisition should impact Idea’s overall margins, as Spice has lower margins than
Idea. Also, management indicated that, in the near term, due to higher investments, especially
in Karnataka, margin improvements for Spice circles would be limited. We believe that Spice
will be merged with Idea during 2H FY10.
Ebidta Margins
40%
34% 33%
30% 26% 26%

30%
%
20% 23%
16% 15%
10%
0%
Mar-08 June-08 Sept-08 Dec-08
Spice Comm Idea Cellular
T E L E COM SE CTOR
B) JV with Indus Towers

Idea, Bharti Airtel, and Vodafone Essar signed an Indefeasible Right of Use Agreement (IRU)
with Indus Towers, effective from January 2009. Around 11,100 towers of Idea are covered under
this IRU agreement; accordingly, these towers have become rent-paying for Idea with effect from
1 January. The net book value of the towers, which will be transferred, is ~INR14.5 billion.
Ownership structure of the tower business
Idea Cellular
80%
Aditya Birla Telecom 20%

Providence Equity Partners
42% Limited (ABTL)
Bharti Infratel 16%
Indus Towers
Vodafone Essar
42%
Source: Company, ACMIIL Research
Tower Portfolio of Indus Towers

Operator No of towers- Dec 2008
Idea Cellular 11,100
Bharti Airtel 35,066
Vodafone Essar 30,000
Source: Company.
The circle spread of Indus Towers
Category Circles
Metros Delhi, Mumbai, Chennai, Kolkatta
Category A Maharashtra, Gujarat, Andhra Pradesh, Karnataka, Tamil Nadu.
Category B Kerala, Punjab, Haryana, UP (W), UP (E), Rajasthan, West Bengal.
Source: Company
We expect the JV with Indus Towers to provide significant benefits for Idea in terms of network
roll-out in new Circles, where Indus Towers has presence. The company has adopted a strategy
of network roll-out via sharing of towers. Of the 16 circles, Idea is in the process of rolling out
Indus JV to help Idea network in West Bengal, Kolkata, Tamil Nadu, and Chennai. This should help the company
accelerate its network accelerate its network roll-out in these Circles.
roll out in new circles. Management indicated that the net negative impact of the Indus agreement on EBITDA would
be ~2.2%. However, due to limited information, we do make FY10/FY11 projections for Indus
towers and consolidate 16% of its financials with Idea. Therefore, our estimates factor in the
merger between Idea and Spice but exclude the Indus JV.
Long distance services

Idea obtained NLD and ILD licenses in April 2006 and started NLD operations in April 2008; its
ILD operations are still in the nascent stage. The company currently carries 25% of its wireless
traffic on its own NLD network and plans to increase this to 50%. The primary focus in obtaining
such a license is to facilitate carriage of calls between its Circles and reduce operating costs
(component of interconnection charges present).
Due to lack of pan-India presence like other integrated operators, Idea was forced to share its
revenue with other operators with whom it has a roaming arrangement. The company largely
depended on numerous mobile operators for its interconnection arrangements. Both these concerns
have been resolved to some extent, as it has rolled out its own NLD network.
T E L E COM SE CTOR
FINANCIAL HIGHLIGHTS
Revenue analysis
For FY07-FY09, Idea’s revenue grew at a CAGR of 52.3%. The subscriber base increased
significantly from 14.01 million in 2007 to 43.02 million as of March 2009, due to aggressive
expansion into Circles.
With aggressive expansion and consolidation of Spice, we expect the subscriber base to increase
at a CAGR of 26.8% from 43.02 million as of March 2009 to 69.2 million as of March 2011. As
the company expands into new Circles, containing the rapid fall in ARPUs would be a challenge.
This is mainly because the expansion would mainly focus on B and C Circles, which are high
growth Circles, but have low revenue potential. Therefore, for FY09-11, we expect revenue to
register a CAGR of 32.9%.
Revenue Growth
200.00 80.00
69.17
57.63
150.00 60.00
43.02
With aggressive
In Mn
In Bn
100.00 40.00
24.00
expansion into new 50.00
14.01
20.00
circles, we expect
revenue to register a 0.00 0.00
CAGR of 32.9%. 2007 2008 2009 2010E 2011E
Revenue Subscribers
Source: Company and ACMIIL estimates
Network expansion to restrict margin growth

Idea has accelerated the roll-out of its network over the past 12 months and has increased cell sites
by 78.4% from 24,793 in March 2008 to 44,230 in March 2009, of which ~80% are rented. This
has led to an increase in the network operating cost, which has been the primary drag on margins.
The strategy to rent higher proportion of its towers, although beneficial for a faster roll-out of
network, would hurt EBITDA margins. We expect network cost to remain high due to aggressive
network expansion. Further, consolidation of Spice is also likely to affect margins, as Spice has
Margins to be under lower margins than Idea and because higher investments would be made in Spice Circles.
pressure. Network Expenditure
30%
24.5%
22.2%
19.5%
20% 17.1% 17.3%
15.2% 16.5%
10%
0%
Mar-08
June-08
Sept-08
Dec-08
Mar-09
Sept-07
Dec-07
T E L E COM SE CTOR
Leverage
Idea had a net debt to equity of 1.10 as of March 2008. However, it received a total funding of
INR73 billion from TMI and INR21 billion from Providence. The company also paid INR21
billion for acquisition of 40.8% stake of Spice Communication. Post this infusion, the net debt to
equity has reduced to 0.26 in FY09. Management believes that the funds from TMI and Providence
will be sufficient to finance its investments plans for the next 12 months.
Net Debt to Equity
1.2 1.14 1.1
1
Fund infusion to result
0.8
in well funded balance 0.55
sheet. 0.6
0.4
0.26
0.2
0
2006 2007 2008 2009
Quarterly highlights for 4Q FY09 and FY09

Idea announced its 4Q and FY09 results. It has been able to maintain its growth momentum;
Idea’s consolidated revenue grew 47.9% YoY to INR29,356 million during 4Q. For FY09, the
company registered a revenue growth of 50.7% to INR101,252 million. After the inclusion of
Spice Communications, the company’s subscriber base has reached 43.02 million, corresponding
to an 11% market share. Idea now has commercial operations in 16 circles (from 11 earlier) with
the commencement of Mumbai and Bihar Circles. It has access to the service areas of Punjab
and Karnataka via Spice from October 16, 2008. The company only recently extended to the
Orissa service area with the launch of commercial operations in April 2009. Idea now covers ~
80% of the national subscriber base.
Financial performance for 4Q FY09
 Idea has been able to maintain its growth momentum in the top line, driven by robust subscriber
growth, which, given the consolidation of Spice’s subscribers, rose almost 79% (YoY) to
43.02 million as of March 2009 from 24.0 million in March 2008. The consolidated revenue
increased 47.9% from INR19853 million in 4Q FY08 to INR29356 million in 4Q FY09.
Prepaid subscribers constituted 94% of the total subscriber base as of March 2009. Mobile
revenue was the major contributor in the quarter.
 ARPU for Idea (standalone) declined 4.5% from INR266 as of December 2008 to INR254
as of March 2009. The ARPU for Spice Circles declined 4.3% QoQ to INR267 as of March
2009. The MOU for Idea declined 4.3% QoQ to 402 minutes mainly because 50% of the
subscriber additions for Idea were from rural areas, which largely comprise low-usage
subscribers. The MOU for Spice Circles declined 6.0% from INR494 in December 2008 to
INR467 in March 2009.
 Idea has started consolidating Indus’ financials on a line-by-line basis from the March
quarter. Indus contributed INR1869 million to Idea’s consolidated revenue, INR358 million
to consolidated EBITDA and a net loss of INR36 million to consolidated PAT in 4Q FY09.
In the previous earnings call, management indicated that Indus’ accounting would have a
net negative impact of 2.2% (after taking into account IRU income) on EBITDA margin.
However, on a consolidated basis, the EBITDA margin improved from 25.5% in December
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2008 to 27.6% in March 2009 mainly due to narrowing of EBIDTA losses from Mumbai and
Bihar and higher margins from Spice. Although Spice Communications’ EBITDA margins
at 25% in the quarter are aligned with that of Idea, we do not expect this to continue given
the high investments planned for Spice circles.
 Idea has capex plans of INR60 billion for FY10 excluding 3G investments. Management
believes that the funds from TMI (for 15% stake in Idea) and P5 Asia Holdings Investments
(Mauritius) (20% stake in ABTL) will be sufficient to finance its investments plans for the
next 12 months.
Business Update
 Idea has added 19,437 sites in FY09, an 83% increase in capacity. A majority of the new
sites were on lease instead of being on an ownership basis. The company continues with its
strategy of renting towers; the number of towers on rent has gone up significantly in the past
few quarters.
Cell Sites
50.0
7.7
40.0
17.8
36.6
16.8
30.0
14.7
Nos
14.1
20.0 21.5
16.6
10.0 12.9
10.7
0.0
08-Mar Jun-08 Sep-08 Dec-08 Mar-09
Rented sites Owned sites
Source: Company
 Of the 11 established Circles, except Rajasthan and UP (East), all others have achieved
breakeven. The EBITDA losses from Mumbai and Bihar circles have narrowed considerably.
Having received spectrum, the company plans to launch commercial operation in the remaining
Circles by December 2009, increasing its presence and market share. These measures,
though positive for the long term, should increase the operating cost, which in turn should
put pressure on margins.
 Pursuant to the Share Purchase Agreement between Idea and MCorp Global Communications
Private Limited (MCPL) dated 25 June 2008, Idea acquired 40.8% of the total issued and
paid-up share capital of Spice Communications from MCPL. A public offer has been made
by the company to Spice’s equity shareholders in accordance with the provisions of SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations, 1997. The company would
now approach Stock Exchanges/High Court for approval of the amalgamation of Spice. Idea
has started consolidating Spice’s financials. However, Spice is now a JV between Idea and
Telekom Malaysia. The company has also completed the issue of 14.99% preferential equity
to Telekom Malaysia.
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Key Performance metrics

Metrics Unit Quarter Ended
Mar-08 Jun-08 Sep-08 Dec-08 Mar-09
Idea Subs Mn 24.0 27.2 30.4 33.5 38.9
Chng % 13.3 11.8 10.2 16.1
Spice Subs Mn 4.2 4.5 3.6 3.8 4.1
Chng % 8.3 -20.8 5.6 8.7
Total Subs Mn 28.2 31.7 34.0 37.3 43.0
Chng % 12.6 7.1 9.7 15.4
Total Market Share % 9.2% 9.5% 10.8% 11.0% 11.0%
Idea ARPU INR per sub 287.0 278.0 261.0 266.0 254.0
Chng % -3.1 -6.1 1.9 -4.5
Idea MOU INR per sub 411.0 431.0 421.0 416.0 402.0
Chng % 4.9 -2.3 -1.2 -3.4
Idea ARR INR per min 0.70 0.65 0.62 0.64 0.63
Chng % -7.1 -4.6 3.2 -1.6
Idea Churn % 4.6 4.0 3.9 4.3 5.2
Spice ARPU INR per sub 232.0 259.0 279.0 267.0
Chng % - 11.6 7.7 -4.3
Spice MOU INR per sub 371.0 434.0 494.0 467.0
Chng % - 17.0 13.8 -5.5
Spice ARR INR per min 0.63 0.60 0.56 0.57
Chng % - -4.8 -6.7 1.8
Spice Churn % 3.1 13.9 6.2 7.7
Source: Company.
Interim Results INR Mn

Particulars Q4FY09 Q4FY08 % Chg. Q3FY09 % Chg.
Net Sales 29,364.9 19,852.6 47.9 27,310.5 7.5
Total expenditure 21,257.2 1,3118 20,336.1
Operating Profits 8,107.7 6,734.6 20.4 6,974.4 16.2
Other Income 0 0 0
EBIDT 8,107.7 6,734.6 6,974.4
Depreciation 4,320.9 2,597.2 3,937.3
EBIT 3,786.8 4,137.4 3,037.1
Interest 1,046.5 1,205.5 873.6
Earnings Before Tax 2,740.3 2,931.9 2,163.5
Tax -2.3 165 -31
Profit after Tax 2,742.6 2,766.9 -0.9 2,194.5 25.0
Equity Share capital 31,001.0 26,353.6 31,001.0
EPS (Rs.) 0.9 1.0 0.7
CEPS (Rs.) 2.3 2.0 2.0
Profitability
EBIDTM (%) 27.6% 33.9% 25.5%
PATM (%) 9.3% 13.9% 8.0%
Source: Company.
T E L E COM SE CTOR

Net Sales 67,199.9 101,252.0 144,106.3 180,363.5
Other income 174.6 232.1 220.0 180.0
EBDIT 22,692.6 28,353.4 36,547.7 47,446.1
Depreciation 7,569.0 14,039.1 19,396.1 25,492.8
EBIT 15,123.6 14,314.3 17,151.6 21,953.2
Interest 3,975.3 4,943.2 6,549.9 9,312.4
PBT 11,148.3 9,371.1 10,601.7 12,640.9
Taxes 725.2 362.4 1,201.2 1,432.2
Net Profits 10,423.1 9,008.7 9,400.5 11,208.7
Growth in sales (%) 53.9% 50.7% 42.3% 25.2%
PAT Growth (%) 107.5% -13.6% 4.3% 19.2%
Sources and Application of Funds (INR Mn)

Sources of Funds
Share Capital 26,353.6 31,020.0 31,020.0 31,020.0
Outstanding Stock Options 37.6 182.0 182.0 182.0
Total Loan Funds 65,154.0 89,165.0 109,165.0 124,165.0
Net Deferred Tax Liability 661.0 917.0 1,319.9 1,800.2
Total Capital Employed 115,340.3 233,438.0 258,170.9 280,529.9
Gross Block 128,033.4 196,770.3 253,773.2 301,773.2
Net Block 78,898.9 134,859.8 170,463.7 189,970.9
Goodwill on Consolidation 61.2 22,457.0 22,457.0 22,457.0
Investments 5,560.0 5,560.0 5,560.0 5,560.0
Net Current Assets -11,522.9 28,469.5 16,406.8 12,658.6
Non Compete Fee 0.0 5,440.0 5,440.0 5,440.0
Profit and Loss account 14,079.2 5,070.5 0.0 0.0
Total Assets 115,340.3 233,438.0 258,170.9 280,529.9
T E L E COM SE CTOR
Cash Flow Statement (Rs Mn)

Pre tax profits 11,148.3 9,371.1 10601.7 12,640.9
Operating Profit before WC changes 23,433.2 28,113.4 37,464.0 43,995.2
Cash from Investment activities -59,768.2 -100,516.3 -61,262.2 -51,600.0
Cash from Finance 21,319.2 112,754.2 13,450.1 5,687.6
Total cash generated -13,224.9 40,,781.0 -2,314.5 4,316.2
Cash at the beginning 18,199.4 4974.5 45,755.6 43,441.1
Cash Balance 4,974.5 45,755.6 43,441.1 47,757.3
Key ratios
EBIDTA Margin (%) 33.8% 28.0% 25.4% 26.3%
PAT Margin (%) 15.5% 8.9% 6.5% 6.2%
RONW (%) 36.4% 10.4% 6.6% 7.4%
ROCE (%) 14.8% 8.2% 7.0% 8.2%
Per Share Ratios
Earnings (Rs.) 4.0 2.9 3.0 3.6
Cash Earnings (Rs.) 6.8 7.4 9.3 11.8
Book Value (Rs.) 13.5 44.6 47.6 49.9
Valuation Ratios
P/E (x) - - 22.4 18.8
Cash P/E (x) - - 7.3 5.7
P/BV (x) - - 1.4 1.4
Debt/Equity 1.3 0.6 0.7 0.8
Turnover Ratios
T E L E COM SE CTOR
Annexure- Spectrum allotted to operators using GSM based systems in different service area
SERVICE AREA OPERATOR Spectrum allotted *
Delhi Bharti Airtel Ltd 10+10 MHz
Hutchison Essar Mobile Services Ltd. 10+10 MHz
Mahanagar Telephone Nigam Ltd. 8+8 MHz
Idea Cellular Ltd. 8+8 MHz
Mumbai BPL Mobile Commn. Ltd. 10+10 MHz
Hutchison Essar Ltd. 10+10 MHz
Mahanagar Telephone Nigam Ltd. 8+8 MHz
Bharti Airtel Ltd 9.2+9.2 MHz
Kolkata Bharti Airtel Ltd 8+8 MHz
Huchison Telecom East Ltd. 9.8+9.8 MHz
Bharat Sanchar Nigam Ltd. 6.2+6.2MHz
Reliable Internet Ltd. 6.2+6.2MHz
Chennai Aircel Cellular Ltd. 8.6+8.6 MHz
Bharti Airtel Ltd 8.6+8.6 MHz
Hutchison Essar South Ltd. 8.0+8.0MHz
Andhra Pradesh Idea Cellular Ltd. 8+8 MHz
Bharti Airtel Ltd. 7.8+7.8 MHz
Bharat Sanchar Nigam Ltd. 8+8 MHz
Assam Dishnet Wireless Ltd. 6.2+6.2MHz
Reliance Telecom (P) Ltd. 6.2+6.2MHz
Bharti Airtel Ltd. 6.2+6.2MHz
Bihar Reliance Telecom (P) Ltd. 8.0+8.0MHz
Dishnet Wireless Ltd. 4.4+4.4 MHz
Gujarat Fascel Ltd. 9.8+9.8 MHz
Idea Cellular Ltd. 6.2+6.2 MHz
Bharat Sanchar Nigam Ltd. 7.4+7.4 MHz
Haryana IDEA Mobile Commun. Ltd. 6.2+6.2MHz
Aircel Digilink India Ltd. 6.2+6.2MHz
Himachal Pradesh Bharti Airtel Ltd 6.2+6.2MHz
Idea Telecommunications Ltd. 4.4+4.4MHz
Dishnet Wireless Ltd. 4.4+4.4MHz
J&K Bharti Airtel Ltd. 6.2+6.2MHz
Bharat Sanchar Nigam Ltd. 8.0+8.0 MHz
Dishnet Wireless Ltd. 4.4+4.4 MHz
Karnataka Spice Commn. Pvt. Ltd. 6.2+6.2 MHz
T E L E COM SE CTOR

Hutchison Essar South Ltd. 8+8 MHz
Kerala Hutchison Essar Cellular Ltd. 6.2+6.2MHz
IDEA Mobile Commun. Ltd. 8+8 MHz
Maharastra & Goa Hutchison Essar Cellular Ltd. 6.2+6.2MHz
Idea Cellular Ltd. 9.8+9.8 MHz
Madhya Pradesh BTA Cellcom Ltd. 8+8 MHz
North East Reliance Telecom. (P) Ltd. 6.2+6.2MHz
Bharti Hexacom Ltd. 4.4+4.4MHz
Orissa Reliance Telecom. (P) Ltd. 6.2+6.2MHz
Bharti Airtel Ltd. 8+8 MHz
Punjab Spice Commn. Pvt. Ltd. 7.8+7.8 MHz
Rajasthan Aircel Digilink India Ltd. 6.2+6.2MHz
Bharti Hexacom Ltd. 6.2+6.2MHz
Tamil Nadu Hutchison Essar Cellular Ltd. 6.2+6.2MHz
Aircel Ltd. 9.8+9.8 MHz
Bharat Sanchar Nigam Ltd. 8 + 8 MHz
U P (W) IDEA Mobile Commun. Ltd. 8 + 8 MHz
Bharat Sanchar Nigam Ltd. 8 + 8 MHz
Huchison Essar South Ltd. 6.2+6.2MHz
U P (E) Aircel Digilink India Ltd. 8.0+8.0MHz
Andaman, Nicobar Sikkim & West Bengal Reliance Telecom (P) Ltd. 6.2+6.2MHz
Huchison Essar South Ltd. 4.4+4.4MHz
Source: TRAI
T E L E COM SE CTOR
Notes:
Institutional Sales:
Ravindra Nath, Tel: +91 22 2858 3400
Bharat Patel, Tel: +91 22 2858 3730
Kirti Bagri, Tel: +91 22 2858 3731
Himanshu Varia, Tel: +91 22 2858 3732
HNI Sales:
Pranav Jain, Tel: +91 22 2858 3211
Disclaimer:
This report is based on information that we consider reliable, but we do not represent that it is accurate or complete and it should not be relied upon such. ACMIIL or
any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information
contained in the report. ACMIIL and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report.
To enhance transparency we have incorporated a Disclosure of Interest Statement in this document. This should however not be treated as endorsement of the views
expressed in the report
Disclosure of Interest Bharti Airtel Limited OnMobile Global Limited Tata Communications Limited Idea Cellular Limited
1. Analyst ownership of the stock YES NO NO NO

2. Broking Relationship with the company covered NO NO NO NO
3. Investment Banking relationship with the company covered NO NO NO NO
4. Discretionary Portfolio Management Services NO YES NO NO
This document has been prepared by the Research Desk of Asit C Mehta Investment Interrmediates Ltd. and is meant for use of the recipient only and is not for
circulation. This document is not to be reported or copied or made available to others. It should not be considered as an offer to sell or a solicitation to buy any security.
The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We
may from time to time have positions in and buy and sell securities referred to herein.

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T E L E COM SE CTOR

Telecom Sector : “Rural Penetration drives Growth”

GLOBAL TELECOM INDUSTRY

that worldwide mobile 2500 34 40

Region-wise subscriber base

Region wise Subscriber Break Up

Source: ITU World Indicators Database

Top 5 Countries by Subscribers

India is the second- 500

in the world after China,

Penetration levels in India vis-à-vis other emerging and developed markets

INDIAN TELECOM INDUSTRY: CURRENT TRENDS

450 130.6 140

Rapid pace of monthly net adds

added each month.

Indian wireless market share, March 2009

MOU growth not in line with the fall in tariffs

Rapid growth in investments

Industry appears to be moving towards consolidation

INDIAN TELECOM INDUSTRY: FUTURE TRENDS

driver for the telecom 40.0

industry. 30.0 21.3

Wireless subscriber base to reach 612 million by March 2012

Source: ACMIIL Research

B and C Circles: Next growth drivers

B&C Circle-Next Driver for Growth

Dec-07 Mar-08 Jun-08 Sep-08 Dec-08

Higher spectrum charges

Himachal Pradesh 34.9%

Source: TRAI and ACMIIL Research

CHALLENGES FOR THE INDUSTRY

COMPARISON OF INDIAN PLAYERS WITH PEERS ON KEY OPERATING METRICS

Valuations Amount (INR Mn)

9.0 24.6% 24.7% 25.0%

Net Adds Market Share

 Performance metrics: Bharti scores well over competitors

Source: Telecommunications Regulatory Commission of India.

 We expect subscriber base to reach 148 million by FY12

Subscriber Growth Net Adds

160 24.3% 35 31.9

Source: Source: ACMIIL Research

B) Telemedia (broadband and fixed line)

C) Enterprise services - Carriers

D) Enterprise services - Corporates

Enterprise services – Corporates: Performance (INR Mn)

E) Passive infrastructure services

FINANCIAL HIGHLIGHTS AND FINANCIALS

Revenue Ebidta Ebidta Margins

Strong balance sheet

Well Funded Balance 1 0.82

Source: Company and ACMIIL Research

QUARTERLY HIGHLIGHTS FOR 4Q FY09

Key performance metrics

INTERIM RESULTS (INR Mn)

Earnings Summary (INR Mn)

Sources and Application of Funds (INR Mn)

Cash Flow Statement (INR Mn)

VALUATION AND RECOMMENDATION

INORGANIC GROWTH STRATEGY: PERFORMING WELL

FINANCIALS AND FINANCIAL HIGHLIGHTS

New customer 4000 80%

Source: Company and ACMIIL Research