Download - india telecom sector

30th Mar 2012

Investment Thoughts ADDRESSING THE NEEDS OF INDIVIDUAL INVESTORS AND PLANTING THE SEEDS FOR A SECURE FUTURE.

Company CMP Target Risk

Nutek 0.85 42.65 High

Tulip Telecom 90.40 422.10 Moderate

Bharti Airtel 330 1005.8 Low

Telecom Industry

TELECOM LANDSCAPE IN 2012-14

India has emerged as one of the youngest and

fastest growing economies in the world today.

One of the sectors that has shown the signs of

profitability and contributed significantly to the

country’s economy is the telecom industry.

In fact, the Indian telecom market has gained

recognition as one of the most lucrative markets

globally.

In 2012, the total Telecom Subscriber base is

expected to reach approximately 950 million and

the internet subscriber base is expected to rise to

approximately 60 million.

After auction on 3G & WIMAX in 2009, initially

they concentrate on top 20 cities in India. Based

on this, 3G subscriber base could reach 30 – 35

million by 2012.

The entry of MVNO’s will help achieve growth

faster by targeting niche customer segments.

The Telecom Industry in India has witnessed a

phenomenal and manifold growth over the recent

years and it contributes nearly 2% to India’s GDP.

The launch of 3G services will drive data

revenues. India’s data revolution is going to be

fuelled by 3G and WiMax.

Risk & Return Matrix

30th Mar 2012


BSE CODE 533015

NSE CODE NUTEK

Market Cap (Rs Cr) 14.06

52 week High/Low (Rs) 13.35/0.70

Lat. Face Value 5

Lat. EPS (TTM) 0.08

Lat. Book value (Rs) 32.78

Lat. P/E Ratio 11.38

NUTEK INDIA CMP:0.85 TGT: 42.65

INVESTMENT ARGUMENTS

Nutek is a Telecom Infrastructure services

company providing rollout solutions for

wireless and fixed telecom networks.

During the FY2011, NUTEK witnesses a

change in revenue mix where in the revenue

contribution from FTK services declined while

the contribution from other service verticals (TI,

TIS and O&M). However, owing to intense

competition in the sector and the resultant low

call rates, margins at all the verticals in the

Telecom value chain are under pressure.

NUTEK plans to foray into power sector in a

major way, ranging from owing raw material

assets to setting up power generating capacities,

and has made an acquisition to tie up its

backend raw material supply notably the coal

assets.

NUTEK recently acquire 45% equity in Gulf

Corporation, a company having coal mines in

Indonesia, for USD 45 Million through its Hong

Kong subsidiary. Company is actively looking

to acquire both existing downstream projects in

the conventional power generation space as well

as foray into non-conventional power generation

area which appears to be lucrative proposition in

the long run.

NUTEK Company is eyeing to enter into the

lucrative defence sector in India. With Army

recently announcing investments of over

Rs.40000 crores for its Private Communication

Network, the defence sector looks attractive

.NUTEK has set-up a branch office in Nepal to

capture the opportunities offered by the under-

developed Telecom market in Nepal.

Valuation outlook

With the positive change in revenue mix

of NUTEK from FTK services to TI, TIS and O & M the

growth in NUTEK would be expected as high. Based on

DCF valuation model NUTEK occupies the 1st place

among Telecom Service Providers in India with subject to

increase in value per share in 2014(e). The estimated

value of NUTEK is 42.64 rupees per share.

30th Mar 2012


Fair Value 6588.27

Value Per share 42.64

WACC Calculation

Cost of equity

Rf 8%

Beta 0.572471694

Rm 22.00%

Rm-Rf 14.00%

Cost of equity 16.01%

Total equity 5215

Cost of debt 282.72%

Tax rate 30.00%

Total debt 10.3

Enterprise value 5,225.30

WACC 16.37%

FREE CASH FLOW(Rs in

MILLIONS) 2012(e) 2013(e) 2014(e)

EBITDA 622.71 684.98 753.48

Net Income 186.81 205.49 226.04

Interest 46.70325 51.373575 56.5109325

1-tax rate 0.70 0.70 0.70

Interest * (1-tax rate) 32.69 35.96 39.56

Add: Depreciation 18.68 20.55 22.60

Less : Fixed Capital Investment 42.00 42.00 42.00

Less :Working Capital

Investment -540.80 -540.80 -540.80

FREE CASH FLOW TO FIRM 736.99 760.81 787.01

NET BORROWING 0.00 0.00 0.00

Interest * (1-tax rate) 32.69 35.96 39.56

FREE CASH FLOW TO

EQUITY 704.29 724.84 747.45

SWOT Analysis

DCF Valuation

30th Mar 2012


2008 2009 2010 2011 2012 e 2013 e 2014 e

TOTAL INCOME 951.6 1803.1 1943 2830.5 3113.55 3424.905 3767.396

YOY % 89.48% 7.76% 45.68% 10.00% 10.00% 10.00%

EBITDA 484.5 717.1 652.2 643.5 622.71 684.981 753.4791

% of sales 50.91% 39.77% 33.57% 22.73% 20.00% 20.00% 20.00%

depreciation 8.8 11.9 16.3 18.1 18.6813 20.54943 22.60437

% of sales 0.92% 0.66% 0.84% 0.64% 0.60% 0.60% 0.60%

EBIT 302.8 215.3 267.5 313.3 373.626 410.9886 452.0875

% of sales 31.82% 11.94% 13.77% 11.07% 12.00% 12.00% 12.00%

TAX 107.9 111.1 60.2 87.9 93.4065 102.74715 113.0219

% of sales 11.34% 6.16% 3.10% 3.11% 3.00% 3.00% 3.00%

Profit after tax 194.5 175.3 182.7 193.1 186.813 205.4943 226.0437

YoY -10.95% 4.05% 5.39% 20.10% 3.72%

% of sales 20.44% 9.72% 9.40% 6.82% 6.00% 6.00% 6.00%

Tax expenses 107.9 111.1 60.2 87.9 93.4065 102.74715 113.0219

% of sales 11.34% 6.16% 3.10% 3.11% 3.00% 3.00% 3.00%

Interest expenses 8.5 8.6 28.3 41.6 46.70325 51.373575 56.51093

% of sales 0.89% 0.48% 1.46% 1.47% 1.50% 1.50% 1.50%

Income Statement (Rs in Millions)

30th Mar 2012


BSE CODE 532691

NSE CODE TULIP


52 week High/Low (Rs) 173.80/92.40

Lat. Face Value 2.00

Lat. EPS (TTM) 22.95


Lat. P/E Ratio 4.22

TULIP TELECOM CMP: 90.40 TGT: 422.11

Incorporated in 1990 Tulip Telecom Ltd has

emerged as India’s leading Enterprise Data

Connectivity ( EDC) player.

By having the rapid growth in telecom sector,

EDC market was Rs 62 billion (FY10) and with

increasing demand for data connectivity from

private and government sector it is anticipated to

expand to Rs 130 billion by FY16(e) at a CAGR

of 12%

With the greater demand in IT infrastructure,

TTL is identifying opportunities in this segment

by providing end-to-end IT Infrastructure

solutions covering managed security, unified

communication and colocation & data canters to

its customers. TTL currently enjoys a leadership

position in fastest growing MPLS/VPN services

with 30.6% market share

Reliance emerges as the single player having

Pan-India license for 4G network. But, we

believe, Reliance for that matter may like to

partner with TTL or government allows for more

competition to break the monopoly of Reliance

in the emerging scenario, any other player apart

from reliance may utilize the fiber network

service of TTL for speedy roll-out of 4G

services. This scenario can prove to be a big

boon to TTL.

Valuation Outlook

TTL, a leading player in EDC space, is

slowly moving to enterprise data services space by and

has huge opportunity on its hands. Using DCF valuation

we found that TTL occupies 2nd

place with subject to the

increase in market price per share in 2014(e). The

estimated value of TTK is 422.11 rupees per share.

30th Mar 2012


FREE CASH FLOW(Rs in

MILLIONS) 2012(e) 2013(e) 2014(e)

EBITDA 9028.03 10833.64 13000.37

Net Income 3916.50 4699.80 5639.76

Interest -705.32 -846.38 -1015.65

1-Tax Rate 0.70 0.70 0.70

Interest * 1-Tax Rate -493.72 -592.46 -710.96

Add: Depreciation 2398.07 2877.69 3453.22

Less : Fixed Capital Investment 8964.32 8964.00 8964.00

Less : Working Capital Investment -1916.17 -1916.00 -1916.00

Free cash Flow of Firm -1227.30 -62.98 1334.02

Interest * 1-tax rate -493.72 -592.46 -710.96

Net Borrowing 0.00 0.00 0.00

FCFE -733.58 529.49 2044.98

DISOUNT FACTOR 0.96 0.88 0.81

Present value of free cash flow -703.24 466.47 1655.68

Fair value (Rs in MILLIONS) 61206.10

Value Per Share 422.11

WACC Calculation

Cost of Equity

Rf 8%

Beta 0.642055461

Rm 21.50%

Rm-Rf 13.50%

Cost of Equity 16.67%

Total equity 12125

Cost of Debt 3.56%

Tax Rate 30.00%

Total Debt 15061

Enterprise Value

27,186.00

WACC 8.81%

Figure 3.19

Business Segments

SWOT Analysis

DCF Valuation

30th Mar 2012


2008 2009 2010 2011 2012 E 2013 E 2014 E

Revenue 12189.8 16144 19664 23510.5 28212.6 33855.12 40626.14

YoY % 32.44% 21.80% 19.56% 20.00% 20.00% 20.00%

EBITDA 2776.9 3851.9 5857.5 7355 9028.03 10833.64 13000.37

22.78% 23.86% 29.79% 31.28% 32.00% 32.00% 32.00%

Depreciation 418.1 414.4 1353 1717 2398.07 2877.69 3453.22

3.43% 2.57% 6.88% 7.30% 8.50% 8.50% 8.50%

EBIT 2038 2952.6 3901.8 4916.9 6629.96 7955.95 9547.14

16.72% 18.29% 19.84% 20.91% 21.00% 21.00% 21.00%

Profit after tax 1871.2 2497.8 2304.4 3053.3 3916.50 4699.80 5639.76

YoY % 25.09% -8.39% 24.53% 20.10%

% of sales 15.35% 15.47% 11.72% 12.99% 13.88% 13.88% 13.88%

Tax expenses 139.5 330.4 899.4 1000 847.66 1017.20 1220.64

1.14% 2.05% 4.57% 4.25% 3.00% 3.00% 3.00%

Interest expenses -171 -327 -638 -766 -705.32 -846.38 -1015.65

-1.40% -2.03% -3.24% -3.26% -2.50% -2.50% -2.50%

Income Statement (In Millions Rupee)

30th Mar 2012


BSE CODE 532454

NSE CODE BHARTIARTL


52 week High/Low

(Rs) 447.82/316.00

Lat. Face Value 2.85

Lat. EPS (TTM) 15.78


Lat. P/E Ratio 20.87

BHARTI AIRTEL CMP: 330 TGT: 1005.8

Bharti Airtel Limited, together

with its subsidiaries, provides

telecommunication services in India, south

Asia, and Africa. Its Mobile Services

segment offers GSM mobile services; and

post-paid, pre-paid, roaming, Internet.

As regard the Africa operations,

looking forward into FY 2011-12, the

Company will be focusing on

strengthening its business model across all

the 16 countries of operation. It will also

be leveraging the opportunities that 3G,

data, MNP and Airtel money presents.

In future BHARTI AIRTEL

entering into rural market and with the

As a market leader in the Indian Telecom space,

Bharti Airtel’s outlook is promising and is in line

with future growth potential of the sector.

Emerging markets of Sri Lanka and Bangladesh

and newer product family of Digital TV will

continue to be the focus areas and Airtel will

continue to build its integrated solutions created for

enterprise and small & medium business.

As regard the Africa operations, looking forward

into FY 2011-12, the Company will be focusing on

strengthening its business model across all the 16

countries of operation. It will also be leveraging the

opportunities that 3G, data, MNP and Airtel money

presents. Exploited fully, these opportunities have

the potential to make Airtel truly unique to both

current and prospective customers in the market.

The growing demand of digital content, especially

High Definition (HD) content, will further

accelerate the growth of digital TV services. Digital

Media Exchange (DMX), coupled with Teleport

Services, will get content aggregation capabilities

to the market, thereby opening new avenues for a

telecom service provider in digital signage and

digital cinema content delivery domains

With technologies like cloud computing and grid

computing gaining momentum, the Indian Data

Centre Services are on the rise and is emerging as a

long-term growth opportunity. Cloud based

services such as Software as a Service (SaaS),

Platform as a Service (PaaS) offer new

opportunities for small and medium businesses.

Valuation Outlook

BHARTI AIRTEL concentrating into rural

market and with the advantage of new technologies like 3G,

BWA and VAS, it will gain moderate profit and huge

subscribers as well. Based on DCF model we found that

BHARTI AIRTEL occupies 3rd

place among Telecom

Service Providers in India with respect to value per

share in 2014(e) The estimated value of BHARTI

AIRTEL is 1005.8 rupees per share.

30th Mar 2012


TOTAL NO OF

EQUITY SHARES 3797.5

DISOUNT FACTOR 0.95 0.85 0.77

PRESENT VALUE OF

FREE CASH FLOW -77751 161280.9 180503.5

Enterprise value 3819523.3

Value per share 1005.8

WACC

CALCULATION

COST OF EQUITY

RF 9%

BETA 0.89489424

RM 22.00%

RM-RF 13.11%

COST OF EQUITY 20.62%

TOTAL EQUITY 516231

0.12

COST OF DEBT 2.68%

TAX RATE 30.00%

TOTAL DEBT 532298

ENTERPRISE VALUE 1,048,529.00

WACC 11.11%

FREE CASH FLOW 2012 2013 2014

EBITDA 205161.84 235936.12 271326.53

EBIT 76925.87 88464.75 101734.46

NET PROFIT 41032.37 31458.15 27132.65

INTEREST -24313.21 -27960.19 -32154.22

1-TAX RATE 0.70 0.70 0.70

INTEREST * 1- TAXRATE -17019.25 -19572.13 -22507.95

ADD: DEPRECIATION 55014.21 335422.51 385735.89

LESS : CAPEX 176461.00 176461.00 176461.00

LESS : WCINV 1540.20 1540.00 1540.00

FREE CASH FLOW TO

FIRM -98973.87 169307.53 212359.59

INTEREST -24313.21 -27960.19 -32154.22

INT*1-TAX RATE -17019.25 -19572.13 -22507.95

NET BORROWING 0.00 0.00 0.00

FCFE -81954.62 188879.66 234867.54

SWAT Analysis

DCF Valuation

30th Mar 2012


2008 2009 2010 2011 2012 E 2013 E 2014 E

TOTAL INCOME 270249.3 369615.5 418472 594672 683872.8 786453.72 904421.78

36.77% 13.22% 42.11% 15.00% 15.00% 15.00%

EBITDA 117037.4 154664.2 224228 307065 205161.84 235936.116 271326.53

43.31% 41.84% 53.58% 51.64% 30.00% 30.00% 30.00%

DEPRECIATION 0 0 62832 102066 55014.20847 335422.5116 385735.89

0.00% 0.00% 15.01% 17.16% 8.04% 42.65% 42.65%

TAX 8378.1 6614.6 13453 17790 18970.77345 21816.38947 25088.848

3.10% 1.79% 3.21% 2.99% 2.77% 2.77% 2.77%

PAT 67008 84699.1 89768 60467 41032.368 31458.1488 27132.653

YoY 20.89% 5.65% -48.46% 20.10%

% of sales 24.79% 22.92% 21.45% 10.17% 6.00% 4.00% 3.00%

TAX EXPENSES 8378.1 6614.6 13453 17790 18970.77345 21816.38947 25088.848

3.10% 1.79% 3.21% 2.99% 2.77% 2.77% 2.77%

INTEREST EXPENSES -4053 -27617.9 -7626 -20378 -24313.20937 -27960.19078 -32154.22

-1.50% -7.47% -1.82% -3.43% -3.56% -3.56% -3.56%

Income Statement (Rs in Millions)

30th Mar 2012


Research Manager: Vijayababu M

Email: [email protected]

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