Earnings Update: Telecos

Earnings Update of Telecom Operators and sector outlook

Bharti Airtel CMP 628 Target 822

Results Highlights

 Consolidated revenues zoomed 39% at Rs. 9,667 crore while net surged by 39.6% at Rs.
2,023 yoy.
 Sequentially revenues grew by 8.3% while net by 18%.
 Revenues from mobile services grew by 42%, Telemedia revenues by 16% and Enterprise
revenues by 52.2%.
 ARPU fell down by 9.2% during the last 9 months and 2.1% qoq to 324 while MoU too
plunged by 4% qoq to 505.
 Total traffic on its network has continued to rise. It increased by 6% qoq.
 Tower sharing factor got better to 1.34 from 1.26 in previous quarter.
 Forex loss has been reported at Rs 222.1 crore against Rs. 586.2 crore a quarter ago.
 It maintained its EBIDTA margin above 41% despite 3 new launches and increasing input
costs.
 It added 8.28 million subscribers during the quarter.
 Capex for the Q3 stood at Rs 3,877.5 crore and the company expects the same level of
capex of FY2009 in the following FY as well.
 The company has raised $1.35 billion for the expansion purposes and the rest will be raised
by way of loans, which have already been tied up.

Quick comments on Q3 numbers:

Despite difficult financial environment and cut throat competition, the company has been able to
maintain its hegemony in the sector by outperforming on every parameter: financial as well as
operational. Though mobile EBIDTA margin has been declining but this quarter it improved by 124
bps to 31.44%. It achieved a milestone when it had a free cash flow of close to Rs. 400 crore since
its inception. However, the investors should not expect dividends in future as it requires huge funds
to invest in new technologies like 3G as and when the auctions happen.

Bharti
Quarter 9 months Year
Consolidated P&L Account ended QoQ YoY ended YoY ended
% %
Rs Crore Dec-08 % Growth Growth Dec-08 Growth Mar-08
Net Sales 9667 8.3% 39.1% 27097 41.5% 27012
Operating expenses 4473 7.7% 46.0% 12437 48.6% 11853
Gross Profit 5194 8.9% 33.7% 14660 36.0% 15160
Selling & marketing expenses 673 14.0% 37.0% 1814 37.4% 1906
General & Admin expenses 645 10.4% 31.9% 1906 27.1% 2103
EBIDTA 3876 7.8% 33.4% 10939 37.4% 11151
Depreciation 1249 13.3% 26.6% 3348 26.0% 3591
Deepak Tiwari Operating Income 2627 5.4% 36.9% 7591 43.1% 7560
Research Analyst Other Income 21 -27.5% -68.8% 112 -47.6% 280
Interest 458 -58.4% -7.8% 1463 554.8% 528
deepakt@arthamoney.com
PBT 2191 54.0% 46.9% 6241 17.9% 7312
T: + 91 22 4063 3007 Taxes 167 -157.2% 303.2% 292 -60.5% 816
Net Profit 2023 18.0% 39.6% 5948 30.6% 6495
EPS 10.41 18.5% 36.4% 30.61 29.3% 34.19
Sources: Company, Artha Money Research

January 30, 2009 For Private Circulation only 1

 Reliance Communications CMP 162 Target 319

Results Highlights

 Consolidated revenues zoomed 20% at Rs. 5,850 crore while net surged by 3.5% at Rs.
1,444 yoy.
 Sequentially revenues grew by 3.6% while net shrank by 10.4%.
 Wireless segment grew by 1.8%, Global segment tanked marginally by 0.8% and
Broadband segment grew by 8.6% on qoq basis.
 ARPU fell sharply down by 20.8% during the last 9 months and 7.4% qoq to 251 while
MoU too plunged by 3.1% qoq to 410.
 Total NLD and ILD traffic on its network has continued to rise. It increased by 6.9% qoq.
 It maintained its EBIDTA margin above 40% however trend is declining.
 It added 5.3 million subscribers during the quarter.
 During the quarter, the company launch nation wise GSM services and has already
crossed 10 million subscribers on this platform.
 The company has revised its capex plan for FY09 downward to Rs 200 billion from
earlier Rs 300 billion. Expansion plans are on right track and sees no financial crunch.
 The capex for FY10 is expected at Rs 150 billion.

Quick comments on Q3 numbers:

For the largest CDMA player which recently launched its services on GSM platform, Q3 numbers
were disappointing. Though it posted 20% growth in topline but bottomline was flat 3.5%. In
comparison to arch rival Bharti, it’s performance was abysmal. On every parameter like ARPU,
net addition of subscribers and MoU, its performance was not satisfactory. Moreover, of late it
has launched two services - DTH and GSM mobile services. This apart, it has to participate in 3G
and Wimax auction, which will further require huge funding. Its debt-equity ratio is already at
0.64:1.

Rcom
Quarter 9 months Year
Consolidated P&L Account ended QoQ YoY ended YoY ended
% % %
Rs Crore Dec-08 Growth Growth Dec-08 Growth Mar-08
Net Sales 5,850 3.6% 20.0% 16,817 22.3% 18827
Operating expenses 2,474 6.7% 25.5% 6,873 25.7% 7463
Gross Profit 3,376 1.5% 16.3% 9,945 20.0% 11365
Selling & Admin expenses 1,024 -0.2% 28.6% 3,041 26.3% 3406
EBIDTA 2,353 2.2% 11.7% 6,904 17.4% 7959
Depreciation 1,043 6.1% 43.8% 2,953 46.2% 3947
Operating Income 1,310 -0.7% -5.2% 3,951 2.3% 4012
Other Income 0 0 0 240
Interest -150 -36.4% -1.4% -619 58.0% -400
PBT 1,459 -6.1% -4.8% 4,570 7.4% 4652
Taxes 15.3 -127.0% -88.9% -61 -119.6% 284
Net Profit 1,444 -10.4% 3.5% 4,631 17.4% 4368
EPS 7.0 22.4 21.2
Sources: Company, Artha Money Research

January 30, 2009 For Private Circulation only 2

 Idea Cellular CMP 45.3 Not Rated

Results Highlights

 Consolidated revenues zoomed 59.7% at Rs. 2,731 crore however net tanked by 7.3%
at Rs. 220 yoy.
 Sequentially revenues grew by 18.6% while net zoomed by 52.5%.
 ARPU fell down by 7.3% during the last 9 months and 1.9% qoq to 266 while MoU
declined marginally by 0.2% qoq to 410.
 Total traffic on its network increased by 10.8% qoq.
 Its EBIDTA margin has declined sharply since Q2 to 25-26% from earlier over 33%.
 It had 17.6% market share in net additions during the quarter.
 The capex for FY09 was Rs 65 billion and for FY10 it is expected at Rs 60 billion.
 The company has received infusion of Rs 21 billion.
 The company is numero uno player in 4 circle of India.
 It is in JV with Spice where it holds 41.9%.

Quick comments on Q3 numbers:

The company’s margins are under immense pressure thanks to its aggressive expansion plans.
In the last 12 months it has almost doubled its network capacity on all-India basis. Moreover, this
capacity is largely coming on a rental basis rather than owned sites. And since the rentals of
such sites are as high as 145% it is pulling down its margins. In future too, this pressure is
unlikely to abate.

Idea
Consolidated P&L Quarter 9 months
Account ended QoQ YoY ended YoY Year ended
% % %
Rs Crore Dec-08 Growth Growth Dec-08 Growth Mar-08
Net Sales 2,731 18.6% 59.7% 7,213 51.8% 6720
Operating expenses 2,034 19.8% 78.2% 5,188 64.4% 4468
EBIDTA 698 15.0% 22.5% 2,025 26.9% 2,252
Depreciation 394 29.8% 72.9% 972 57.5% 877
Operating Income 304 0.1% -11.1% 1,053 7.6% 1,375
Interest 87 -41.6% 11.8% 390 147.9% 278
PBT 216 40.7% -17.9% 663 -19.3% 1,115
Taxes -3.1 -131.3% -111.6% 37 -34.9% 73
Net Profit 220 52.5% -7.3% 627 -18.1% 1,042
EPS 0.71 42.0% -21.1% 2.21 -24.1% 3.96
Sources: Company, Artha Money Research

January 30, 2009 For Private Circulation only 3

 Outlook for the Industry

At a time when every sector is bearing the brunt of global recession and slowdown in
the demand, telecom sector is one of those few sectors that is not only faring well, its
growth prospects are also heartening. The telecom operators are adding about 8-10
million subscribers every month and growing exceptionally though few players are
reporting not so good bottom lines but that is because of their aggressive investment
plans. The industry added 32 million customers in the last quarter which is
outstanding. Still in the rural markets mobile penetration is yet abysmal and yet to
catch up with urban markets. There are immense growth potentials for the sector as
only one out of every three Indians has a phone now. We have yet to see how 3G
services flourish in the fastest growing Indian markets where tariffs are lowest in the
world.

Indian telecom sector is plagued with uncertainties vis-à-vis policies which are
tweaked every now and then by the Department of Telecommunications (DoT). This
sector has also witnessed numerous tussles amongst various Government and nodal
agencies such as DoT, TRAI, Telecom Commission and Ministries of Finance and
defence as well as telecom operators and their bodies etc. It is obvious when huge
interests are at the stake. 3G and Wimax auctions have been again delayed and
unlikely to happen during the tenure of this outgoing UPA govt. Moreover, policies
related to Mobile Number Portability (MNP), Mobile Termination Charges (MTC) and
vacation of spectrums by the defence are not clear and no development has been
made. As far as new players are concerned, though they have been allocated
spectrums in certain circles, none of them have launched their services hitherto. This
is why incumbents are so aggressive to usurp the uncharted territories to take the
bigger pie.

Relative Stock Performances vis-à-vis Sensex

140%

120%

100%

80%
Bharti
60% Idea
Rcom
40%
Sensex
20%

0%
1-Jul-08
8-Jul-08
15-Jul-08
22-Jul-08
29-Jul-08
5-Aug-08

4-Sep-08

3-Oct-08
13-Oct-08
20-Oct-08
27-Oct-08
4-Nov-08
11-Nov-08
19-Nov-08
26-Nov-08
4-Dec-08
12-Dec-08
19-Dec-08
29-Dec-08
5-Jan-09
13-Jan-09
20-Jan-09
28-Jan-09
12-Aug-08
20-Aug-08
27-Aug-08

11-Sep-08
18-Sep-08
25-Sep-08

January 30, 2009 For Private Circulation only 4

A comparative Analysis

Subscribers base in Mn % Share in Net Additions

Bharti Rcom Idea

90.00 35.00%
Bharti Rcom Idea
80.00
30.00%

70.00
25.00%
60.00

50.00 20.00%

40.00 15.00%

30.00
10.00%
20.00

5.00%
10.00

0.00 0.00%

Trend in ARPU Trend in Minutes of Usage

450 600
Bharti Rcom Idea Bharti Rcom Idea
400
500
350

300 400

250
300
200

150 200

100
100
50

0 0

Comments: The chasm of subscriber base is getting wider amongst Bharti, RCom and Idea. Even in net additions, Bharti is far
ahead of its rivals. The spread of ARPUs between Bharti and RCom has expanded while Idea has outperformed arch rival RCom
this quarter as the ARPU of RCom fell below that of Idea. The similar trend is witnessed in Minutes of Usage whereas RCom’s MoU
has declined sharply. Bharti however has been able to maintain its hegemony from every corner.

January 30, 2009 For Private Circulation only 5

 EBIDTA Margins

45.0% Bharti Rcom Idea

40.0%

35.0%

30.0%

25.0%

20.0%

15.0%

10.0%

5.0%

0.0%

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January 30, 2009 For Private Circulation only 6