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Question Paper
Integrated Case Studies III (MSF3S3) : October 2008
Case Study (100 Marks)

This section consists of questions with serial number 1 - 8.

Answer all questions.

Marks are indicated against each question.

Do not spend more than 80 - 90 minutes on Section D.

Case Study*
1.

<Answer>

Perform Michael porter five factor analysis for Indian Telecom Industry.
(

2.

<Answer>

Elucidate the reasons for such a high level of penetration of mobile services in India.
(

b.

10

marks)

Analyse the reasons for the low mobile penetration in rural India.
(

10

marks)
<Answer>

Based on the data given in Annexure I and II, analyze and comment on the financial performance of
Spice Communications.
(

4.

marks)

When we look at statistics, the level of penetration of mobile services in urban India is significantly
high at around 45% when compared with around 5% in rural India. However, as whole the telecom
industry has experienced enormous average annual growth rate of 45%. In this context,
a.

3.

10

12

marks)
<Answer>

Mr. Shah, an analyst, says that ROC is a momentum indicator that measures velocity and also leads the
price action. He has provided with the following model to calculate ROC Index:
ROC Index = (Today's close / Close n periods ago) 100
Using information in Annexure IV, calculate 12 month ROC Index for the stock of Spice
Communications and interpret the same with the diagram.
(

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12

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5.

<Answer>

Mr. Kiran Bhatia, an investor in options market, believes that in next three months, the stock price of
Spice Communications will not move significantly in either direction. He wants to create an option
strategy to get the benefits from his view and at the same time he wants to minimize his potential loss
in case of market moving against his expectations. Mr. Bhatia, has collected following information of
call options on the stock price of Spice Communications, which is currently trading at Rs.74.
Strike price
(Rs.)
70
76
82

Call price
(Rs.)
23
12
4

Maturity
3 months
3 months
3 months

You are required to suggest a suitable option strategy to Mr. Bhatia, considering the price range of
Rs.70 - Rs.83, prepare the payoff table for the strategy and also find the maximum profit/loss and
breakeven point(s) for such a strategy.
( 12 marks)
6.

<Answer>

Perform SWOT Analysis for Spice Communications.

(

7.

marks)
<Answer>

We are in the paradigm shift from the voice centric world of the previous generations of wireless
networks to the multi-media centric world of 3G. In this context, explain the advantages of 3G mobile
services to the users.
(

8.

12

12

marks)

We have been observing a trend of consolidation in Indian Telecom Industry as evidenced by different
mergers that have taken place recently. In light of this, analyse the rationale behind telecom companies
going for consolidations.
(

10

marks)

Spice Communications Limited

Our philosophy is simple to add Spice to the lives of our subscribers and at the
same time offer them the most economical mode of communication. All this is in keeping in line with our credo of Spice Hain Toh
Life Hain.
Swarn Bajaj
General Manager (marketing)
Spice Telecom
AN OVERVIEW OF THE INDIAN TELECOM INDUSTRY
In recent years, the Indian telecommunications industry has experienced tremendous growth mainly due to the upsurge in the
mobile sector. The Government of India primarily controls this sector through the Department of Telecommunications (DoT) under
the Ministry of Telecommunications and Information Technology. It liberalized this sector during early 1990s and realized that to
achieve rapid and comprehensive development in this sector, infrastructure investment from private sector is required as the public
investment was insufficient. The transition from a government-controlled monopoly to a multiplayer industry, where both public
and private sector participated, helped the telecommunications industry become one of the fastest growing industries in India.
Growth Triggers
Increase in the Affordability of Services

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During 2003-2005, TRAI played an important role pertaining to the tariff orders. During this phase, severe competition resulted in
the reduction of tariff. Further, reduction in regulatory charges for operators resulted in the tariff reductions to subscribers. Added to
this, during 2003 and 2005, TRAI facilitated significant reduction in tariffs and the market witnessed a reduction in handset prices.
The following figure shows how the falling tariffs have been instrumental in spurring the growth in subscribers:
Figure: Mobile Growth and Effective Charge per Minute Steps taken for Increasing Growth

Source: TRAI.
Entry of Large Mobile Companies in India
A mobile service operator with physical expansion of its network gains substantial economies of scale and enhanced profitability.
Mobile service providers who have already established networks in India having pan-India exposure are Bharti, Airtel, Reliance
Communications and BSNL. Other mobile companies like Hutchison Essar, Airtel and Spice have applied for licenses to develop a
pan-India track thereby increasing competition and improving profitability.
Forecast of Healthy Economic Growth
To promote economic stability and growth, the Government of India initiated a series of comprehensive macroeconomic and
structural reforms in 1991. The Government of India initiated significant policy reforms for the economic growth of the country;
these reforms focused on deregulation of certain industry sectors, speeding up of foreign investments and execution of a
privatization program for disinvestment in public sectors. As a result, there was a significant increase in mobile access. Steady
growth in the services sector and a high growth in the industrial sector supported Indias per capita GDP growth.
Constructive Regulatory Regime
[1]
To improve mobile Tele density, TRAI took certain positive steps. The regulatory regime has not only encouraged healthy
competition but also allowed significant Foreign Direct Investment (FDI) participation up to 74% ownership in telecom companies.
Better clarity to the existing rules and procedures has been brought about in recent years. All these factors allowed operators to
focus on improving network quality and telecommunications services. In India, greater predictability of operational environment
ensured that the players could operate easily and efficiently in this sector and thereby increase financing and other funding on more
attractive terms. At the same time, there lies certain issues such as 3G spectrum allocations and number portability, which require
further clarity from the regulators.
TRENDS IN INDIAN TELECOMMUNICATIONS SECTOR
Global System for Mobile (GSM) communication and Code Division Multiple Access (CDMA) are the historically evolved two
different technology platforms in the Indian wireless market. Initial players, including Spice, adopted GSM technology and players
who received the limited mobile licenses in 2001 adopted CDMA technology. Indian regulatory environment became technology
neutral permitting players using both technologies to offer similar wireless services with the introduction of Unified Licensing
Policy. The main CDMA players have positioned CDMA 1.0x technology in most of their coverage areas in order to deliver highhttp://206.223.65.215/suggested/MSF3S3-1008.htm (3 of 17) [01-Nov-2008 2:18:07 PM]

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speed data services and efficient utilization of spectrum compared to the traditional GSM technology. In addition to this,
subscribers hand sets with the CDMA technology are pre-programmed so that they are not reprogrammed if the subscriber switches
to another service provider resulting in barriers to switch and also in lower churn rates for CDMA providers. CDMA-based service
providers recorded a considerable growth with a market share of 22.6% as on March 2006 compared to 20.8% market share as on
March 2005. Prepaid subscribers dominate the growth of subscriber additions in India. In addition, affordability aspect of mobile
services has increased with the introduction of innovative tariff packages; for instance, Lifetime validity recharge, and micro
recharges that are as low as Rs.10. With the increase in the number of subscribers, mobile operators in the Indian
telecommunications industry attained economies of scale as companies negotiated better prices from network equipment vendors.
This resulted in the decrease of incremental capital expenditure per subscriber. Blended Average Revenue per User (ARPU) has
decreased with the domination of prepaid subscribers and fall in tariffs. Further, the impact of decreasing ARPU levels has been
mitigated with the rise in Memorandum of Understandings (MOUs). Expansion of telecommunications industry in India resulted
from the higher number of subscribers and the rise in MOUs. Increasing Demand for Value-added Services such as information
services, music messaging and voice recognition products contribute to the industry revenues. The development and supply of new
data-enabled handsets at lower prices is expected to enhance this trend. With increasing competition, tariffs of various kinds
declined drastically such as, the tariff between Delhi and Mumbai reduced from Rs.30.00 per minute in the year 2000 to Rs.1.00 per
minute in October 2006. Expenditure is expected to increase on account of the industry expansion to semi-urban and rural areas,
which may result in increased infrastructure costs and also Backhaul connectivity. Thus, operators are required to invest in capital
expenditure for network rollout.
SPICE COMMUNICATIONS
On 28th March 1995, spice communications was incorporated under the name, Modicom Network Private Limited. Later it
registered as Spice Communications Limited in 1999. In the year 1996, Modi Wellvest Private Limited (MWPL), a group company
incorporated in India, promoted the company and held 51% of its equity. Distacom Communications (India) Limited (DCIL) held
39% equity. Motorola India Networks Limited (MINL), a company incorporated under the laws of Republic of Mauritius, held 10%
of equity. In September 1999, DCIL purchased the entire 10% equity held by MINL and became the holder of 49% equity. In
March 2006, TMI Mauritius, a fully owned subsidiary of TMs international investment holding company, purchased the entire 49%
share capital of DCIL. The following table captures the key milestones of the company:
Table 1: Milestones Achieved by the Company
Year
1995
1995

1996
1996
1997
1999
1999
1999
1999
2000
2002
2003
2003
2004
2006
2006
2006
2006

Milestones
Incorporated as Private Limited Company under the name Modicom Network Private Limited for providing
telecommunication services.
Company fields bids for providing telecommunication services in six circles, out of which it got H-1 position in three
circles, i.e., it was the highest bidder for getting the license in Karnataka and Punjab and Rajasthan telecom circles.
The Company opted for two telecom circles of Karnataka and Punjab.
Company signed License Agreements with DoT for operation of Cellular Mobile Telephone Services in Punjab and
Karnataka.
MWPL, DCIL and MINL were issued 51%, 39% and 10% equity of the company.
Commencement of commercial operations in May 1997 in Karnataka Circle and June 1997 in Punjab Circle.
DCIL acquired the 10% equity in the Company held by MINL and became a 49% equity shareholder of the Company.
Achieved 0.1 million subscriber base.
Change of status by conversion into Deemed Public Limited Company and change of name to Modicom Network
Limited.
Change of name of the Company to Spice Communications Limited.
The Company became entitled to Revenue sharing regime of licensing instead of Fixed license fee regime.
Obtained ISP license.
Change of name of the Company to Spice Communications Private Limited.
Achieved 1 million subscriber base.
Migrated to United Access Services.
Achieved 2 million subscriber base.
TM International purchased the entire share capital of DCIL.
The Company applied for obtaining ILD and NLD Licenses.
The Company applied for Cellular Licence in 20 Circles.

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2006
Name of Company changed to Spice Communications Limited.
Source: Adopted from the Companys Financial Report.
In the year 1995-96 Company bid for 6 circles wherein it got H-1 position i.e., highest bidder for getting license only in three
circles: Karnataka, Punjab and Rajasthan. It opted for Karnataka and Punjab; and accordingly, in the year 1996, it entered into
license agreement with DoT for cellular mobile service operation. Subsequently, in 1997 it commenced its operations of cellular
services in these circles. By the end of 2006, it became the second largest cellular service provider in Punjab and the sixth largest
cellular service provider in Karnataka based on the total number of subscribers.
Table 2 sets forth certain information relating to the companys subscribers for the period indicated:
Table 2: Subscriber Base
Particulars

Year Ended Year Ended and Year Ended and

and as of June as of June 30,
as of June 30,
30, 2004
2005
2006

Number of Billable Subscribers:

Pre-paid
Post-paid
Total Number of Billable Subscriber
Average Revenue Per User (in Rs.)
Blended
Minutes of Usages
(Average per subscriber)
Pre-paid
Post-paid

For Quarter
Ended Sept.
2006

359,123
223,548
582,671

46,087
347,11
803,398

768,301
395,579
1,163,880

807,124
396,120
1,203,244

633

536

424

368

228
642

239
602

315
576

362
637

Source: Adopted from the Companys Financial Report.

The major strength of the company lies in its size, presence and relatively long history in these two circles; this resulted in strong
brand recognition and substantial experience in providing services that appeal to various markets. In March 2006, TM invested in
the company giving it a chance to influence the operational and strategic expertise of a major regional telecommunications player.
TMs experience and its record of business expansion helped the company not only in implementing the pan-India expansion
strategy but also the technical expertise, marketing expertise and economies of scale. One of the strengths of the company is its
management that includes senior executives who have experience working in the Indian wireless communications market since
1995. Their experience in planning and implementing strategies in the fast-changing Indian cellular market will be crucial in the
implementation of companys future growth plans. The Spice brand is a vibrant and well-recognized name obtained from MCorp
Global Private Limited through a deed of assignment. The brand is positioned as an innovative, youthful and high performing
appeal in all the telecom circles in India.
Strategies
i.
To strengthen its position in existing markets by expanding geographic network coverage, improve cellular services
network quality, and to provide wide coverage area outside its footprint for the subscribers of Karnataka and Punjab.
ii.
To expand its operations nationwide: For this, it already applied to concerned regulatory authorities to acquire
licenses to provide cellular services in an additional 20 circles throughout India; and it has also applied to acquire licenses of
National Long Distance (NLD) telephone services and International Long Distance (ILD) telephone services. This will benefit
the company not only in marketing and branding but also simplifies national pricing policy, increases national accounts
penetration and provides additional revenue streams at a relatively low marginal cost.
iii.
To improve profit margin and cash flow, the company contemplates to better its bottom line by using different
financial, management and operational tools. In an attempt to facilitate cost reduction of infrastructure development and to
fasten the rollout of infrastructure, the company is planning to support cost-efficient build-out of network, to continue sharing
of towers with other cellular service providers and to outsource infrastructure build-up. The company is also expecting cost
savings in outgoing calls and estimating to earn revenue from incoming traffic once they get the NLD and ILD licenses.
iv.
To improve the recognition of the brand name Spice at both local and national levels. In order to retain its position
in local existing markets, it plans to continue region-focused, local language advertising and marketing programs. In order to
make its presence felt nationwide, it plans to promote and advertise all over India through newspapers, radio and television
media networks. It plans to position Spice as a youthful, pioneering, high performing, savvy and technologically advanced,

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targeting the increasing below 35-years age group population in India.

v.
To increase the customer base through expanding its distribution network. It plans to attract new subscribers by
leveraging its relationship with its independent distributors so that to increase the association of retailers who sell more prepaid and post-paid services. Company plans to expand its dealers and distributors set-up so as to improve its brand
recognition, to offer better logistical support to its customer base and to build a strong channel of communication between the
company and customers.
vi.
To provide better value-added services so that the customers across broad spectrum of various market segments get
attracted. In this regard, the company plans to leverage its relationship with Cellebrum.com and TM to not only pioneer valueadded services that keep company ahead of its competitors but also design to appeal various market segments.
vii.
To leverage its relationship with TM so as to gain in creating new products and services, sharing technological
experience and executing and influencing group synergies like global procurement from TMs experience in operational and
management in Malaysia and other important Asian countries. TM has high volume commitments in the Asia- pacific
segments, which will benefit the company when it attains the ILD license.
RISK MANAGEMENT AT SPICE
Credit Risk
The possibility of losses related to the decrease in the credit quality of borrowers or counterparties is known as credit risk. The risk
management system at spice is designed to identify and prevent misuse of its services and also to minimize its bad debts in the postpaid section. It verifies through Contact Point Verification (CPV) and apportion credit limit based on CPV assessment while issuing
new post-paid connections to the customers. These limits are reviewed monthly to control exposure; in case, subscriber exceeds this
limit then the company takes various steps that include sending reminders, requesting interim payments and barring all outgoing
calls. Post-paid subscribers are given 15 days time from the bill date to make payment. If a customer fails to pay bill within the time
limit, then the company sends reminders, telephonic and SMS messages for payment, disconnects the services totally or partially,
uses services of recovery agencies, and as a last recourse the company initiates legal proceedings based on the merits of the case and
the amount due. Company is not exposed to this risk when it comes to pre-paid customers, distributors and retailers as the
distributors purchase items for cash and then sells to retailers.
Foreign Exchange Risk
Changes in foreign exchange spot and forward rates lead to foreign exchange risk. Company is exposed to this risk as its capital
loans are in US Dollars. Equipment purchased from outside India by the company is based on deferred payment terms. Foreign
exchange loss or gain for the company is based on the amount of increase or decrease in the value of rupee between the time of
equipment purchased and the time when payments are made. On the date of balance sheet, company identifies its unrealized foreign
exchange loss or gain based on its US dollars debts payable. Generally, the company does not involve in hedging transactions to
mitigate foreign exchange risk.

Interest Rate Risk

Interest rate risk refers to the risk when a change in the market interest rates will negatively affect the value of the interest
receivable. As on June 30, 2006, companys total debt was sensitive to interest rate fluctuations and it does not involve interest rate
swaps to mitigate interest rate risk.
CASH FLOW ANALYSIS
Table 3: Liquidity and Capital Resources
(Rs. in million)
Particulars
Net cash flow from operating activities
Net cash flow from investing activities
Net cash from financing activities
Effect of exchange difference on translation
of foreign currency
Cash and cash equivalents at the beginning
of the year
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2003
1,925.33
(714.18)
(801.71)

For the years ended June 30,

2004
2005
2,029.80
1,471.70
(1,053.29)
(1,194.54)
(445.76)
(251.05)

2006
1,065.03
(1,929.36)
237.96

1,132,77

1,542.21

2,072.96

2,099.06

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Cash and cash equivalents at the end of the year

1,542,21

2,072.96

2,099.06

1,472.69

Source: Adopted from Companys Financial Report.

Cash Flows from Operating Activities
For the financial year 2006, net cash from operating activities was Rs.1,065.03 million wherein Rs.929.67 million has generated
from operations before working capital changes and Rs.154 million has generated from net changes in working capital being
partially offset by income taxes and Fringe benefit tax of Rs.18.64 million. For the FY-2005, net cash from operating activities was
Rs.1,471.70 million wherein Rs.1,829.48 million has generated from operations before working capital changes was partially offset
by net changes in working capital of Rs.350.90 million and income tax of Rs.6.88 million. For the FY-2004, net cash from
operating activities was Rs.2,029.80 million wherein Rs.1,681.36 million has been generated from operations before working
capital changes and Rs.378.54 million has been generated from net changes in working capital being partially offset by income tax
of Rs.30.10 million. (Refer to Annexure III)
Cash Flow from Investing Activities
For the financial year 2006, net cash used in investing activities was Rs.1,929.36 million wherein Rs.1,867.09 million was spent on
purchasing fixed assets that include network equipment and office equipment, and Rs.118.49 million was recorded as the decrease
in car loans, which was partially offset by the earnings from sale of assets amounting to Rs.5.55 million and interest received on
fixed deposits was Rs.50.67 million. For the financial year 2005, net cash used in investing activities was Rs.1,194.54 million
wherein Rs.1,325.25 million was spent on purchasing fixed assets that include network equipment and office equipment which was
partially offset by Rs.81.84 million as the increase in car loans, the earnings from the sale of assets amounted to Rs.0.43 million and
interest received on fixed deposits was Rs.48.44 million. For the financial year 2004, net cash used in investing activities was
Rs.1,053.29 million wherein Rs.1,187.47 million was spent on purchasing fixed assets that include network equipment and office
equipment, which was partially offset by Rs.80.77 million as the increase in car loans, the earnings from the sale of assets amounted
to Rs.0.63 million and interest received on fixed deposits was Rs.52.78 million.
Cash Flow from Financing Activities
For the financial year 2006, net cash from financing activities was Rs.237.96 million wherein proceeds from long-term borrowings
were Rs.1,0911.93 million offset by long-term payment of Rs.4,859.51 million, short-term payment of Rs.3,364.28 million,
debentures repayment of Rs.2,347.73 million and interest payment of Rs.102.45 million. For the financial year 2005, net cash used
on financing activities was Rs.251.06 million wherein proceeds from short-term borrowings were Rs.1,444.50 million, proceeds
from long-term borrowings were Rs.52.47 million, which was offset by short-term payment of Rs.1,444.50 million and interest
payment of Rs.303.53 million. For financial year 2004, net cash used on financing activities was Rs.445.76 million wherein longterm payment was Rs.57.39 million and interest paid was Rs.388.37 million.
Total capital expenditure for the financial year 2003 was Rs.519.03 million, and for financial year 2004 it was Rs.1,187.47 million,
for financial year 2005 it was Rs.1,077.60 million, financial year 2006 was Rs.1,870.49 million and for the quarter ended September
30, 2006 it was Rs.895 million which consists of costs related to expansion of network in existing circles. Capital expenditure is
anticipated to increase in the next 24 months due to network expansion.
As on September 30, 2006, the companys cash and cash equivalents were Rs.1,363.41 million, outstanding long-term debt was
Rs.11,491.46 million, available lines of credit was US$50 million, and the total amount outstanding under these facilities was US
$25 million. In the past, the cash flow from operations and borrowings from banks were the main sources of funds for the company.
Company anticipates using proceeds from the public issue, bank borrowings and operating cash flows for the growth and working
capital requirements for at least one year.
Out look
Telecom sector may have a mixed experience for different segments in the first quarter of 2007-08. Wireless segment growth may
remain healthy with the subscriber base moving to
Rs.184 million. This implies 12% Quarter on Quarter (QoQ) and 64% Year-over-Year (YoY) growth. But the industry Average
Revenue Per User (ARPU) may decline by 6% QoQ as the new subscribers may come in at marginal ARPU. On the whole, in the
first quarter of 2007-08, telecom industry may record 33% growth in revenues and 71% growth in earnings.

ANNEXURE I

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Statement of Profit and Loss

(Rs. in million)
Year ended 30 Year ended 30 Year
Particulars

30
June 2002

Income
Service Income
Sales of traded products

Other Income
Total (A)
Expenditure
Operating costs
Personal costs
Revenue sharing license fees
Administrative costs
Sales and marketing costs
Loan prepayment and restructuring Cost
Finance cost
Depreciation and amortization
Total (B)
Net profit (loss) before tax (A.B) Provision
for tax
Fringe benefit tax
Net profit/(loss) after tax
Profit/(Loss) brought forward from
previous year
Profit/(Loss) carried forward to Balance
Sheet

ended Year ended 30 Year

June 2003

June 2004

June 2005

ended
30

June 2006

5,016.99

4,942.59

5,363.41

6,018.96
46.71

6,614.86
0.07

5,016.99
309.37
5,326.36

4,942.59
849.95
5,792.54

5,363.41
180.70
5,544.11

6,065.67
364.92
6,430.59

6,614.93
189.60
6,804.53

1,237.63
296.49
488.04
590.98
803.43
3.28
1,057.86
1,004.45
5,482.16
(155.80)

1,454.76
315.55
452.70
461.72
597.72
3.28
763.11
1,171.59
5,220.43
572.11

1,800.51
346.82
424.95
513.81
773.20
3.28
677.26
1,235.09
5,774.92
(230.81)

2,149.08
381.51
340.49
601.27
928.55
3.28
715.71
1,239.25
6,359.14
71.45

2,377.51
406.68
358.49
809.85
1,156.29
48.11
862.18
1,458.21
7,477.32
(672.79)

(155.80)
(6,012.38)

572.11
(6,168.18)

(230.81)
(5,596.07)

1.76
69.69
(5,826.88)

12.97
(685.76)
(5,757.19)

(6,168.18)

(5,596.07)

(5,826.88)

(5,757.19)

(6,442.95)

Source: Adopted from Companys Financial Report.

ANNEXURE II
Statement of Assets and Liabilities
(Rs. in million)
Particulars
A.

B.
C.

Fixed Assets
i.
Gross block
Less: Accumulated
Depreciation
Net Block
ii.
Capital work in
Progress/advances

Investments
Current Assets, Loans and Advances
i.
Inventories

As at 30
June
2002

As at 30
June
2003

As at 30
June
2004

As at 30
June
2005

As at 30
June
2006

13,928.98
4,340.58

14,590.79
5,500.87

15,632.70
6,708.44

16,663.68
7,934.85

18,458.36
9,370.35

9,588.40

9,089.92

8,924.26

8,728.83

9,088.01

212.53
9,800.93

118.79
9,208.71

239.32
9,163.58

271.91
9,000.74

318.93
9,406.94

9.64

3.91

0.52

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ii.
iii.
iv.

D.

Sundry debtors
Cash and bank balances
Loans and advances

555.79
1,132.77
303.62
2,001.82
11,802.75

493.88
1,542.21
698.82
2,738.82
11,947.53

517.32
2,072.96
642.81
3,233.09
12,396.67

578.65
2,099.06
749.86
3,428.09
12,428.83

487.77
1,472.69
520.38
2,480.84
11,887.78

7,300.73
3,602.24
1,565.95
12,468.92
(666.17)

7,180.24
3,368.41
1,489.67
12,038.32
(90.79)

7,451.41
3,364.28
1,899.29
12,714.98
(318.31)

7,397.34
3,364.28
1,912.56
12,674.18
(245.35)

11,073.12

1,973.32
13,046.44
(1,158.66)

5,519.40

5,519.40

5,519.40

5,519.40

5,519.40

(6,168.18)
(17.39)

(5,596.07)
(14.12)

(5,826.88)
(10.83)

(5,757.19)
(7.56)

(6,442.95)
(235.11)

(666.17)

(90.79)

(318.31)

(245.35)

(1,158.66)

(A + B + C)
Liabilities and provisions
i.
Secured loans
ii.
Unsecured Loans
iii.
Current Liabilities and Provisions

Net worth (A + B + C D)
E. Represented by
i.
Equity Share Capital
ii.
Reserves and surplus
Profit and Loss Account
iii.
Misc. Expenditure
to the extent not Written off or adjusted
Net Worth
(i + ii + iii)
Source: Adopted from Companys Financial Report.

ANNEXURE III
Statement of Cash flows
(Rs. in million)
Particulars

Cash Flow from

Operating Activities
Net Proft/(Loss) before tax
Adjustment for:
Depreciation and amortization
Write down in capital work in progress
Investments written off
Loss/(Profit) on sale of fixed assets
Interest Income
Interest cost
Bad debts written off
Provision for bad and doubtful debts
Loan Origination Cost
Liabilities/ Provisions no longer required
written back
Unrealised foreign Exchange (gain)/loss
Extinguishment of liabilities (loans written
Back)
Operating (Loss)/proft before changes in
Working Capital Adjustments for:
(Increase)/decrease in sundry debtors
(Increase)/decrease in loans and advances

Year
ended 30

Year
ended 30

Year
ended 30

Year
ended 30

Year
ended 30

June 2002

June 2003

jUNE 2004

June 2005

June 2006

(155.80)

572.11

(230.81)

71.45

(672.79)

1,004.45

1.00
(66.12)
1,057.86
14.26
118.36

1,171.59
16.68

0.88
(57.28)
763.12
55.91
75.21

(54.48)

1,235.09
12.44

0.51
(54.89)
668.01
102.73

(0.61)

1,239.25
11.06

0.75
(58.43)
661.81
0.19
119.21

(28.95)

1,458.21

0.54
(44.58)
821.39
3.41
155.16
5.73
(66.04)

113.18

(190.66)

(51.11)

(186.86)

6.23
(737.59)

2,087.19

2,353.08

1,681.36

1,829.48

929.67

(405.47)
(939.73)

(66.38)
(414.77)

(126.17)
159.13

(173.26)
(80.76)

(61.69)
191.10

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(Increase)/decrease in inventories
(Increase)/decrease in miscellaneous
expenditure
Increase/(decrease) in current Liabilities and
provisions
Net changes in Working Capital
Income tax refund/ (paid)
Fringe benefit tax paid
Cash generated from operations
Cash Flow from Investing Activities
Increase/(decrease) in capital creditors
Proceeds from sale of fixed assets
Additions to fixed assets (including CWIP)
Interest received
Net Cash from (used in) Investing Activities
Cash Flow from Financing Activities
Proceeds from borrowings short-term
Proceeds from borrowings long-term
Repayment of Debentures
Repayment of borrowings long-term
Repayment of borrowings short-term
Interest paid
Net cash from (used in) Financing Activities
Net increase/(decrease) in cash and cash
equivalents
Cash and cash equivalents at the beginning
of the year
Cash and cash equivalents at the end of the
year
Cash and cash equivalents at the year end
comprise:
Cash in hand
Cheques in hand
Balance with scheduled banks:

On current accounts

In other accounts

5.73
3.28

5.73
3.28

3.91
3.29

(0.52)
3.28

0.52
(233.29)

189.29

35.67

338.38

(99.64)

257.36

(1,146.90)
800.92

1,741.21

(436.47)
8.72

1,925.33

378.54
(30.10)

2,029.80

(350.90)
(6.88)

1,471.70

154.00
(9.27)
(9.37)
1,065.03

198.28
4.65
(761.35)
60.39
(498.03)

(257.21)
0.76
(519.03)
61.30
(714.18)

80.77
0.63
(1,187.47)
52.78
(1,053.29)

81.84
0.43
(1,325.25)
48.44
(1,194.54)

(118.49)
5.55
(1,867.09)
50.67
(1,929.36)

2,882.44

(693.39)
(168.90)
(2,212.21)
(793.06)
(985.12)
258.06

252.88

(69.97)
(467.08)
(517.54)
(801.71)
409.44

(57.39)

(388.37)
(445.76)
530.75

1,444.50
52.47

(1,444.50)
(303.53)
(251.06)
26.10

10,911.93
(2,347.73)
(4,859.51)
(3,364.28)
(102.45)
237.96
(626.37)

874.71

1,132.77

1,542.21

2,072.96

2,099.06

1,132.77

1,542.21

2,072.96

2,099.06

1,472.69

4.74
66.75

3.22
22.21

4.16
34.40

4.60
4.74

3.25
10.27

141.72
919.56
1,132.77

125.53
1,391.25
1,542.21

620.51
1,413.89
2,072.96

875.02
1,214.70
2,099.06

474.68
984.49
1,472.69

Source: Adopted from Companys Financial Report.

ANNEXURE IV
August 2007
Trading Day
Closing Price(Rs.)
1
55.65
2
58.45
3
58.70
4
57.95
5
57.45
6
58.00
7
56.45

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August 2008
Trading Day
Closing Price (Rs.)
1
73.80
2
73.50
3
73.65
4
73.65
5
73.95
6
74.20
7
74.50

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8
9
10
11
12
13
14
15
16
17
18
19
20

54.65
54.65
52.85
49.95
49.75
49.85
49.60
50.05
50.65
50.20
53.05
51.30
52.45

8
9
10
11
12
13
14
15
16
17
18
19
20

74.60
75.15
74.50
74.25
74.05
74.00
73.95
74.10
74.10
74.45
74.65
74.90
74.75

END OF CASE STUDY

END OF QUESTION PAPER

Suggested Answers
Integrated Case Studies III (MSF3S3) : October 2008
Section D : Case Study
1.Michael porter analysis: Indian Telecom Industry
Barriers to entry - Moderate
High capital costs and long gestation period, license needed by service providers to operate in a particular area,
reducing Average Revenue Per User (ARPU), all these factors act as a significant entry barrier. Network
coverage and spectrum allocation also deter new entrants.
Bargaining power of suppliers - Moderate
As there are 8-9 service providers and tariffs are controlled by the regulatory authorities, bargaining power with
the service providers is very less.
Bargaining power of buyers High
Drop in the handset prices, lowering tariffs and increasing affordability, all these factors are contributing to the
subscriber base. With the implementation of mobile number portability, the service providers have to constantly
endeavour to further improve their quality of service in order to retain existing customers and attain new
subscribers.
Inter firm rivalry - High
Owing to number of players operating in the industry and very little brand differentiation to speak of, the
competition is intense with players resorting to expanding reach and achieving pan India presence.
Threat of substitutes - Low
Telecommunications has virtually no substitutes. Postal services can be used as a means of communication but
today is the world of dot com and wireless, so telecom industry has almost no substitute.

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2.a.

< TOP >

Reasons for high penetration of mobile services in India :

Reduced calling rates: The series of price cuts in voice minutes and the introduction of low
entry one-nation call rate plans in 2006 prove that raising the affordability rates, among the masses is
increasingly important to penetrate into the lower-end markets.
Innovative tariff packages: Affordability aspect of mobile services has increased with the

introduction of innovative tariff packages; for instance, Lifetime validity recharge, and micro
recharges that are as low as Rs.10.
Decline in handset prices: During 2003 and 2005, TRAI facilitated significant reduction in

tariffs and the market witnessed a reduction in handset prices

Expansion of network infrastructure

The wireless telecom connections are becoming more and more lucrative for subscribers due to

the easy procurement of the service, competitive tariff plans, portability and many other value added
services such as internet, PMRTS, VSATs, radio paging, GMPCs, basic services and mobile services.
India has one of the lowest mobile phone tariffs in the world resulting in low Average Revenue

per User (ARPU).

b.

The reasons behind the less penetration in Rural India:

Although mobile appears like an easy thing to use, for most of rural Indians it is a tough nut to

crack; training is needed to teach them how to operate the phone.

Keypads are very uncomfortable, so keypad should have common standards and language one

is much comfortable to educated people

Good plan, in turn selecting a service provider, is virtually impossible to decide. For this, plans

have to be introduced which are easily understandable to a lay man.

Electricity outages/load shedding makes it a relatively less useful one. So good battery power is

needed.
Unavailability of signals is also a problem in rural areas. To overcome this problem towers are

needed.
Affordability of the service is the more important aspect. Plans should be kept using the data

the way they use it.

Data services are not targeted at right audience. For this rural semi-educated mass should be the

target.
< TOP >

3.
Particulars
Profitability ratios
Operating Margin (%)
Net Profit Margin (%)
Cash Earnings Ratio
Leverage ratios
Long Term Debt/Net worth
Long Term Debt/Assets
Liquidity ratios
Current Ratio
Quick Ratio
Interest Coverage Ratio

June 02

June 03

June 04

June 05

June 06

75.33
-2.925
0.16

70.57
9.877
0.30

66.43
-4.163
0.18

64.57
1.083
0.20

64.06
-10.08
0.11

-16.37
0.92

-116.19
0.88

-33.98
0.87

-43.86
0.87

-9.56
0.93

1.28
1.27
0.85

1.84
1.84
1.75

1.70
1.70
0.66

1.79
1.79
1.10

1.26
1.26
0.22

The operating profit margin has constantly decreased from 2002 to 2006. Net profit margin has been fluctuating
over the years and it can also be observed that net profit margin is negative for the years 2002, 2004 and 2006;
this can be due to terrific growth in indirect expenses, such as administration, sales and marketing, and
depreciation. This decrease in profit margin is probably due to improper-cost management. The same can be
observed in case of cash earning ratio.
The Long-term debt to net worth ratio has been negative through out the period under consideration. It is because
of negative net worth as the company has been incurring significant losses. Long-term debt to assets ratio shows
that capital expenditure spent on fixed assets including network equipment and office equipment have been

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financed with debt, due to negative net worth. Hence, the company is highly levered firm indicating huge amount
of financial risk.
The current ratio of the company has been more or less stable over all these years under consideration and not
satisfactory. Also the quick ratio of the company is almost on the same levels as the current ratio. By careful
observation of current and quick ratios, it can be interpreted that inventories maintained by the firm are
negligible. It is due to the nature of the company or its operations in tele communication business. Interest
coverage ratio also has been fluctuating in all the years. The reason for this can be the foreign exchange exposure
the company has, due to the denomination of capital loans in US dollars.
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4.
Trading Day
August 2007

Closing Price (Rs.)

Trading Day
August 2008

Closing Price (Rs.)

ROC Index
(%)

55.65

73.80

132.61

2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

58.45
58.70
57.95
57.45
58.00
56.45
54.65
54.65
52.85
49.95
49.75
49.85
49.60
50.05
50.65
50.20
53.05
51.30
52.45

2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

73.50
73.65
73.65
73.95
74.20
74.50
74.60
75.15
74.50
74.25
74.05
74.00
73.95
74.10
74.10
74.45
74.65
74.90
74.75

125.75
125.47
127.09
128.72
127.93
131.98
136.51
137.51
140.96
148.65
148.84
148.45
149.09
148.05
146.30
148.31
140.72
146.00
142.52

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Interpretation:
A rising ROC Index indicates a growth in momentum (a bullish factor) and a falling index a loss in momentum (a
bearish factor). The line drawn at level 100 functions as a reference line to study the movement of the index.
When the ROC Index is above the reference line, the market price is at a higher level than the prevailing 12
months earlier. If the ROC Index is above the reference line and is also rising, then the rate at which the price
increases grows. Any fall in the ROC represents a drop in momentum. If the index is falling but is still above
reference line, it indicates a slow down in the rate of increase in price.
When the index falls below the reference line, a future loss of momentum is indicated. The point at which the
momentum index crosses the reference line, marks the onset of a trend reversal (Note that the ROC Index reaches
its peak much before it crosses the reference line).
When the index is below the reference line, but is rising, this is indicative of an increase in upward momentum.
The ROC Index turning upward, even while it lies below the reference line, marks a reversal of bearish trend.
Here in the case of spice communications, we can observe that the ROC index of the company has been
experiencing an up trend in the beginning, then it was more or less constant with minor fluctuations.
5.Current stock price = Rs. 74
The appropriate strategy is long butterfly spread. Mr. Mehta could create a long butterfly spread by buying one
call option each at strike prices Rs.70 and Rs.85 and selling two call options at the intermediate strike price
Rs.76
Initial investment = 23 + 4 - (2 12) = 3
Pay-off table
Stock price
70
71
72
73
74
75
76

Long call
(Rs.70)
0
1
2
3
4
5
6

Long call
(Rs.82)
0
0
0
0
0
0
0

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Short calls
(Rs.76)
0
0
0
0
0
0
0

Initial
outflow
-3
-3
-3
-3
-3
-3
-3

Net pay-off
-3
-2
-1
0
1
2
3

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77
78
79
80
81
82
83

7
8
9
10
11
12
13

0
0
0
0
0
0
1

-2
-4
-6
-8
-10
-12
-14

-3
-3
-3
-3
-3
-3
-3

2
1
0
-1
-2
-3
-3

Therefore maximum possible profit = Rs.3

Maximum possible loss = Rs.3
Break-even points are Rs.73 and Rs.79
6.SWOT Analysis: (Spice Communications)
STRENGTH
Leadership position: Spice communications is the No. 1 player in both the circles (Karnataka and Punjab)
Strong Brand Equity and it is positioned as the Total Telephony Company.
High network quality and reliability: Rated one of the best service providers of mobile telephony in India
with high network quality and reliability
Fusion of Telekom Malaysias operational experience and Spice Telecoms management expertise
Pooling technological skills to create innovative new products and services to delight a young, techsavvy market
WEAKNESS

Unable to restrict Bhartis fast growth

Isolated presence in a market of scale: Spice Communications is one of the smaller players in the

Indian telecom sector, has GSM operations in only two circles (Punjab and Karnataka).
Operating margins would be significantly lower than larger peers based on: i) lower proportion of

on-net calls, ii) insufficient leverage of long distance infrastructure iii) bargaining power for interconnects, and iv) roaming with other operators.
OPPORTUNITY
Value added services: The company develops Mobile VAS and other operating solutions, as well
as content for Mobile Service Providers. Spice Mobile VAS has partnered with the Airtel, Idea and
Reliance. The company specializes in mobile VAS and tech platform solutions (TELCO-centric), social
networking, gaming solutions and mobile marketing.
Leading a partnership with other operators to form a fourth front.
Spice telecom has applied for licenses for 20 additional circles, in addition to applying for licenses for
NLD and ILD, which will enable it to capture captive traffic from its 2 licensed areas. This would be
sufficient to make these services viable. Apart from starting VPN services, NLD/ILD Service will permit
National Presence and enhance Spice Telecoms offering.
Focus on traders and small business segments in Punjab with a teledensity of 23% has the highest mobile
penetration amongst all circles, now will be on coverage in interior and rural areas. Karnataka on the
other hand is double the size of Punjab in terms of population and geography and therefore represents
enormous untapped potential. Both these states are rated as the GO LD PLATED states by the
Industry. There will be continuous development of more Innovative Products and Services with
differentiated features for target markets ensuring customer loyalty and delight.
THREAT
Bigger competitors: Bharti group which has very aggressive network coverage and spectrum
allocation.
One of the reasons behind the success of regional brands is their ability to focus on their region,
with flexibility to respond faster to market forces. But with unstable regulatory policies and a vacuum
created as not being a national player, the local image is seen as limiting, especially when it s
compared with National tariffs, STD, GPRS and roaming.

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7.3G represents a paradigm shift from the voice centric world of the previous generations of wireless networks to
the multi-media centric world of 3G. Reflecting the high 3G bandwidth and the fact that it is packet based, 3G
devices will offer capabilities that are a combination of a phone, PC, and a TV. Examples of services that will be
3G networks can offer are:
Always-on connection with users paying only when sending or receiving packets.
Web surfing.
Instant messaging and email with multimedia attachments.
Location based services.
Personalized services, where content can be pushed to users.
Broadband multimedia data services like video conferencing and streaming video.
Receiving faxes.
Global roaming capability.
Getting maps and directions with a multi-modal user interface.
Customized entertainment.
Simultaneous access to multiple services, each service offering some combination of voice, video, data,
etc.
Long-distance phone calls, domestic and international, could get a lot cheaper. Apart from general
telephone users, other major beneficiaries will be BPO companies, who will be able to slash costs of
making phone calls, by almost 70 per cent as per some estimates. That will be good for the
competitiveness of India's BPO industry.
Broadband wireless access (BWA) technologies enable high-speed data communication over wireless
links. It offers significant advantages over wireline broadband systems based on cable network or DSL,
having better coverage, speedy deployment, high scalability, lower maintenance and upgrade costs, and
phased investment to match market growth
Potential Killer Applications:
The high bandwidth of 3G networks will lead to the creation of new services, some of which we have no idea
about at this time. The big question is what services will be big revenue makers for the wireless service
providers. In 2G networks, the big winners have been short text messaging in GSM networks (Europe and
countries other than USA) and image downloads and forwarding on iMode networks in Japan. Two candidate
services for big winners in 3G networks are
video conferencing and
video messaging.
It will allow users to view movies on their mobile phones, conduct video telephony, send and receive e-mail,
play the stock market while on the move, and so on.
8.Rationale behind consolidation phase in Indian Telecom Industry:
The companies that are not big enough to compete on the scale with the big guys and not able

to establish a tight relationship with the communities they serve, are going away,
The stated trends behind the consolidation push, the need for global economies of scale and

fixed/mobile convergence.
There is a need for telecom service providers to be large enough to provide adequate logistical

support, carry more inventory with short lead times to accommodate success-based builds, [equip,
furnish and install] support and have the ability to offer some outsourcing capabilities around networks
and an end-to-end portfolio, with aggressive pricing to match.
Equipment vendors have to provide an end-to-end solution for delivering voice, data and video

to their ever-larger customers.

Demand for new spectrum as the industry grows and the fact the spectrum allocation is done on

the basis of number of subscribers will force companies to merge, so as to claim large number of
subscribers to gain more spectrum as a precursor to the launch of larger and expanded services.
However, it must also be noted that this may very well never happen on account of low telecom
penetration.

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* The above case is prepared only for the purpose of examination and not to illustrate either effective or ineffective
performance of the fund. The case contains real information adapted and combined with other information to generate
discussion or analysis on the desired topics.

[1]
Tele density implies the number of landline telephones in use for every 100 individuals living within an area. A tele density greater than
100 means there are more telephones than people.

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