A PROJECT REPORT

ON "EQUITY ANALYSIS OF TELECOM SECTOR”

FOR "ANAND RATHI SECURITIES LTD.”

BY
"SHILPA MANDHAN"

UNDER THE GUIDANCE OF

"PROF. MAHESH HALALE"

SUBMITTED TO
"UNIVERSITY OF PUNE"

IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE

AWARD OF THE DEGREE OF MASTER OF BUSINESS
ADMINISTRATION (MBA)

VISHWAKARMA INSTITUTE OF MANAGEMENT

PUNE-411048

[i]
 TO WHOMSOEVER IT MAY CONCERN

This is to certify that Ms. Shilpa Mandhan is a bonafide student of

Vishwakarma Institute Of Management, Pune. She has successfully
carried out his Summer Project titled , Equity Research of Telecom sector.

This is the original study of Ms. Shilpa Mandhan and important

sources used by her have been acknowledged in his report. This report is
submitted in the fulfillment of two-year full time course of MBA (2006-
2008) as per the rules of the Pune University. She has worked under our
guidance and direction.

Dr. Sharad Joshi Prof. Mahesh Halale.

(Director VIM) (Project guide)

[ii]
 ACKNOWLEDGEMENT

Talent and capabilities are of course necessary but opportunities and good
guidance are two very important things without which no person can climb those
infant ladders towards progress.
I am really thankful to ANAND RATHI SECURITIES PVT LTD.,
PUNE for giving me the permission to carry out my summer internship in their
esteemed organization.
I want to express my deep sense of gratitude to the management and staff of
ANAND RATHI SECURITIES, for the support, cooperation and briefings they
provided during the internship to make it a success.
I express my sincere thanks to Prof. Mahesh Halale and Dr. Sharad L.
Joshi, Director, Vishwakarma Institute of Management, Pune for their valuable
advice and guidance. They are always a source of inspiration for me.
My thanks are also due to the faculty and non-faculty member of
Vishwakarma Institute of Management, Pune for their cooperation and support in
completion of my project.
Last but not least, I thank my parents, friends for their wholehearted
support in this effort of mine.

Shilpa Mandhan

[iii]
 CONTENTS

Sr. TOPIC Page

No. No.
1 Executive summary 1
2 Objective and scope of the study 3

3 Company Profile 4

4 About Equity Analysis 11

5 Research methodology 15

6 Theoretical Framework 17

7 Analysis and Interpretation of data 39

8 Findings 65

9 Recommendation 67

10 Limitation 68

11 Assumptions 69

12 Conclusion 70

13 Bibliography 71

[iv]
 CHAPTER I
EXECUTIVE SUMMARY

The field of equity research is very vast and one has to look into various aspects
of the functioning of the company to get to any conclusion about the possible
performance of the company in the market. Investors like warren buffet made a fortune
out of investments in the stock market, which is quiet impossible without proper research
about the companies. The field of equity research is full of challenges. It is your door to
fame, fortune and, above all, professional challenge. In a world that is shrinking in size
due to information technology and blurring boundaries between nations, the stock market
(or the equities market), which is considered to be in its infant stage, is all set to grow in
size.
The project on “Equity Analysis of Telecom Sector” was carried out in Anand
Rathi Securities Pvt Ltd., Pune, a very well known company in the field of stock broking
and capital market services sector.. The duration of the project was two months i.e from
st st
1 June 2007 to 31 July 2007. These two months were not only limited to learning and
devoting time towards equity research but it also provided an insight on what various
services such broking houses provide and what efforts are required to manage such
organizations.

The reason behind choosing this project is that it provides hands on experience
with what goes on in the stock market on a day-to-day basis. Some value investors only
look at present assets/earnings and don't place any value on future growth. Other value
investors base strategies completely around the estimation of future growth and cash
flows. Despite the different methodologies, it all comes back to trying to buy something
for less than its worth.

The project initiated with understanding the mannerisms of the stock market
trading followed by the dynamics of the telecom sector. Some of the major players in
Telecom sector were then chosen for further analysis. These companies were further

[1]
studied in detail with respect to their financials and the management’s future plans
regarding the functioning of the company, their expansion plans, and various news about
these companies and their global forays.
Based on the complete study of the companies, Bharti Airtel Limited Looked
promising and with a view to derive maximum value from the investment Bharti Airtel
Limited, the company with strong financials, competent management personnel,
promising global forays was recommended as a “Buy or Hold” share. VSNL, a company
with not so strong financials was seen to be too risky and was recommended as a “Sell”
share.

[2]
 CHAPTER II

OBJECTIVE OF THE STUDY

To analyze the telecom industry and find the future growth opportunities.
To carry out the company analysis of the selected companies and to suggest
whether they are a viable investment option.

Also to look at the historical performance data of the company and estimate the
future performance of stocks. Looking at this information to gain an insight on the
company s future performance. It is a method of evaluating a security by attempting
to measure its future performance by examining related economic, financial and other
qualitative and quantitative factors. To estimate a value that an investor can compare
with the security's current price and figure out what sort of position to take with that
security.

SCOPE OF THE STUDY

The scope of this project is limited to only one sector i.e. telecom (service
provider) sector. This project is concerned with only one sector of companies in
the stock market. The project does not extend its scope to any other sector of
companies.
Also, the project is concerned with only two companies from among the major
players in the Telecom sector i.e. Bharti Airtel Limited and Videsh Sanchar
Nigam Limited (VSNL).

[3]
 CHAPTER III

COMPANY PROFILE

ANAND RATHI SECURITIES PVT LTD.

Anand Rathi (AR) is a leading full service securities firm providing the entire
gamut of financial services. The firm, founded in 1994 by Mr. Anand Rathi, today has a
pan India presence as well as an international presence through offices in Dubai and
Bangkok. AR provides a breadth of financial and advisory services including wealth
management, investment banking, corporate advisory, brokerage & distribution of
equities, commodities, mutual funds and insurance, structured products - all of which are
supported by powerful research teams. The entire firm activities are divided across
distinct client groups: Individuals, Private Clients, Corporates and Institutions and was
recently ranked by Asia Money 2006 poll amongst South Asia's top 5 wealth managers
for the ultra-rich. In year 2007 Citigroup Venture Capital International joined the group
as a financial partner.

PHILOSOPHY:

AnandRathi tries and understands the financial needs; to offer personal advice
and expert analysis that one one needs for assets to go Xtra mile. The ability to think far
ahead and formulate long-term strategy coupled with long hours of practice and research
are the key drivers which make wealth work harder for you.

[4]
 The company believes that the key to build wealth lies in allocating assets across
various markets, financial instruments and industry sectors. Keeping this in mind it
leverages its expertise in scientific asset allocation, to help you maximize returns and
minimize risks.

SLOGAN:

“behind every successful Investor”

The firm's philosophy is entirely client centric, with a clear focus on providing
long term value addition to clients, while maintaining the highest standards of excellence,
ethics and professionalism.

PRODUCT AND SERVICES:

Wealth Management.
• Equities
– Stocks, PMS, Derivatives, Mutual Funds
• Fixed Income
– Bonds, Mutual Funds
• Commodities & Precious Metals
• Life & General Insurance
• Real Estate Private Equity Fund
• Currencies
• Structured Products & Capital-Guaranteed Notes
•Alternative & Non-correlated investments

Investment Banking and Corporate Finance.

• Equity Capital Market
– IPO/Rights/Secondary issues
– Delisting & Open Offers
– Block Deals & Private Equity

[5]
 – Management Buy-outs
• Advisory
– Business Sale/Disposal
– M&A / JVs / Strategic alliances
– Valuations
• Debt Advisory
– Rupee & Foreign Currency
– Debt Raising / Negotiation
– Debt Restructuring
– Creditor Settlement / OTS

Distribution and Brokerage:

• Equities
• Derivatives
• Commodities
• IPO’s
• Mutual Funds
• Life & Non-Life Insurance
• Depository Services
• Bonds
• Value-add services
– backed by independent research teams
– real-time support to clients

MILESTONES:

1994:

Started activities with consulting and institutional equity sales with staff of 15.

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1995:
Set up a research desk and empanelled with major institutional investors

1997:
Introduced investment banking businesses
Retail brokerage services launched

1999:
Lead managed first IPO and executed first M & A deal

2001:
Initiated Wealth Management Services

2002:
Retail business expansion recommences with ownership model

2003:
Wealth Management assets cross Rs1500 crores
Insurance broking launched
Launch of Wealth Management services in Dubai
Retail Branch network exceeds 50

2004:
Commodities brokerage and real estate services introduced
Wealth Management assets cross Rs3000crores
Institutional equities business relaunched and senior research team put in place
Retail Branch network expands across 100 locations within India

2005:
Real Estate Private Equity Fund Launched
Retail Branch network expands across 200 locations within India

2006:
AR Middle East, WOS acquires membership of Dubai Gold & Commodity
Exchange (DGCX)

[7]
 Ranked amongst South Asia's top 5 wealth managers for the ultra-rich by Asia
Money 2006 poll
Ranked 6th in FY2006 for All India Broker Performance in equity distribution in
the High Networth Individuals (HNI) Category
Ranked 9th in the Retail Category having more than 5% market share
Completes its presence in all States across the country with offices at 300+
locations within India

2007:
Citigroup Venture Capital International picks up 19.9% equity stake
Retail customer base crosses 100 thousand
Establishes presence in over 350 locations

CLIENTELE

Industrial groups:
Birla’s - Birla Sunlife, Grasim, Hindalco, Indal, Indian Rayon, Indo Gulf,
Transworks;Vedanta- Balco, Hindustan Zinc, Sterlite, Vedanta; Tata’s- Tata
Investments, TISCO, Tata Motors, Trent, VSNL

Multinationals:
Bayer, Clariant, Color Chem, Datacraft, Godfrey Philips, Goodlass Nerolac,
Nestle,Grindwell Norton, HLL, Kuoni Travel, Quest International, Syngenta, Thomas
Cook, Wartsila

Banks / FIs:
Andhra Bank, BoI, BOB, BoM, Canara Bank, HDFC Ltd, IDFC, GIC, LIC, PNB, United
Bank

[8]
Corporates :
ACC, Berger, Boots Piramal, Century Textiles, Cosmo Films, CRISIL, Crompton
Greaves, Dabur, Datamatics, DCM, Deepak Fertilizers, DSL Software, East India Hotels,
Emami, GE Shipping, Globus, Godrej, Gokuldas Exports, Gujarat Ambuja, Gujarat
Pipavav, HCL group, Himat Singka Siede, ICICI Ventures, Infosys PF, ITC, Jet Airways,
Jindal Group, L&T, Mastek, M&M, NCDEX, Radico Khaitan, Raymonds, Sonata
Software, Varun Shipping, West Coast Paper, Wipro

Private Clients:
Individuals / Families across India, Middle East and SE Asia (with minimum relationship
size of USD 1 million+ / Rs 5 crores each)

Priority Clients:
Individuals / Families with minimum relationship size of Rs 50 lacs

Competitors:

In this field of financial services there are a whole lot of companies and a few
keep adding every year. To remain at the top of this sector is no mean task and there are a
lot of big companies which provide stiff competition to Anand Rathi Securities in this
regard. The list of competitors would include:
Motilal Oswal
India Infoline
Indiabulls
Geojit
Sharekhan

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Branches and Offices:

Corporate Office:
JK Somani Bldg,
British Hotel Lane,
Bombay Samachar Marg,
Mumbai 400 023
Tel: +91 22 663 77000 Fax: +91 22 663 77070

Brokerage and Retail Head Office:

B-2, Shubham Centre,
5th Floor, Cardinal Gracious Road,
Chakala, Andheri (E),
Mumbai 400 099
Tel: +91 22 4001 3700 Fax: +91 22 4001 3770

Key Locations:

New Delhi Hyderabad

Ahmedabad Pune
Chennai Dubai
Kolkata Bangkok
Bangalore

[10]
 CHAPTER IV
EQUITY ANALYSIS

Professional investor will make more money & less loss than, who let their heart
rule. Their head eliminate all emotions for decision making. Be ruthless & calculating,
you are out to make money. Decision should be based on actual movement of share price
measured both in money & percentage term & nothing else. Greed must be avoided
patience may be a virtue, but impatience can frequently be profitable.
In Equity Analysis, anticipated growth and calculations are based on considered
FACTS & not on HOPE. Equity analysis is basically a combination of two independent
analysis, namely fundamental analysis & Technical analysis. The subject of Equity
analysis, i.e. the attempt to determine future share price movement & its reliability by
references to historical data is a vast one, covering many aspect from the calculating
various FINANCIAL RATIOS, plotting of CHARTS to extremely sophisticated
indicators.
A general investor can apply the principles by using the simplest of tools: pocket
calculator, pencil, ruler, chart paper & your cautious mind, watchful attention. It should
be pointed out that, this equity analysis does not discuss how to buy & sell shares, but
does discuss a method which enables the investor to arrive at buying & selling decision.

EQUITY ANALYSIS

Economic Analysis Industry Analysis Company Analysis

Fundamental Analysis Technical Analysis

[11]
Economic Analysis:

An Economic analysis is the filter or scanner of the surrounding at the time of

equity research, which help the analyst to make a rational decision. In the economic
analysis, the following factors are considered as a whole with a perspective of industry &
also considered with a perspective of individual company:
1. Inflation rates.
2. Economic growth.
3. Governmental Exim & other policies regarding businesses & industry.
4. LPG (liberalization, privatization, globalization)
5. Interest rates: standards of returns for measurement.
6. FII s perception to share market.
7. Political feel.

Industry Analysis:
Since each industry is unique, a systematic study of its specific features and
characteristics must be an integral part of the investment decision process. Industry
analysis should focus on the following:
Structure of the industry.
Nature of the competition.
Nature and prospects of the demand.
Costs, efficiency and profitability.
Technology and research.

Company Analysis:
In the company analysis, the investor assimilates the several bits of information
related to the company and evaluates the present and future values of the stock. The risk
and return associated with the purchase of the stock is analysed to take better investment

[12]
decisions. The present and future values of the stock are affected by a number of factors
such as:
Earnings
Capital structure
Management
Competitive edge
Operating efficiency
Financial performance

Fundamental Analysis:

Fundamental analysis is the study of economic, industry and company conditions

in an effort to determine the value of a company s stock. Fundamental analysis typically
focuses on key statistics in company s financial statements to determine if the stock price
is correctly valued.
Most fundamental information focuses on economic, industry and company
statistics. The typical approach to analyzing a company involves four basic steps:
1 Determine the condition of the general economy.
2 Determine the condition of the industry.
3 Determine the condition of the company.
4 Determine the value of the company s stock

Fundamental analysis facilitates comparison between two companies. It reflects

the financial efficiency & financial position of a company. Fundamental analysis is
fruitful in preparing plans for the future. However, fundamental Analysis should not be
considering as the ultimate objective test but it may be carried further based on the
outcome & revelations about the cause of variations. Fundamental Analysis is helpful in
forecasting likely position of company in near future.
Fundamental analysis is a very powerful analytical tool useful for measuring
performance of an organization. The ratio analysis concentrates on the inter-relationship
among the figures appearing in the financial and accounting statements. The ratio

[13]
analysis helps the investor to analyze the past performance of the firm and to make
further future projection regarding financial position. Ratio analysis allows interested
parties like shareholders, investors, creditors and government to make an evaluation of
financial aspect of a firm s performance.
Fundamental Analysis consist of following:
Study of Balance sheet
Study of Profit and Loss a/c
Study of Ratios

Technical analysis:

Technical analysis refers to the study of market generated data like prices and
volume to determine the future direction of prices movements. Technical analysis mainly
seeks to predict the short-term price travels. It is important criteria for selecting the
company to invest. It also provides the base for decision-making in investment. It is one
of the most frequently used yardstick to check and analyze underlying price progress. For
that matter a variety of tools are used.
The Technical analysis is helpful to general investor in many ways. It provides
important & vital information regarding the current price position of the company.
Technical analysis involves the use of various methods for charting, calculating
and interpreting graph & chart to assess the performances & status of the price. It is the
tool of financial analysis, which not only studies but also reflecting the numerical &
graphical relationship between the important financial factors.
The focus of technical analysis is mainly on the internal market data, i.e. prices &
volume data. It appeals mainly to short term traders. It is the oldest approach to equity
investment dating back to the late 19th century.

[14]
RESEARCH METHODOLOGY

Research is often described as an active, diligent and systematic process of

inquiry aimed at discovering, interpreting and revising facts. This intellectual
investigation produces a greater understanding of events, behavior or theories and makes
practical applications through laws and theories. The term research is also used to
describe a collection of information about a particular subject, and is usually associated
with science and scientific method.

BASIC RESEARCH:
Basic research is also called as fundamental or pure research. Its primary
objective is the advancement of knowledge and the theoretical understanding of the
relations among the variables. It is exploratory and often driven by researcher’s curiosity
or interest. It is conducted without any practical end in mind. Basic research often lays
down the foundation for further applied research.

APPLIED RESEARCH:
Applied research is done to solve specific, practical questions. Its primary
objective is not to gain knowledge for its own sake. It is usually descriptive in nature. It is
almost always done on the basis of basic research.

As far as equity research is concerned there are two types of research methods
that are followed:
Fundamental analysis
Technical analysis
Financial statement analysis is the biggest part of Fundamental analysis also
known as quantitative analysis, it involves looking at historical performance data to
estimate the future performance of stocks whereas Technical analysis does not care one
bit about the value of the company, it is only interested in the price movements of the
company s share in the market.

[15]
 This project deals with the fundamental analysis aspect of the equity research.
The researcher in this project has tried to look into the details of the financial statements
of the companies, the environment surrounding the telecom sector, the latest
developments in this regard, the management discussions on the part of every company
and the government policies concerned with the telecom sector.

DATA COLLECTION:
Primary data for a project is the first hand information regarding the project being
studied. In this regard the primary data for this project would be getting the
necessary information from the company management by an interview, telephonic
conversation or direct mail.
Secondary data for a project would be the collection of information that has a
bearing on the outcome of the project from secondary sources like news, press
releases, internet etc.

The data collected for this project was from a secondary source. The data was
complied with the help of sources like News articles, Internet, Capitaline software. In this
research, primary data could not be gathered as the company officials could not be
contacted for a one to one interview or a telephonic interview.

[16]
 CHAPTER V
THEORETICAL FRAMEWORK

BASIC MODEL OF A TELECOM COMPANY

A brief description of the four major segments that make up the telecom industry
is as follows:
I. Wireless/Mobile/Cellular services:
The cellular mobile service providers (CMSPs) make available mobile telephone
services where by a customer on possession of a handset and obtaining a connection by
way of SIM card (for GSM based technology phones) is able to connect to the network

[17]
 of the service provider. This is a wireless service that allows the customer to connect
with other wireless customers as also wire line customers. A CMSP derives its revenues
by way of tariff charges for outgoing calls made by subscribers on its network.
II. Fixed line services:
The fixed (wireline) services are dominantly provided for by the PSUs (BSNL
and MTNL) in India. A customer can obtain a connection where by a wireline
provides him with the last mile connectivity on the national telecom network.
Although this had been a dominant mode of telecommunication in the past, it is fast
being replaced with mobile telephony, which has the advantage of connectivity on the
move. The fundamental business of a fixed line operator is almost similar to that of a
CMSP, in terms of ARPU and Subscriber base.

III. Internet/Broadband:
The Internet services are provided either by telecom service providers or
independent Internet service providers (ISP) who deal exclusively in providing this
service. There are two forms of Internet that are currently popular - the dial-up
connections and the broadband connections. While both these forms are used for
transmitting and receiving data, a broadband connection (Internet access that allows
minimum download speed of 256 kilo bits per second from the point of presence of the
service provider) allows you to transmit data at faster rate.

IV. Enterprise services:

These services are used by large and medium corporates for data transfer between
their offices and/or their suppliers' offices, which may be spread in a city, or a country,
or even across continents. The need of users to have a seamless connectivity with their
associates is what drives this business for telecom companies. Considering that this
business takes care of data transfer needs of corporates, who are not as 'affordability'
conscious as the individuals, telecom companies generally earn higher margins on
Enterprise services than they earn on any of the other three business lines. IT and BPO
sectors, whose business is so data dependent, are the major users of Enterprise services.

[18]
TELECOM COMPANY - REVENUE ANALYSIS

Let us first take up the revenue analysis of the various segments of the telecom
service providers and then move on to their cost structure.
A Cellular Mobile service provider (CMSP) derives its revenues by way of tariff
charges for outgoing calls made by subscribers on its network. As such, revenue for a
CMSP is simply a multiple of average revenue per subscriber per month (ARPU) and
number of subscribers. Let us now understand what determines the ARPU’s and
subscriber base.

Average Revenue Per User (ARPU):

Average revenue per subscriber per month, or ARPU, is the amount of money that
a CMSP generates per subscriber per month. It can be obtained by dividing the total
wireless revenues by number of subscribers and then dividing the output by number of
months in a period (i.e., 3 months for a quarter and 12 months for a year's calculation of
ARPU). To even out the volatility in ARPUs, if any, it is better to arrive at the figure by
averaging the wireless revenues and subscriber base for the latest two years. However,
considering the rapid pace of subscriber addition for Indian CMSPs, ARPU calculated as
dividing the trailing 12-months wireless revenues by latest subscriber base is also an
appropriate figure. For instance, if a CMSP has earned a total of Rs 50,000 m as wireless
revenues in the past 4 quarters (or trailing 12 months) and its current subscriber base
stands at 20 m, its ARPU will be Rs 208 per month (Rs 50,000 m of wireless revenues
divided by 20 m subscribers divided by 12 months).
Another way to arrive at ARPU is to multiply the average number of minutes of
usage (MOU) per subscriber per month with the per minute tariff. Most of the Indian
CMSPs generally disclose their MOUs and per minute tariff and as such, these can be
used to determine the ARPU.
The ARPU in current industry scenario is decreasing day-by-day due to the
decline in the margins and also competition.

[19]
Subscribers:
Growth in a CMSP's subscriber base is dependent on several factors, the key
amongst them being:
Economic growth: With growth in the economy, and the consequent increase in
activity, it requires people to be in touch even when on the move. This brings out a
pressing need for owning mobile/cellular phones. Thus, with a growth in economic
activity there will be more and more people subscribing to telecom services, thus leading
to growth in subscriber base for CMSPs.
Rising income level: As the real income levels in a society rise, more and more
people are able to afford usage of cellular phones. Also, with rising incomes, as personal
consumption expenditure (as percentage of income) reduces, the consumer does not feel
the pinch of rising telephone bill, thus having the propensity to talk more, thus leading to
higher MOUs for telecom services providers.
Affordability: While there may be a need to be in constant touch as outlined by the
above two factors, it is the increased affordability that really increases the demand for
such services. The affordability is interplay of lower tariff charges and availability of
cheaper handsets. While lower handset costs make mobile more affordable at the entry
level thus allowing more people to be a part of the 'mobile community', lower tariffs
allow for an increased usage of telecom services, while not having such an overbearing
impact on telephone bills.
Apart from the usual - economic growth and rising income levels - the growth of
the Internet business is dependent upon:

PC penetration:
Internet penetration in India is currently at very low levels, as compared to its
developing peers. This is set to take off with the rise in PC penetration, which will again
be a consequence of affordability in terms of lower PC costs and reduced cost of data
transfer. The cost of data transfer depends on whether one is using a dial-up or a
broadband connection. The dial-up package entails a fixed charge for Internet access and
a variable charge for the telephone connection. On the other hand, tariffs for broadband

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are usually designed on the basis of quantum of data transmission. As there is
rationalisation of these tariffs going forward, Internet will become more affordable and
this will drive growth, as the recurring expenditure will reduce.

Parental encouragement:
An interesting change that has come is the way parents now look at computers.
The age of a typical computer user has dropped significantly as parents increasingly
realise the growing importance of computers in education in the years to come. So, unlike
most products where children are targeted to drive sales of consumer durables, in the case
of computers, it is the parents who are going all out to ensure that their child grows up to
be a computer literate. Thus, with computers coming into homes, it will not be long
before parents will wish their children to be wired to the web owing to the rich source of
information.

[21]
TELECOM COMPANY – COST ANALYSIS

After discussing the revenue aspects of telecom service providers, let us now
understand the major cost heads for these companies. These cost heads can be broken up
into regulated and non-regulated costs. Entry fee, access deficit charge and license fee are
regulated. On the other hand, sales, general and administrative (SG&A) and employee
expenses are non-regulated in nature.

Entry fee:
The companies providing national and international long distance (NLD and ILD)
services are required to pay a flat entry fee of Rs 25 m each (from earlier fees of Rs 1,000
m and Rs 250 m respectively). These fees are to be paid to the central government for
obtaining a license for providing these services.

Access deficit charge:

The government also collects from the cellular operators an access deficit charge.
The charge payable is 1.5% percent of non-rural annual gross revenue (AGR) of the
telecom service providers and the amount collected is used to subsidise the telecom
service provided by BSNL in rural areas.

License fees:
Telecom companies are required to pay an annual license fee of 6% of their AGR
to the Government of India. Licenses offered to the telecom players are for a limited
period of time and these are required to be renewed on expiry.

SG&A expenses:
Telecom companies incur expenditure in the form of advertisement costs for
enhancing their visibility and also to make their brand more appealing to the consumers.
Expenses are also incurred on customer acquisition and on maintenance of telecom
equipment and network.

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 Personnel expenditure:
These are costs incurred for maintaining the staff for executing the telecom
companies' marketing strategies, for general administrative purposes, for maintenance
and repair of telecom infrastructure, and customer relationship management in call
centers.

Apart from these operating costs, telecom companies also incur cost for servicing
debt and tax payments. Telecom is an operating leverage play (indicates that each new
subscriber will come at a higher profitability than the previously added subscriber), and,
as such, the benefits of faster subscriber addition are directly seen on companies'
improving operating profitability (as fixed costs are apportioned over a larger subscriber
base).

[23]
KEY FINANCIAL METRICS:
Before investing in a telecom stock (or for that matter any stock), an investor
must closely look at the key financial operating and profit ratios of the company. The
ratios are nothing but an arithmetical representation of a company's financial data that
help in gauging the health of the company. Key ratios to be look at for a telecom
company are as under. It is important to look at these ratios for 3-5 years in the past,
considering that most telecom companies in India do not have a history before that.
Sales growth
Average revenue per user
Subscriber growth
EBIDTA margins or Operating margins [(Sales - Operating
expenditure)/Sales)] Interest coverage [Profit before interest and tax/Interest]
Net profit margins [Net profits/Sales]
Earnings per share
EBIDTA per share
Debt to equity
Return on equity [PAT/Equity or Net worth]
Return on capital employed [PBIT/Capital employed, which is Equity + Debt]
Free cash flow [Profit after tax + Depreciation - Dividend & Dividend Tax - Capex -
Working capital changes]

Apart from these, investors should also compare other key ratios like receivable days,
working capital turnover and asset turnover, amongst others to arrive at a final view on
the company (not the stock!).
Importantly, these ratios must not be looked at in isolation and one should look at the
past data as well to arrive at a trend, which shall give a better perspective of the
company's performance over the years. Also, an investor must compare ratios of the
company with the industry leader and its peers to gauge a company's relative
performance.

[24]
 TELECOM SECTOR IN INDIAN ECONOMY

India, emerging as a major player:

In 1975, the Department of Telecom (DoT) was separated from P&T. DoT was
responsible for telecom services in entire country until 1985 when Mahanagar Telephone
Nigam Limited (MTNL) was carved out of DoT to run the telecom services of Delhi and
Mumbai. In 1990s the telecom sector was opened up by the Government for private
investment as a part of Liberalisation-Privatization-Globalization policy. Therefore, it
became necessary to separate the Government's policy wing from its operations wing.
The Government of India corporatised the operations wing of DoT on October 01, 2000
and named it as Bharat Sanchar Nigam Limited (BSNL). Many private operators, such as
Reliance India Mobile, Tata Telecom, Hutch, BPL, Bharti, Idea etc., successfully entered
the high potential Indian telecom market.

Growth of mobile technology:

[2]
India has become one of the fastest growing mobile markets in the world . The
mobile services were commercially launched in August 1995 in India. In the initial 5-6
years the average monthly subscribers additions were around 0.05 to 0.1 million only and
the total mobile subscribers base in December 2002 stood at 10.5 millions. However,
after the number of proactive initiatives taken by regulator and licensor, the monthly
mobile subscriber additions increased to around 2 million per month in the year 2003-04
and 2004-05.

Although mobile telephones followed the New Telecom Policy 1994, growth was
tardy in the early years because of the high price of hand sets as well as the high tariff
structure of mobile telephones. The New Telecom Policy in 1999, the industry heralded
several pro consumer initiatives. Mobile subscriber additions started picking up. The
number of mobile phones added throughout the country in 2003 was 16 million, followed
by 22 millions in 2004, 32 million in 2005 and 65 million in 2006 and over 100 million

[25]
by mid of 2007. The only countries with more mobile phones than India with 156.31
million mobile phones are China – 408 million and USA – 185 million.

India has opted for the use of both the GSM (global system for mobile
communications) and CDMA (code-division multiple access) technologies in the mobile
sector. In addition to landline and mobile phones, some of the companies also provide the
WLL service.

The mobile tariffs in India have also become lowest in the world. A new mobile
connection can be activated with a monthly commitment of US$ 5 only. In 2005 alone 32
million handsets were sold in India. The data reveals the real potential for growth of the
Indian mobile market.

PRESENT SCENARIO

Although India's tele-density has improved from under 4% in March 2001 to over
18% at the end of March 2007, we are way behind other developing nations. The total
annual telecom revenue is estimated to be over Rs 650 bn.

The cellular telephony segment has emerged as the fastest growing segment in the
Indian telecom industry. The mobile subscriber base (GSM and CDMA combined)
has grown from 1.9 m at the end of FY00 to 140 m at the end of July 2007. A slew of
tariff reduction in the past few years has helped the segment to gain in scale. The
cellular segment is playing an important role in the industry by making itself
available in the rural and semi urban areas where teledensity is the lowest.

As far as the Internet services are concerned, India currently has a subscriber base of
6.9 m users. Of this, around 19% is accounted for by broadband users (>=256 kbps).
The ARPU for this segment was Rs 210 at the end of FY06. PSU major, BSNL holds
the top spot with a market share of 42%, followed by MTNL with a share of 12%,.
This is followed closely by Sify, which ranks third with a market share of 11%.

[26]
 On the international basic telephony front, the end of VSNL's monopoly in 2002
brought three private players in the international basic telephony business and the
immediate effect was the fall in tariffs. In the first six months only, the tariffs fell by
50% and the trend is likely to continue. With the most favored customer status given
to VSNL by fixed line majors like BSNL and MTNL going away, the segment has
been witness to fierce competition.

KEY POINTS:

Supply:

Intense competition has resulted in prompt service to the subscribers. However,

smaller towns and villages continue to have waiting periods on account of non-
availability of adequate infrastructure.

Demand:

Given the low penetration levels in the country and continuously falling tariffs,
demand will continue to remain higher in the foreseeable future across all the segments.

Barriers To Entry:

o High capital investments

o Older and well-established players who have a nation wide network
o License fee
o Continuously evolving technology, and
o Falling tariffs.

[27]
Bargaining Power Of Suppliers:

Improved competitive scenario and commoditization of telecom services has led

to reduced bargaining power for services providers.

Bargaining Power Of Customers:

A wide variety of choices available to customers both in fixed as well as mobile

telephony has resulted in increased bargaining power for the customers.

Competition:

The entry of fourth cellular player and commencement of WLL services has
resulted in intense competition in the bigger cities. Reducing tariffs will hurt the new
entrants, as they will be unable to recover their high capital investments.

CHART SHOWING TOTAL TELECOM SUBSCRIBER BASE:

Total Telecom Subscriber Base

250

N 200
o.
of
S 150
ub
sc
ri 100
be
rs
(M 50
n)

0
1999 2000 2001 2002 2003 2004 2005 2006 2007
year Subscriber Base

(Source: TRAI)

[28]
 The Indian telecom industry is witnessing rapid rise in subscriber base, thanks to
multiple growth drivers like:

improving demographics
lower handset prices
expansion by wireless operators
infrastructure sharing
lower regulatory levies.

SECTOR CONTRIBUTION TO SENSEX GROWTH:

SECTOR CONTRIBUTION TO SENSEX GROWTH

25.00%

20.00% 19.40%

C
O 15.00%
N
T
RI
B 10.00%
U
TI
4.80%
O 5.00%
2.80% 2.70% 2.40% 2.10%
1.20% 0.90% 0.90% 0.80% 0.70% 0.60% 0.40%
0.00%

P
CONTRIBUTION TO SENSEX
SECTOR

(Source: Merill Lynch Research)

The Sensex has grown immensely since 2005 and is still increasing. Currently it
has reached 15,000. This growth would not have been possible without the help and
support of the various sectors in the industry. One of the sectors which has a major
contribution in this growth is the Telecom Sector. In the last year, Sensex grew by 19.4%
whereas the contribution of Telecom sector was seen to be 4.8%.

[29]
 TRENDS IN INDIAN CELLULAR SERVICES

Cellular Subscriber Base

Operator May'2007 May'2006 Var. (%)

BSNL (21) 27994410 18000908 56%

Bharti Airtel (23)* 40743725 21860212 86%

Idea (11) 15266618 8062961 89%

Hutchison Essar (18)$ 18083466 11040797 64%

Spice Communication (2) 3007118 2027551 48%

MTNL 2547895 2097478 21%

BPL Mobile (1) 2091353 1792966 17%

Dishnet Wireless (7) 1874481 424475 342%

Reliance Telecom (23)# 4014404 2049254 96%

Total Cellular Subscriber
base 130607955 75290092 73%

Source: COAI & AUSPI

Figure in the brackets denotes the current operating circles
* Include the WLL subscribers
# Include the GSM Subscribers in 7 telecom circles, the subscribers of Reliable Internet
in Kolkata circle and the WLL subscribers
$ Includes the subscribers of BPL Cellular but excludes subscribers of BPL Mobile
Mumbai

[30]
 Cellular Subscriber base
450
400

Subs350
cribe300
r
Base250
(
200
i
n150 May'2006
May'2007
100
50
0

Ope rator
( Source: Cellular Operators Association of India)

Indian Telecom subscriber base has increased rapidly by 47% to touch

218.85 million in May 2007, from 148.39 million in May 2006. The surge in
subscriber based was powered by impressive 73% spurt in GSM cellular subscriber
base to 130.61 million in May 2007 from 75.29 million in May 2007. Nevertheless,
the country has been witnessing sustained fall in Average Revenue Per Unit (ARPU)
from Rs 375 per unit in September 2005 to Rs 335 per unit in September 2006.
Nevertheless, thanks to strong growth in subscriber base, increasing non voice
revenues and lowering fixed cost per unit, the Indian telecom service sector is set to
report buoyant growth in revenues and profitability in the short to medium term.

[31]
MARKET-SHARE OF THE MAJOR PLAYERS IN THE TELECOM SECTOR:

Players Market-
share (%)
Bharti Airtel 22
Reliance Communication 20.3
BSNL 15.97
Hutch 10.4
Idea 8.56
Tata teleservices 9.7
Others 13.07
Total 100

From the chart given above, it is observed that Bharti Airtel leads the race with a
major market share i.e. 22%. The reason behind this is the widespread network, huge
subscriber base, plethora of services, pace with the new technology, etc. whereas reliance
communication being a comparatively late entrant has attained a significant market share.
As competition among the existing players is huge, it makes the role of new players
unnoticeable. The major players in the telecom industry cover almost 86.93% of the
market share.

[32]
 REGULATORY CHANGES

* Access Deficit Charge (ADC) regime:

A revised ADC regime has been implemented w.e.f. April 01, 2007 wherein
revenue-share ADC reduced to 0.75% of AGR and per-minute ADC on outgoing ILD
calls has been abolished. ADC on incoming calls reduced to Rs.1.00 per minute. The
revised estimate for ADC for 2007-08 is Rs. 20.5 bn

* Universal Service Obligation (USO) Tender:

The DoT has finally extended the USO subsidy to wireless networks with the
successful conclusion of bidding under the USO scheme. 7,954 towers are entitled to the
subsidy - in 19 service areas (except Metros).

* National roaming tariff:

Domestic roaming tariffs have been revised with effect from February 15, 2007.
Under the new structure, there is no rental/surcharge for national roaming and lower
ceiling for the 'per-minute charges' for roaming calls. Incoming SMS while roaming is
free though outgoing SMS rates continue under forbearance.

* Subscriber re-verification:
In November 2006, DoT directed all service providers to complete the re-
verification of their entire prepaid subscriber base by March 31, 2007, in terms of
collation of their identity/address proofs and updating of their database with subscriber
details. As DoT had imposed a penalty of Rs.1,000 per unverified subscriber after the
expiry of the deadline, most operators had to disconnect some subscribers whose
documentary proofs could not be collected until March 31, 2007.

* Increase in Foreign Direct Investment (FDI) cap from 49% to 74%:

On November 03, 2005, Government of India announced-enhancement of FDI
ceiling from 49% to 740% in the telecom sector, subject to certain preconditions.
In view of the complications involved in implementation of the preconditions, DoT

[33]
had granted several extensions to the telecom licensees to ensure compliance. On
April 19, 2007 DoT finally notified the FDI limit with a deadline of July 18, 2007 to
report compliance.

* Terms and Conditions of resale in IPLC segment:

DoT has accepted the recommendations of TRAI on the terms and conditions on
which reselling of international bandwidth is to be permitted in India. The broad
conditions include entry fee at Rs.10 mn. License Fee at 6% of AGR, term of license
being 10 years and identical terms for FDI ceiling as applicable to ILDOs.

* Port Charges Regulation:

In February 2007, TRAI amended the existing Port Charges Regulation 2001, by
reducing the port charges payable by private operators to BSNL/MTNL w.e.f. April 01,
2007. Another significant change is that the slab rate for ports shall now be determined
on the basis of the demand made and not on the basis of ports finally allotted by BSNL.

* Regulation on QoS for broadband services:

In October 2006, TRAI issued a regulation on QoS for broadband services
offered by all access and internet service providers pursuant to a public consultation
conducted in June 2006. This regulation was implemented on January 01, 2007.

* TRAI decision on Interconnect Usage Charge for Short Message Service

(SMS):
On August 21, 2006, TRAI published its decision to refrain from specifying any
termination charge for SMS, thus leaving it under the Forbearance' category. At the same
time TRAI has expressed its concern that the tariff for premium rate SMS Is high and
apparently unrelated to cost, hinting to operators to voluntarily reduce these tariffs
* TRAI decision on roaming revenue sharing:
After a public consultation, TRAI published its decision on September 11, 2006
disallowing any revenue sharing on roaming calls. TRAI reiterated that the termination
charges prescribed by them are cost based and since no additional cost is incurred in

[34]
terminating roaming traffic, there is no justification for higher payout to the terminating
network.

* Regulation for interconnection of Intelligent Networks (IN) of all service

providers:
On November 27, 2006, TRAI issued a regulation mandating all service
providers to provide interconnection to all eligible service providers so that subscribers of
all access providers can access the IN services offered by other service providers.
Service providers are required to enter into reciprocal and non-discriminatory agreements
for technical and commercial aspects of such connectivity within three months.

* Changes in the NLD and ILD licenses:

There have been significant changes in the NLD and ILD licenses recently.
The entry fees for these licences have been substantially reduced to Rs.25 million each
for ILD and NLD licences, which has already led to a number of new players entering the
field.

[35]
 RECENT DEVELOPMENTS

The Bharti group's application for direct-to-home (DTH) broadcasting is all set to
be cleared and soon the group may be issued a letter of intent (LoI) for the DTH
service. Recently, clarifications were sought from Bharti on its foreign direct
investment (FDI) component and the equity structure, in connection with its DTH
proposal.
Anil Ambani-promoted Reliance Blue Magic is expected to launch its DTH
service soon. Sun TV is also in the queue for DTH. As against the multi-operator DTH
scenario in India, in most countries, DTH attracts only one or two players.

Idea Cellular and Nokia Siemens Networks announced signing of a USD 500
million GSM network expansion contract. Under the contract, Nokia Siemens Network
will expand Idea Cellular’s GSM/GPRS/EDGE networks to cover population centres
across six more circles. The 2-year contract includes supply and services of GSM
equipment, Intelligent Network, Value Added Services and Circuit and Packet core
equipment. Nokia Siemens Networks will deploy the latest state of art equipment like
flexi BTS, mini-ultra base stations, Release 4 architecture, media gateways and MSS
servers.

Spice Communications promoted by Dilip Modi, part of the B K Modi group and
providing cellular services in the states of Punjab and Karnataka, has lined up a public
issue to raise Rs 464 crore at lower band (Rs 41) and Rs 520 crore at upper band (Rs
46). The net proceeds from the issue are intended to be used for part repayment of long-
term debt, for payment of NLD and ILD license fee and related capital expenditures to
set up base infrastructure for NLD/ILD.

The Bangalore-based value-added services (VAS) provider OnMobile is planning

to tap the capital market with an initial public offering (IPO) of Rs 500-600 crore. The
company’s maiden offer is expected to open during the current financial year and it
intends to invest the proceeds for its foray into the Wireless Application Protocol
(WAP) and General Packet Radio Service (GPRS) segments. The company was
incubated by Infosys Technologies in 2000, and at present the IT major holds a 14 per
cent stake in it.

[36]
 PROSPECTS OF TELECOM SECTOR

As far as the fixed line business goes, the low penetration levels in the country and the
increasing demand for data based services such as the Internet will act as major
catalysts in the growth of this segment, which has touched 50 m subscribers by the end
of FY06 (including WLL subscribers). The huge market share of public sector
behemoths, MTNL and BSNL (together they account for 82% of the total fixed line
connections) is likely to get reduced further as the penetration by private players
spreads. In spite of this the PSUs will continue to retain their dominant position this is
on account of high capital investments required in setting up a nation wide network. As
a result, the private sector players will have to rely on key business centers and pockets
of high urbanization for their growth.
Increasing choice and one of the lowest tariffs in the world have made the cellular
services an attractive proposition for the average consumer. The segment has grown at
over 73% YoY in FY06. It is being estimated that during the tenth five-year plan,
around 31.6 m subscribers would jump onto the cellular bandwagon all over India and
this would entail an investment to the tune of Rs 252.4 bn. Policy measures like
lowering of taxes on the cellular industry and benefits of enhanced FDI limits shall
further the prospects of the cellular industry.
The International Long Distance (ILD) telephony business is expected to witness
increased competition with the entry of private players. Already, private players like
Bharti, Reliance and Data Access have started providing ILD services and this has
pulled the tariffs significantly down. Although increased competition will result in
depressed revenues in the near term, low tariffs would ultimately result in increased
volumes and higher usage.
Taking the competition further in the ILD space where we saw huge tariffs fall last year
due to the entry of private players, TRAI has written to the Ministry of
Telecommunication and Information Technology to permit resale of IPLC. If the move
goes through, apart from increasing competition in this space, it is expected that the
bandwidth prices will come down by a further 20-25%. This move is also believed to
be a step forward in opening up the ILD sector

[37]
 SELECTION OF THE COMPANY

After understanding the dynamics of the telecom sector and the various issues
revolving around it, three companies were chosen from a group of players in the telecom
sector. Such companies have been chosen which showed consistent performance in the
past and were also fundamentally sound.
Some of the major players in Telecom sector are as follows:
Bharti Airtel
BPL Mobile Comm.
Escorts telecomm.
Hutchison Essar
Idea Cellular
MTNL
Reliance Communication
Spice Telecommunication
Tata Teleservices
VSNL

Time (2 months duration) being a major constraint, two companies were chosen
from the whole telecom sector. Companies chosen for further analysis are:
Bharti Airtel
VSNL

[38]
 CHAPTER VI

DATA ANALYSIS AND INTERPRETATION

BHARTI AIRTEL LIMITED

Bharti Airtel Ltd (Formerly known as Tele-Ventures (BTVL)) was incorporated

on 7th July, 1995, for promoting investments in diversified telecom service projects. The
company was formed as a 80:20 joint venture between the Bharti Group through its
subsidiary Bharti Telecom and STET International Netherlands NV, a company
promoted by Telecom Italia, Italy.

Bharti Airtel has bagged the 'Best Emerging Market Carrier' award at the Telecom
Asia Awards 2007. The GSM service provider was adjudged best from among a list of 30
telecom companies in the Asia Pacific region. Earlier, Bharti Airtel had won the 'Best
Indian Carrier' award for two consecutive years, in 2005 and 2006. The company
introduced new products like BlackBerry wireless solution, Airtel Live and the company
was the first wireless services operator to introduce Ring back tones(Hello Tunes).

Also the company entered into the partnerships with the leading companies like
Nokia, Siemens, Ericsson and IBM for its network planning, supply & management and
for its IT requirements respectively. During 2005-2006, Vodafone acquired 10%
economic interest in the company by way of subscription of convertible debentures in
Bharti Enterprises Ltd, representing an indirect economic interest in Bharti Airtel Ltd and
acquisition of direct interest in the company from Warburg Pincus LLC. The company
also signed a managed capacity expansion contract with Ericsson to provide managed
services and expand its GSM/GPRS network into rural India in 15 circles.

BUSINESS OVERVIEW:

Bharti is one of India's leading private sector service-provider of telecom services

with more than 20 million customers in India and is the first to have an all India presence.
The company is structured into three main units, Mobile Services which offers GSM

[39]
Mobiles Servies and Infotel Services which provides broadband & Telephone, long
distance and enterprise services which offers carriers and corporates. All the services of
company is been provided under brand name AIRTEL.

The company was first GSM Operator to have more than ten million customers
and also the first telecom company to cover all the 23 telecom circles of India. The
Company has a presence in 4,676 census towns and in 207,327 non-census towns and
villages, covering an addressable population of 59% of the total population. With this
coverage facility the company became the first operator to have an All-India footprint.

BUSINESS RISK:
The business is subject to extensive regulation by the Government; which could
have an adverse effect on the business. Technical failures and natural disasters could
damage the telecommunication networks. Changes in available technology could increase
competition and the capital costs.

MARKET RISK:
There is very little market risk in this segment, considering the ever increasing
demand of the telecom services. There have been substitutes for telecom services like the
Postman, which has been available for years but the demand for it is getting decreased
whereas the demand for telecom services has never been affected due to that. There is a
permanent market for the product, and it does not face any serious market risk.

VOLUME BASED BUSINESS:

The profits of the company are totally based on the volume of their business. The
more efficiently they provide the service, their turnover will increase accordingly and
thereby adding additional profits to the company’s account. With the expansion
undertaken by the company in recent times, it is slated to make the most of this
situation.

[40]
FUTURE FORECAST:

In long term the demand for telecom services is expected to rise further. The
reasons being the low tariffs, technology, focus on rural areas, ever increasing population,
etc. Telephony penetration in urban areas is quite high as compared to rural penetration
and as of now this is been taken into consideration by various players. Technology is also
expected to improve a lot in the years to come, which would help not only in cost
reduction but also in providing services efficiently.

MANAGEMENT OVERVIEW:
It is evident that the management of the company is very experienced and the
company looks to be in safe and able hands. The management structure of Bharti Airtel is
as follows:

[41]
PRICE INFORMATION:

Price Information
BSE(13-07-07) Rs. 880.75

NSE(13-07-07) Rs. 881.9

P/E x 37.5

EPS Rs. 21.27

Market Cap. Rs. In Cr 166930.2

52W High at BSE Rs. 960

52W Low at BSE Rs. 410

COMPARATIVE CHART OF BHARTI AIRTEL WITH SENSEX:

Comparative Chart of Bharti Airtel with

900 SENSEX 18000

800 16000

700 14000
M
ar 600 12000
ke
t 500 10000 Se
pr ns
ic 400 8000 ex
e
of 300 6000
B
ha 200 4000

100 2000

0 0
2003 2004 2005 2006 2007
Avg. Price
year
BSE_SENSEX

[42]
 From the chart given above, it is observed that there has been an upside trend in
the SENSEX as well as the Share price of Bharti Airtel. But the rise in the value of Bharti
Airtel is more than that of SENSEX.

ONE YEAR PRICE MOVEMENT OF BHARTI AIRTEL:

One year Price movement of Bharti Airtel

1000

900

800

700

600
pr
ic
e 500
(R
s.) 400
300

200

100

0
7- 7- 7- 7- 7- 7- 7- 7- 7- 7- 7- 7- 7- 7- 7- 7- 7-
Ap M Ju Ju Au Se O N De Ja Fe M Ap M Ju Ju Au
r ay n l g p ct ov c n b ar r ay n l g

The Chart given above shows a consistent rise in the price of Bharti Airtel in the
previous one year. Some minor fluctuations were observed during the year but it did not
affect the price movement to a remarkable extent. The stock observed an uptrend during
the year and is expected to rise further.

[43]
 PROJECTED PROFIT AND LOSS ACCOUNT

Projected Operating Income Statement (Rs. In Crs.)

Year Mar 06(12) Mar 07(12) Mar 08(12)e
INCOME :
Net Sales 11,231.47 17,851.60 26871.9
Other Income 178.56 80.46 268.72
Total Income 11,311.93 18,030.16 27140.62
EXPENDITURE :
Raw Materials 54.42 53.95 81.21059
Power & Fuel Cost 26.98 39.72 59.79026
Employee Cost 754.99 1,102.03 1658.879
Other Manufacturing Expenses 4,404.78 6,709.58 10099.89
Selling and Administration Expenses 1,330.07 1,973.64 2970.908
Miscellaneous Expenses 671.92 801.13 1205.936
Less: Pre-operative Expenses Capitalised 0.85 1.8 2.709529
Total Expenditure 7,242.31 10,678.25 16073.9
Operating Profit 4,069.62 7,351.91 11066.72
Interest 236.81 282.07 303.58
Gross Profit 3,832.81 7,069.84 10763.14
Depreciation 1,547.02 2,468.47 4532.05
Profit Before Tax 2,285.79 4,601.37 6231.09
Tax 273.71 568.14 769.365

Reported Net Profit 2,012.08 4,033.23 5461.725

No. of Shares 1,894,613,936 1897148464 1897148464

Earnings Per Share 10.62 21.27 28.79

Market price of share 430.25 798.57 1079.63

P/E Ratio 40.5 37.5 37.5

[44]
Net Revenues:
The net revenues of the company are growing at an average rate of 50.52% per
year. As the industry is under the growth stage, this may help in boosting the revenues
further. Some of the reasons behind this are declining prices due to competition,
increasing rural penetration, technology, etc.

Turnover Chart

30000
26871.9
25000

Tu 20000 17851.6
rn
ove 15000
r 11231.47 T urnover
(Rs. 10000 7903.03
5000

0
2004-05 2005-06 2006-07 2007-08
Year

Expenses:
The expenses of the company are growing but the company is able to keep them
within permissible limits, which would enable the company to earn higher operating
profit.

Operating Profit:
The operating profit of the company as a percentage of net revenues is constantly
above 30%, which indicates that even though the company is operating on a larger scale
the operations of the company are being carried out with utmost efficiency. The
profitability of the company has not taken a beating and real income of the company
continues to look good.

[45]
Profit after Tax:
The company is being able to manage its financing very well and on that account
has managed to retain more interest of its shareholders. An increase in the interest
payments by the company is reflected in the profit after tax of the company. Inspite of
this, the PAT shows a consistent growth in the future years.

PAT Growth

6000

5000

4000
P
A
T 3000
(Rs. PAT
In 2000

1000

0
2004-05 2005-06 2006-07 2007-08
Year

Operating profit before tax:

The operating profit before tax of the company is increasing consistently every
year. This is a very good sign for the company that the operating profit of the company is
ever increasing. It shows that the performance of the company in terms of their
operations is good. The company is not only increasing its business in terms of volume
but it is also realizing more profits or in other words its margins have not dropped.

[46]
 PROJECETED BALANCE SHEET

Projected Balance Sheet (Rs. In Crs.)

Year Mar 06 Mar 07 Mar 08e
SOURCES OF FUNDS :
Share Capital 1,893.88 1,895.93 1,895.93
Reserves 5,456.38 9,562.45 12,949.30
Total Shareholders Funds 7,350.26 11,458.38 14,845.23

Total Debt 4,772.84 5,285.89 7,255.61

Total Liabilities 12,232.20 16,939.09 22,100.84

APPLICATION OF FUNDS :
Net Block 13,818.60 20,504.38 29,013.70
Lease Adjustment 0 0 0
Capital Work in Progress 2,436.48 2,470.88 2,505.47
Investments 247.95 147.14 97.11
Current Assets, Loans & Advances 3,346.35 5,433.72 8,310.00
Total Current Liabilities 7,430.28 11,380.97 17,825.44

Net Current Assets -4,083.93 -5,947.25 -9,515.44

Total Assets 12,232.20 16,939.09 22,100.84

The capital structure of the firm is stable i.e. there is proportionate rise in the
shareholders’ funds and the debts of the company. As the current liabilities in the form of
creditors are more, it signifies the creditworthiness of the company. Also, there is a
consistent increase in the fixed assets of the company.

[47]
 PROJECTED CASH FLOW SUMMARY

Projected Cash Flow Summary (Rs. In. Crs)

Year Mar-06 Mar-07 Mar-08

Cash and Cash Equivalents at Beginning of
the year 384.14 307.43 571.61
Net Cash from Operating Activities 4631.33 8107.95 13343.34
Net Cash Used in Investing Activities -5084.39 -7975.05 -14954.8
Net Cash Used in Financing Activities 376.35 340.13 2420492
Net Inc/(Dec) in Cash and Cash Equivalent -76.71 473.03 -1530.31
Cash and Cash Equivalents at End of the year 307.43 780.46 1302.97

Total cash from operations:

The total cash flow from operations for the company is also increasing. The rise
in cash flow from operations increases considerably in the years 2007 and 2008. This is a
good sign for the company. The rise in the cash flow from the operations signifies that
the company is able to extract maximum value from its available resources. The company
has managed to maintain its margins and thus not allowed its operating profit to dip.
On looking at the operating profit before tax and the total cash flow from
operations it is clear that the cash position of the company is secure. The company looks
to be in a cash rich position. The cash flow statement of the company indicates that the
company is managing its cash position very well and the inflows of cash are very well
managed by the company and it is also evident that the company is allocating adequate
cash to increase their fixed assets.

[48]
Key Financial Ratios:

Key Ratios Formulae Mar-06 Mar-07 Mar-08e

EBITDA Ratio EBITDA / Income 0.36 0.41 0.41
Net Profit Ratio PAT/ Income 0.18 0.23 0.2
Debt-Equity Ratio Debt / Equity 0.83 0.54 0.49
Current Assets /
Current Ratio Current Liabilities 0.46 0.47 0.47
Interest Cover EBIT / Interest 10.7 17.31 21.53
Return on Equity (%) PAT / Equity 27.37 35.2 36.8
Return on Capital EBIT / Capital
Employed (%) Employed 20.26 28.83 29.57

EBITDA or Operating Profit Margin:

The operating profit margin in true sense is the indicator of the company’s actual
operating efficiency. The company has increased its sales considerably but if there is no
rise in the operating profit margin then there is a lack of efficiency on the part of the
company. In this case the company’s operating profit margin is consistently over 30%.
This means that even though the company is undertaking huge expansions it has
maintained its operating profit margin.

Net Profit Margin Ratio:

The net profit margin ratio measures the overall efficiency of production,
administration, selling, financing, pricing, and tax management. After looking at the
company’s net profit margin, one can say that it is consistent, which is considered to be
favorable.

[49]
Debt-Equity Ratio:
The debt-equity ratio shows the relative contributions of creditors and owners.
The debt-equity ratio of the company is declining, and is expected to still lower down.
The lower the debt-equity ratio, the higher the degree of protection enjoyed by the
creditors.

Current Ratio:
The current ratio measures the ability of the firm to meet its current liabilities-
current assets get converted into cash during the operating cycle of the firm, and provide
the funds needed to pay current liabilities. Even though the current ratio of the firm is
consistent but it is much lower than the general norm i.e. 1.33 in India.

Interest Coverage Ratio:

Interest Coverage Ratio, a major determinant of bond rating is widely used by
lenders to assess a firm’s debt capacity. High interest coverage ratio signifies the ability
of the firm to meet its interest burden even if the PBIT suffer a considerable decline.
Interest Coverage ratio in case of Bharti Airtel is quite favorable as it is increasing
consistently.

Return on Equity:
This ratio measures the profitability of equity funds invested in the firm. Bharti
Airtel has a favourable Return on Equity as it is increasing every year i.e. from 27.37 it
has reached 36.8 in 2years duration. This ratio is of great interest to the equity
shareholders.

Return on Capital Employed:

The ROCE measures the profitability of the capital employed i.e. shareholder’s
funds plus the total debt (both short term as well as long term). Bharti Airtel has attained
a sharp rise in ROCE in 2007 but is expected to give comparatively low returns in 2008
due to comparatively low PBIT and increasing interest.

[50]
Earnings per share:
This ratio indicates the actual profit left for the owners of the company i.e.
shareholders. A growing EPS shows that the company is contributing to the shareholders
value. A growing EPS leads to increase in the value (price) of the company in the market.
Thus, it can be said that Bharti is contributing consistently to the shareholders value.

P/E Ratio:
It is the parameter to judge the proper valuation of the company in the market.
Higher P/E shows that the market is valuing the company at a higher multiple. This is the
widely used parameter by the market for judging the over or under valuation of the
company for investment purpose. A lower P/E is considered one of the most important
criteria for the selection of the company by the investors. The P/E ratio of Bharti is
decreasing from 40.5 to 37.5, which is a good sign from the point of view of the
shareholders.

SHAREHOLDING PATTERN:

(AS ON Jun 2007) No. of Shares [%]

Foreign 598,742,301.00 31.56
Institutions 78,799,714.00 4.15
Govt Holding 0 0
Non Promoter Corp. Hold. 39,163,397.00 2.06
Promoters 1,155,645,678.00 60.92
Public & Others 24,797,374.00 1.31
Totals 1,897,148,464.00 100

[51]
FUTURE PROSPECTS:

The company has already completed the testing of IPTV in NCR region and will
launch in select part in NCR region in November-December this year and in the
next calendar year in other parts of the country.

The company plans a $8bn spread by 2010 and 25% of the market share i.e.
approximately 125 million subscriber base.

Bharti Airtel signed a memorandum of Understanding with Nokia Siemens

Networks for USD 900 Million in July 2007. This is an expansion contract across
Airtel’s mobile, fixed Network platforms. Nokia Siemens Networks will expand
Airtel’s GSM network in eight circles; its NLD and ILD network with 1.8 million
Next Generation Network (NGN) ports and its International Calling Card prepaid
service capacity by 4.5 million new users.

The company is making major investments in international infrastructure and

going to buy full ownership of the i2i cable.

Company expects to achieve 72-74% population coverage till March 2008 from
current level of 62%.

The company has filed the scheme of de-merger for approval of the Honourable
High Court of New Delhi of its passive telecom (mobile) infrastructure to Bharti
Infratel, its wholly owned subsidiary. The company expects the demerger to take
place in October 2007.

Currently the company has 40000 telecom towers and expected to reach about
65000 towers by March 2008. After demerger with 65000 towers, Bharti Infratel
would be the biggest tower company in the world.

[52]
 VIDESH NIGAM SANCHAR LIMITED.

Videsh Sanchar Nigam Ltd (VSNL) was incorporated in 1st April 1986 as a GOI
company, to take over the activities of the erstwhile Overseas Communication Services
(OCS) and with a view to provide International Telecommunication Services to and from
India. The company took control and management of all international telecommunication
services from OCS, a Department of the Ministry of Communications. VSNL is the
leading Indian provider of International Long-distance (ILD) and Internet related
services. VSNL is the first company to introduce retail internet services in India in 1995.

Initially, GOI was holding 52.97% stake in VSNL. In February 2002, GOI
divested 25% stake to the Tata Group as a strategic partner along with the right to
manage the company. M/s.Panatone Finvest Limited, a company which is owned by
various Tata Group companies picked the stake at a price of Rs.202 per share. Following
GOI's subsequent open offer of further 20% equity of VSNL's, the tata group has become
the biggest shareholder with a holding of over 45%, while the GOI stake in VSNL came
down to 26.12%. The company offers its products and services under the brand name
Tata Indicom in India.

BUSINESS OVERVIEW:
The company operates under three business segments in India- Wholesale Voice,
Enterprise and Carrier Data and other services. The company provides value added
telecommunication services such as international telephony, leased channels, dial-up
internet, broadband, net telephony, national long distance, enterprise data, frame relay
and Internet Services. Apart from these services the company is also providing TV
uplinking services, transponder leasing services etc. VSNL's main gateway centres are
located at Mumbai, New-Delhi, Kolkata and Chennai. The international
telecommunication circuits are derived via Intelsat and Inmarsat satellites and wide band
submarine cable systems e.g. FLAG, SEA-ME-WE-2 and SEA-ME-WE-3.
VSNL is the first Indian service provider to enter in to a Wireless Broadband
roaming alliance with an international operator Star Hub, which is Singapore's second

[53]
largest info-communication company. The company one of the leading player in the
growth of Wi-Fi hotspot industry in India has the largest public hotspot network in india
with over 250 hotspots.

BUSINESS RISK:
The business is subject to extensive regulation by the Government; which could
have an adverse effect on the business. Technical failures and natural disasters could
damage the telecommunication networks. Changes in available technology could increase
competition and the capital costs.

MARKET RISK:
There is very little market risk in this segment, considering the ever increasing
demand of the telecom services. There have been substitutes for telecom services like the
Postman, which has been available for years but the demand for it is getting decreased
whereas the demand for telecom services has never been affected due to that. There is a
permanent market for the product, and it does not face any serious market risk.

VOLUME BASED BUSINESS:

The profits of the company are totally based on the volume of their business. The
more efficiently they provide the service, their turnover will increase accordingly and
thereby adding additional profits to the company’s account. With the expansion
undertaken by the company in recent times, it is slated to make the most of this situation.

FUTURE FORECAST:

In long term the demand for telecom services is expected to rise further. The
reasons being the low tariffs, technology, focus on rural areas, ever increasing population,
etc. Telephony penetration in urban areas is quite high as compared to rural penetration
and as of now this is been taken into consideration by various players. Technology is also
expected to improve a lot in the years to come, which would help not only in cost
reduction but also in providing services efficiently.

[54]
PRICE INFORMATION:

Price Information
BSE (27-07-07) Rs. 451.85

NSE (27-07-07) Rs. 450.9

P/E x 27.96

EPS Rs. 15.68

Market Cap. Rs. In Cr 11448.45

52W High at BSE Rs. 515

52W Low at BSE Rs. 342

COMPARATIVE CHART OF VSNL WITH SENSEX:

Comparative chart of VSNL with

500
SENSEX 18000
450 16000
400 14000
350
12000
Pri 300
ce 10000
(R 250 8000
s.) 200
6000
150
100 4000

50 2000
0 0

2003 2004 2005 2006 2007

Avg. Price
Year
BSE_SENSEX

[55]
 From the chart given above, it is observed that there has been an upside trend in
the SENSEX as well as the Share price of VSNL. But the rise in the value of VSNL is
more than that of SENSEX.

One Year Price movement of VSNL:

One Year Price movement of VSNL

600

500

400
Pr
ice
300
(R
s.)
200

100

0
7-Apr
7-May
closing price

The chart given above shows some fluctuations which can prove unfavourable
from investorss’ piont of views. There is not much movement in the stock price and even
if its there keeps on fluctuating. Also, it can be said that the stock volumes traded on the
exchange is quite less.

[56]
 PROJECTED PROFIT AND LOSS ACCOUNT
Projected Profit & Loss A/C (Rs. In Crs.)

Year Mar 06(12) Mar 07(12) Mar 08(12)

INCOME :
Net Sales 3,780.95 4,041.83 4377.3
Other Income 245.75 212.18 132.69

Total Income 4,026.70 4,254.01 4509.99

EXPENDITURE :
Raw Materials 0 0 0
Power & Fuel Cost 36.92 43.09 46.66
Employee Cost 207.99 266.26 288.36
Other Manufacturing Expenses 2,285.05 2,378.29 2473.42
Selling and Administration Expenses 254.54 221.4 244.95
Miscellaneous Expenses 194.3 234.1 253.53
Less: Pre-operative Expenses
Capitalised 0 0 0

Total Expenditure 2,978.80 3,143.14 3306.92

Operating Profit 1,047.90 1,110.87 1203.07
Interest 1.8 6.91 7.48
Gross Profit 1,046.10 1,103.96 1195.59
Depreciation 359.38 391.33 434.38

Profit Before Tax 686.72 712.63 761.21

Tax 207.18 244.07 260.71

Reported Net Profit 479.54 468.56 500.5

No. of Shares 296195182 285000000 285000000

Earnings Per Share 16.19 15.68 17.56

Market price of share 405.91 438.45 490.98

P/E Ratio 25.07 27.96 27.96

[57]
Net Revenues:
The net revenues of the company are growing at an average rate of 8.5% per year.
The revenues of the company underwent a sudden fall in 2004 due to the entry of various
new players in the industry. But after that the company is trying to regain its earlier
position by growing at a medium pace but with consistency. As the industry is under the
growth stage, this may help in boosting the revenues further. Some of the reasons behind
this are declining prices due to competition, increasing rural penetration, technology, etc.

Turnover
Growth

5000
4377.3
4500 4041.83
4000 3780.95
3500 3164.2 3303.04
Tu 3000
rn
ov 2500 S ales
er 2000
1500
1000
500
0
2003-04 2004-05 2005-06 2006-07 2007-08
Year

Expenses:
The expenses of the company are growing but the company is able to keep them
within permissible limits, except the selling expenses which are expected to increase
comparatively more due to need arisen for more marketing. Ultimately, this would enable
the company to earn not only higher profit but also increase the subscriber base.

[58]
Operating Profit:
The operating profit of the company as a percentage of net revenues is constantly
above 20%, which indicates that even though the company is operating on a larger scale
the operations of the company are being carried out with utmost efficiency.

Profit after Tax:

The growth in PAT is not consistent, it is quite fluctuating as is observed over a
period of time. Also the amount of interest is much more high as compared to the interest
that was paid some few years back.

PAT Growth

800
700

P 600
A 500
T
(R 400
s. 300 PAT
Cr
s.) 200
100
0
2002-03 2003-04 2004-05 2005-06 2006-07 2007-08
Year

Operating profit before tax:

The operating profit before tax of the company is increasing consistently every
year. This is a positive sign for the company that the operating profit of the company is
ever increasing though at a low pace as compared to the other players in the industry.
It
shows that the performance of the company in terms of their operations is satisfactory.
[59]
 PROJECTED BALANCE SHEET

Projected Balance Sheet (Rs. In Crs.)

Year Mar06(12) Mar07(12) Mar08(12)
SOURCES OF FUNDS :
Share Capital 285 285 285
Reserves Total 5,776.17 6,074.50 6,519.67
Total Shareholders Funds 6,061.17 6,359.50 6,804.67
Secured Loans 0 0 0
Unsecured Loans 98.25 197.61 221.04
Total Debt 98.25 197.61 221.04
Total Liabilities 6,159.42 6,557.11 7,334.54

APPLICATION OF FUNDS :
Net Block 3,008.55 3,154.17 3,501.13
Lease Adjustment 0 0 0
Capital Work in Progress 147.81 340.44 507.26
Investments 2,499.34 2,673.58 3,034.51
Current Assets, Loans & Advances 2,411.61 2,316.73 2,269.12
Total Current Liabilities 1,832.80 1,856.13 1,977.48
Net Current Assets 578.81 460.6 291.64
Total Assets 6,159.42 6,557.11 7,334.54

The increase in debts of the company is more as compared to the equity. The
Company is continuously making investments but there is no remarkable increase in the
profits made by the company. Also, the net current assets held by the company are
reducing every year, the reason being rising current liabilities and simultaneously
reducing current assets. The Capital Work in Progress is increasing continuously over a
period of time.

[60]
 PROJECTED CASH FLOW SUMMARY

Projected Cash Flow Summary (Rs. In Crs.)

Year Mar-07 Mar-08
Cash Flow Summary
Cash and Cash Equivalents at Beginning of the year 244.53 268.98
Net Cash from Operating Activities 559.13 889.02
Net Cash Used in Investing Activities -647.83 -491.28
Net Cash Used in Financing Activities -52.79 -23.75
Net Inc/(Dec) in Cash and Cash Equivalent -141.49 -136.11
Cash and Cash Equivalents at End of the year 103.04 160.74

Total cash from operations:

The total cash flow from operations for the company is also increasing. The rise
in cash flow from operations increases considerably in the years 2007 and 2008. This is a
good sign for the company. The rise in the cash flow from the operations signifies that
the company is able to extract maximum value from its available resources. The company
has managed to maintain its margins and thus not allowed its operating profit to dip.

On looking at the operating profit before tax and the total cash flow from
operations it is clear that the cash position of the company is secure. The cash flow
statement of the company indicates that the company is managing its cash position very
well and the inflows of cash are very well managed by the company and it is also evident
that the company is allocating adequate cash to increase their fixed assets.

[61]
 Key Ratios Formulae Mar-06 Mar-07 Mar-08
EBITDA Ratio EBITDA / Income 0.28 0.27 0.27
Net Profit Ratio PAT / Income 0.13 0.12 0.11
Debt-Equity Ratio Debt / Equity 0.01 0.02 0.02
Current Assets /
Current Ratio Current Liabilities 1.32 1.25 1.15
Interest Cover EBIT / Interest 382.51 104.13 102.77
Return on Equity (%) PAT / Equity 7.9 7.37 7.35
Return on Capital EBIT / Capital
Employed (%) Employed 11.36 11.31 11.29

EBITDA or Operating Profit Margin:

The operating profit margin in true sense is the indicator of the company’s actual
operating efficiency. The company has increased its sales but still there is no rise in the
operating profit margin. This signifies lack of efficiency on the part of the company even
if the company’s operating profit margin is consistently over 20%. As the company is
undertaking huge expansions it has maintained its operating profit margin but it is low as
compared to the other players in the industry..

Net Profit Margin Ratio:

The net profit margin ratio measures the overall efficiency of production,
administration, selling, financing, pricing, and tax management. After looking at the
company’s net profit margin, one can say that it is declining over a period of years,
which is considered to be unfavorable.

Debt-Equity Ratio:
The debt-equity ratio shows the relative contributions of creditors and owners.
The debt-equity ratio of the company is increasing since 2007, and is expected to stay
constant. The lower the debt-equity ratio, the higher the degree of protection enjoyed by

[62]
the creditors. But in this case the debt-equity ratio is increasing that means the degree of
protection enjoyed by the creditors is comparatively low.

Current Ratio:
The current ratio measures the ability of the firm to meet its current liabilities-
current assets get converted into cash during the operating cycle of the firm, and provide
the funds needed to pay current liabilities. The current ratio of the firm is declining every
year and also it is lower than the general norm i.e. 1.33 in India.

Interest Coverage Ratio:

High interest coverage ratio signifies the ability of the firm to meet its interest
burden even if the PBIT suffer a considerable decline. Interest Coverage ratio in case of
VSNL is quite unfavorable as it is decreasing. Also it is been observed that there was a
sudden fall in the interest coverage ratio in FY07.

Return on Equity:
This ratio measures the profitability of equity funds invested in the firm. VSNL
has got an unfavourable Return on Equity as it is decreasing every year i.e. from 7.9 it
has reached 7.35 in 2years duration. This ratio being of great interest to the equity
shareholders, they may loose interest in the company due to declining RoE.

Return on Capital Employed:

The ROCE measures the profitability of the capital employed i.e. shareholder’s
funds plus the total debt (both short term as well as long term). VSNL has attained a
continuous decline in ROCE in previous two years and is expected to give comparatively
low returns in 2008 due to comparatively low PBIT and increasing interest.

Earnings per share:

This ratio indicates the actual profit left for the owners of the company i.e.
shareholders. A growing EPS shows that the company is contributing to the shareholders

[63]
value. In case of VSNL, the EPS is expected to increase in FY08 but as observed in the
earlier years, there is no consistency in EPS.

P/E Ratio:
It is the parameter to judge the proper valuation of the company in the market.
Higher P/E shows that the market is valuing the company at a higher multiple. This is the
widely used parameter by the market for judging the over or under valuation of the
company for investment purpose. A lower P/E is considered one of the most important
criteria for the selection of the company by the investors. The P/E ratio of VSNL is
increasing from 25.07 to 27.96, which is not a good sign from the point of view of the
shareholders.

SHAREHOLDING PATTERN:

(AS ON Jun 2007) Shares [%]

Foreign 23,074,202.00 8.1
Institutions 36,638,586.00 12.86
Govt Holding 0 0
Non Promoter Corp. Hold. 1,538,852.00 0.54
Promoters 217,272,076.00 76.24
Public & Others 6,476,284.00 2.28
Totals 285,000,000.00 100

FUTURE PROSPECTS:
The company has drawn up major plans this year to further enhance the footprint
to over 1000 hotspots - bringing the internet much more close to the large Indian
travelling and on the move population.
The Company has drawn major plans to enable international roaming for business
travellers by leveraging the alliance.

[64]
 CHAPTER VII
FINDINGS

BHARTI AIRTEL LTD

Investment rationale:
At CMP 880.75 (as on 13 June 2007) the share price trades at 41.4 times (on the
basis EPS of FY2007 i.e. 21.27) and at 30.59 times (on the basis EPS of FY 2008e i.e.
28.79). I predict that the share prices would rise from 880.75 to 1079.63 in a span of 8
months to 10 months.

New technologies and paradigms:

The trend towards adoption of Next Generation Networks (NGN) is global and
the discussions in India are still at a preliminary stage. Technologies like Triple Play,
wherein a single cable can deliver voice, data and video on demand and IPTV, provide
the company with a unique opportunity.

Global foray:
Sri Lanka is the first international operation of Bharti Airtel and is in line with
the Company's plan to expand its telecom operations internationally in select markets.
Bharti Airtel is in the process of preparing a detailed business plan for rolling out GSM
operations in Sri Lanka within the next financial year.

Strong strategic partnerships:

Singtel continues to be an investor and a strategic alliance partner and the
company expects to leverage the strengths and experience of Singtel in years to come

[65]
 VIDESH SANCHAR NIGAM LIMITED

Investment Rationale: At CMP 451.85 (as on 27 June, 2007) the share price
trades at 28.82 (on the basis EPS of FY 2007e i.e15.68) and at 111 times (on the
basis EPS of FY 2008e i.e. 17.56).

The increased competition in India with the DoT issuing ILD licences to new
players, some of who were VSNL's customers earlier, is expected to shrink the
Company's addressable market and hence affect this business adversely.

The growth in broadband subscribers has been slower than that in mobile
subscribers. The predominant reasons are the limited access to last mile networks
that limits the ability to serve retail customers and the inability to demonstrate an
adequate value proposition except to enterprises and a small group of individuals.

An important concern for the Company in its voice business continues to be the
lack of direct access to end customers.

The implementation of the CAC regime has not fallen in place so far, due to
technical and other reasons. The delay in implementation of the CAC regime is a
cause of concern for VSNL.

[66]
 CHAPTER VIII
RECOMMENDATIONS

On completion of the company analysis, I feel that Bharti Airtel is fundamentally

a very strong company and has a tremendous growth potential. I recommend
Anand Rathi Securities Ltd. and all its clientele to Buy/Hold the company’s
shares and derive maximum value from it.

According to me, the fundamentals of VSNL are weak. The company has made
huge investments in domestic market as well as in international markets but still
there is no significant rise in the profits made by the company and also the P/E
ratio is rising. I recommend to Sell the shares of VSNL as the rise in price is
expected to be quite low

[67]
 CHAPTER IX
LIMITATIONS

While conducting the research I was unable to collect data from primary source
which I feel would have had a bearing on the outcome of the research. Through
interviews with the concerned authorities I could have got first hand information
about the company and this could have certainly given me a broader perspective
on the company’s future plans.

Future changes are largely unpredictable; more so when the economic and
business environment is buffeted by frequent winds of change. In an environment
characterized by discontinuities, the past record proves to be a poor guide to
future performance.

The market behavior if irrational may give rise to – under-valuations for extended
periods; over-valuations from unjustified optimism and misplaced enthusiasm for
unreasonable lengths of time. The slow correction of under or over valuation
poses a threat to the analysis.

[68]
 CHAPTER X
ASSUMPTIONS

To arrive at a target price of the socks mentioned above, following assumptions were
made:

1. The estimated growth in sales is calculated by taking Compound Annual Growth

Rate for last five years.

2. The Operating Profit Margin is assumed to be constant, to arrive at operating

profit figure. By keeping the OPM % constant we can arrive at the operating
profit for next year.

3. Depreciation rate is assumed to be constant, due lack of availability of facts about

assets, method of calculating depreciation, depreciation is assumed to be constant.

4. Interest and tax rate are taken as per the current rates. That helped to arrive at
more accurate figures.

5. Profit earning ratio is assumed to be constant. As EPS is calculated from

estimated profits, target price is calculated by keeping P/E constant

[69]
 CONCLUSION

Strong growth in subscriber base, increasing non voice revenues and lowering
fixed cost per unit, the Indian telecom service sector is set to report buoyant
growth in revenues and profitability in the short to medium term.

There are two key drivers for the growth in this business. First, the enhanced
capability of the Company to deliver services on a global basis is attracting new
customers and opening up new markets. Second, there is significant growth in the
existing customers' businesses globally.

Bharti Airtel, one of the major payers in the telecom service provider industry has
attained a significant market share in the country with its widespread network,
huge subscriber base and quality service. Also, the company to make its presence
felt all across the globe, is spreading its wings to international markets.

VSNL, a company striving to make its presence felt in domestic as well as

international market is lagging behind in the race against the new players. The
reason behind this is the inability of the company to operate efficiently due to the
large number of its subsidiaries, because of which there is no direct access to its
end customers

[70]
 BIBLIOGRAPHY

WEBSITES:
o www.rathi.com
o www.google.com
o www.capitalline.com
o www.bseindia.com
o www.nseindia.com
o www.trai.gov.in

BOOKS:
o Investment Analysis and Portfolio Management- Prasanna Chandra.
o Security Analysis and Portfolio Management – Punithavathy Pandian

[71]