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                  SECTORAL ANALYSIS

                 Live Project Submitted to the “College Name”
                    in Partial fulfilment of the requirements


                               SUMATI SETHIA


                        EXECUTIVE SYNOPSIS

Trainee                    :        Sumati Sethia

Organization               :        ShareKhan Limited

Educational Institute      :        Management of Business Finance (MBF) 2008-10

                                    Indian Institute of Finance, Greater Noida - 201306

Address                    :        ShareKhan Limited, Property No. 6,
                                    Begumpur Main Shivalik Road, New Delhi - 110017

Company Guide              :        Mr. Rachit Malhotra, (Sr. Relationship Manager)

Topic                      :        “Sectoral Analysis of Telecommunication Industry”

Duration                   :        12 Weeks (20th Jan 10 – 20th Apr 10)

 SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                       pg. 2


As a part of sixth semester, a student has to pursue a project duly approved by the academic
guide of the institute. I had the privilege of undertaking project under the guidance of Mr.
Pankaj K Jain on “Sectoral Analysis of Telecommunication Industry”.

My project is divided into five chapters and they are given as under.

   1. Chapter one of this study contains, basic concept of financial market. It discuss about

       the introduction of the financial market and EIC Analysis.

   2. Chapter two deals with the Review of Literature on “Equity Research and

       Telecommunication Industry”.

   3. Chapter three is Research Methodology and it deals with Different Valuation

       Strategy wiz. P/E Multiple, DCF Valuation and Technical Analysis. It also discusses

       the about the uses and advances & disadvantages of these strategies.

   4. Chapter four deals with the Analysis and Interpretation part and discuss about the

       fundamental and technical analysis of four stock of telecommunication industry.

   5. Chapter five deals with the Conclusion, Discussion of Results, Suggestion and

       Limitations of the study.



                                                          Enrolment No....................................

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                                      pg. 3


The present study includes the different strategies of equity valuation and also analyses the
industry and different companies on the basis of their fundamental/intrinsic value and
technical value. A comprehensive study is proposed with the following objectives.

   1. To evaluate the performance of selected stocks on the basis of the fundamental and
        technical analysis.

   2. To evaluate the telecommunication industry and its growth.

   3. To examine the best investment option available in the telecommunication industry.

   4. To study the new innovation in telecommunication industry and its impact on the
        profitability of the companies.

In addition to the above objectives, following secondary objectives are also there.

   1.   To understand the basic terminology behind working of capital market.

   2.   To understand the concept of valuating a company on the basis of its financials.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                              pg. 4


The time one talks about stock market, another word also clicks and that is risk. People have
lost their millions in this stock market. Stocks are just like gamble for those who don’t know
how to invest. The market behaves differently to different people. For speculators it can be
risky. They are the speculators, who mostly lose the most. Investor can surely take out profit
from market very easily by just Analyzing the current situation through Fundamental and
Technical Analysis. It helps one to take out his money with sufficient if not unlimited profits.
When I started to learn Equity Analysis at that time the stock market was going through its
Fluctuating phase, it was a slow moving market, and market trend came unexpectedly. So it's
high time when everybody should look at trend of the markets and stocks. Initially I have
tried to show how people suffer losses and make gains in the absence of analysis. I have tried
to show all combinations that can be used for analyzing the equity. It also has detailed study
of some companies that would help one to compare them and decide which one is better to
invest. The future prospects of a company can also seen using this analysis. For this some
ratios like PE ratio, price to sales, price to operating profits, EPS will be used, apart from that
Technical Analysis and P/E Multiple is used to help one in making right decisions.

For my understanding I referred to a book Damodaran on Valuation. This was that book
that actually helps me understanding the analysis Part. For all the data collection,, and
proved to be a great help for me. It helps me track all the historic information about
companies and to track the current trends of the market and stocks.

The project begins with stock market its scenario and gives explanation why people prefer
investing in Indian markets. And then it shifts to its major focus Equity Analysis and with
each step I have understood it better. The following work is the detailed explanation of my

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                               pg. 5

                            TABLE OF CONTENTS

                                                                    Page No.
 DECLERATION                                                             i
 ACKNOWLEDGEMENT                                                        ii
 EXECUTIVE SYNOPSIS                                                     iii
 PREFACE                                                                iv
 OBJECTIVES                                                             v
 ABSTRACT                                                               vi
 LIST OF TABLE                                                       vii-viii
 LIST OF FIGURES                                                       ix-x

 1. INTRODUCTION                                                        1
  1.1 INTRODUCTION TO SHAREKHAN LIMITED                                 2
     1.1.1 TOP MANAGEMENT                                              2-3
     1.1.2 PRODUCT                                                    4-10
     1.1.3 SERVICES                                                   10-15
  1.2 INTRODUCTION TO THE PROJECT                                      16
     1.2.1 STOCK MARKET                                               16-17
     1.2.2 PRIMARY AND SECONDARY MARKET                               17-18
     1.2.3 SEBI                                                       19-21
     1.2.4 NATIONAL STOCK EXCHANGE                                    21-22
     1.2.5 BOMBAY STOCK EXCHANGE                                      22-24
     1.2.6 UNDERSTANDING STOCK MARKET RISK                            24-25
  1.3 EIC ANALYSIS                                                     26
     1.3.1 INDIAN ECONOMY OVERVIEW                                     26 INTRODUCTION                                          26-27 ECONOMIC SCENARIO                                     27-29 RURAL INDIA GROWTH STORY                               30 ADVANTAGE INDIA                                       30-31


 GROWTH POTENTIAL                                      31-32
     1.3.2 INDUSTRY ANALYSIS                                           33 SNAPSHOT OF INDIAN TELECOM INDUSTRY                   33-36 WIRELESS SERVICE OPERATORS                            36-37 GSM AND CDMA SERVICE PROVIDES                         38-39 OTHER SERVICES                                        39-42 INDIA - DESTINATION FOR INVESTMENT                     42 REGULATORY FRAMEWORK                                  43-45 VARIOUS PHRASES OF TELECOM INDUSTRY                   46-48 FDI INVESTMENT IN TELECOM INDUSTRY                    48-49 GROWTH AVENUES IN TELECOM INDUSTRY                    50-54 PORTOR FIVE FORCE MODEL                              55-56 CURRENT DATA OF TELECOM INDUSTRY                     57-59
     1.3.3 COMPANY PROFILE                                             60 BHARTI AIRTEL                                         60-63 RELAINCE COMMUNICTION                                 64-68 IDEA CELLULAR LIMITED                                 69-72 TATA COMMUNICATION LIMITED                            72-74

CHAPTER 2. REVIEW OF LITERATURE                                       75-84

 3.1 RESOURCES                                                         86
 3.2 P/E MULTIPLES                                                     87
     3.2.1 INTRODUCTION                                               87-89
     3.2.2 P/E CONCEPT IN BUSINESS CULTURE                            89-91
     3.2.3 INTERPRETATION                                             91-92
     3.2.4 EQUITY RISK INDICATOR                                      92-93
     3.2.5 MARKET P/E                                                 93-95
     3.2.6 HOW TO USE THE P/E                                         95-96
     3.2.7 P/E DRAWBACKS                                              96-97


 3.3 EQUITY ANALYSIS                                                  97-99
     3.3.1 FUNDAMENTAL ANALYSIS                                      100-101 BASIC OF DCF VALUATION                               101-109
     3.3.2 TECHNICAL ANALYSIS                                        109-111 MACD                                                 112-119 WIILIAMS' %R                                         119-121 BOLLINGER BAND                                       122-127
3.4 RATIO ANALYSIS                                                   128-130
     3.4.1 NET PROFIT MARGIN                                           130
     3.4.2 EARNING PER SHARE                                           131
     3.4.3 PRICE TO BOOK VALUE                                         132
     3.4.4 EV/EBITDA                                                 132-133
     3.4.5 PEG RATIO                                                 133-134
     3.4.6 RETURN ON EQUITY                                          134-135
     3.4.7 DUPONT FORMULA                                              136

CHAPTER 4. ANALYSIS AND INTERPRETATION                                 137
 4.1. BHARTI AIRTEL                                                  139-141
     4.1.1 CALCULATION OF TRAILING EPS & P/E                         142-143
     4.1.2 CALCULATION OF INTRINSIC VALUE                              144 CALCULATION OF BETA                                    144 CALCULATION OF WACC                                    144 CALCULATION OF INTRINSIC VALUE                         145 SCENARIO ANALYSIS                                      145
     4.1.3 TECHNICAL ANALYSIS OF BHARTI AIRTEL                         146
 4.2 RELAINCE COMMUNICATION LIMITED                                  147-148
     4.2.1 CALCULATION OF TRAILING EPS & P/E                         149-150
     4.2.2 CALCULATION OF INTRINSIC VALUE                              151 CALCULATION OF BETA                                    151 CALCULATION OF WACC                                    151 CALCULATION OF INTRINSIC VALUE                         152


 SCENARIO ANALYSIS                                      152
 4.3 IDEA CELLULAR LIMITED                                           154-155
     4.3.1 CALCULATION OF TRAILING EPS & P/E                         156-157
     4.3.2 CALCULATION OF INTRINSIC VALUE                              158 CALCULATION OF BETA                                   158 CALCULATION OF WACC                                   158 CALCULATION OF INTRINSIC VALUE                        159 SCENARIO ANALYSIS                                     159
     4.3.3 TECHNICAL ANALYSIS OF IDEA CELLULAR                         160
 4.4 TATA COMMUNICATION LIMITED                                      161-162
     4.4.1 CALCULATION OF TRAILING EPS & P/E                         163-164
     4.4.2 CALCULATION OF INTRINSIC VALUE                              165 CALCULATION OF BETA                                   165 CALCULATION OF WACC                                   165 CALCULATION OF INTRINSIC VALUE                        166 SCENARIO ANALYSIS                                     166
     4.4.3 TECHNICAL ANALYSIS OF BHARTI AIRTEL                         167
 4.5 COMARATION OF COMPANIES                                           168

CHAPTER 5. CONCLUSION AND SUGGESTION                                   169
 5.1 CONCLUSION                                                      170-172
 5.2 SUGGESTIONS                                                       173
 5.3 LIMITATIONS                                                       174

 BIBLIOGRAPHY                                                        175-193
 WEBLIOGRAPHY                                                        193-195
 ANNEXTURES                                                          196-200


                               LIST OF TABLES

Table No.                                                            Page No.
    I       NUMBER OF SUBSCRIBER OF MAJOR PLAYER                        47
   V        COMPANIES BASIC INFORMATION                                 138


   VII      CALCULATION OF TRAILING EPS & P/E                           142
   IX       CALCULATION OF BETA VALUE                                   144
   XII      SCENARIO ANALYSIS                                           145

  XVI       CALCULATION OF BETA VALUE                                   151
  XVII                                                                  151
 XVIII      CALCULATION OF INTRINSIC VALUE                              152

  XXI       CALCULATION OF TRAILING EPS & P/E                           156

 XXIV       CALCULATION OF WACC                                         158
 XXVI       SCENARIO ANALYSIS                                           159



 XXVIII    CALCULATION OF TRAILING EPS & P/E                            163
  XXX      CALCULATION OF BETA VALUE                                    165
 XXXII     CALCULATION OF INTRINSIC VALUE                               166

 XXXIII    SCENARIO ANALYSIS                                            166
 XXXV      STOCK FOR INVESTMENT PURPOSE                                 168


                               LIST OF FIGURES

Figure No.                                                           Page No.
    1        TELECOM INDUSTRY REVENUES                                  34
    2        BUSINESS MODEL OF TELECOM INDUSTRY                         34
    3        TELECOM SUBSCRIBER BASE IN INDIA                           35
    4        TELEDENSITY IN INDIA                                       36
    5        MARKET OF WIRELESS NETWORK                                 37
    6        INDIAN MOBILE SERVICES SHARE                               37
    7        MARKET SHARE OF GSM PLAYERS                                38
    8        MARKET SHARE OF CDMA PLAYERS                               39
    9        INTERNET SERVICES                                          40
    10       INTERNET SUBSCRIBERS                                       41
    11       TOP FIVE INTERNET SERVICES PROVIDER                        42
    12       INDIAN REGULATORY FRAMEWORK                                43
    13       IMPACT OF POLICY CHANGE ON TELECOM INDUSTRY                45
    14       PHARSES OF GROWTH STORY                                    46
    16       FDI INVESTMENT IN TELECOM INDUSTRY                         49
    17       GROWTH AVENUES IN FUTURE                                   50
    18       CLASSIFICATION OF VALUE ADDED SERVICES                     54
    19       POSITIVE DIVERGENCE IN MACD                                113
    20       BULLISH MOVING AVERAGE CROSSOVER IN MACD                   114
    21       CENTERLINE CROSSOVER IN MACD                               114
    22       NEGATIVE DIVERGENCES IN MACD                               115
    23       BEARISH MOVING AVERAGE CROSSOVER IN MACD                   116
    24       BEARISH CENTERLINE CROSSOVER IN MACD                       117
    25       BUY/SELL SIGNAL USING WILLIAMS' %R                         120
    26       WILLIAMS' %R AND ITS TREND                                 121
    27       BOLLINGER BAND                                             122
    28       CALCULATION OF PRICES USING BOLLINGER BAND                 124


    29      DOUBLE BOTTOM BUY IN BOLLINGER BAND                         125
                                  BHARTI AIRTEL
    31      SALES                                                       139
    32      NET PROFIT                                                  139
    33      EARNINGS PER SHARE                                          140
    34      BOOK VALUE                                                  140
    35      HISTORCAL TRAILING P/E                                      143
    36      TECHNICAL CHART WITH INDICATORS                             146
                          RELAINCE COMMUNICATION
    37      SALES                                                       147
    38      NET PROFIT                                                  147
    39      EARNINGS PER SHARE                                          148
    40      BOOK VALUE                                                  148
    41      HISTORCAL TRAILING P/E                                      150
    42      TECHNICAL CHART WITH INDICATORS                             153
                                  IDEA CELLULAR
    43      SALES                                                       154
    44      NET PROFIT                                                  154
    45      EARNINGS PER SHARE                                          155
    46      BOOK VALUE                                                  155
    47      HISTORCAL TRAILING P/E                                      157
    48      TECHNICAL CHART WITH INDICATORS                             160
                             TATA COMMUNICATION
    49      SALES                                                       161
    50      NET PROFIT                                                  161
    51      EARNINGS PER SHARE                                          162
    52      BOOK VALUE                                                  162
    53      HISTORCAL TRAILING P/E                                      164
    54      TECHNICAL CHART WITH INDICATORS                             167


                     CHAPTER – ONE




Launched on Feb 8th 2000 as an online trading portal, Sharekhan Ltd today, is India’s
leading online retail broking house with its presence through 800 ‘Share Shops’ in 300 cities
and serving more than 6,50,000 customers across the nation. Launched on Feb 8th 2000 as an
online trading portal, Sharekhan Ltd today, is India’s leading online retail broking house with
its presence through 800 ‘Share Shops’ in 300 cities and serving more than 6,50,000
customers across the nation. Launched on Feb 8th 2000 as an online trading portal,
Sharekhan Ltd today, is India’s leading online retail broking house with its presence through
800 ‘Share Shops’ in 300 cities and serving more than 6,50,000 customers across the nation.
Launched on Feb 8th 2000 as an online trading portal, Sharekhan Ltd today, is India’s
leading online retail broking house with its presence through 800 ‘Share Shops’ in 300 cities.


Mr. Tarun Shah, CEO, Sharekhan:

A science graduate from St. Xavier’s College, Mumbai, Mr.Tarun Shah started his
professional life in sales and marketing in a chemicals company. His hands on approach and
rigorous experience in sales led him to higher challenges that the capital markets provided.

In 1987, he joined SSKI, a brokerage firm with over five decades of legendary service to its
credit. The capital markets at that time was undergoing a sea change in its character and SSKI
under the vision and guidance of Shripal Morakhia and the commitment and hard work of
Mr. Shah was able to change and adopt the new business practices to achieve significant
growth in a competitive environment. Since then SSKI has achieved growth in each of its
business Institutional Broking, Retail broking and Corporate Finance. Starting with retail
broking in Bombay and developing a sub-broker network across the country, he was also
instrumental in successfully setting up an Institutional Trading Desk?.

Accepting new challenges is a way of life for Mr. Tarun Shah. To ensure that SSKI?s foray
into retail stock broking business through Sharekhan meets with the same success every other

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                            pg. 15

SSKI venture has, Mr. Tarun Shah moved in to spearhead this new effort as CEO of the

Mr. Jaideep Arora, Director, Product Development:

Jaideep Arora, completed his B.Tech from IIT (Kanpur) and his PGDM from IIM Kolkata
worked with ICICI for 8 years where his work spanned a gamut of functions, which included
project finance, equity sales and brokerage, investments etc. During his tenure there he set up
and headed the Institutional Equity Brokerage Desk at ICICI Securities & Finance Co. Ltd.

Jaideep joined Sharekhan in June 2000 as Head of Product Development. A year later he took
over the Reigns of the online business at Sharekhan. At present Jaideep’s responsibilities
include spearheading Sharekhan’s online foray and overall customer acquisition effort.

Mr. Shankar Vailaya, Director, Operations, Finance and Legal Functions:

A Commerce graduate from the University of Mangalore and an Associate of The Member of
the Institute of Chartered Accountants of India.

Mr. Shankar Vailaya heads the operations, finance and legal functions. He is responsible for
settlements, depository operations, risk and compliance and regulatory & other legal
commitments and Treasury.

Shankar has managed broking operations through the most turbulent times of the post
securities scam period in 1992 and has managed to steer clear of a flurry of bad papers in the
market during 1994-95.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                           pg. 16



SHAREKHAN is a leading online broker in India. Sharekhan is actually a brand name from
'SSKI Securities'. In india if you are planning to trade in shares, buy sell stocks, trade in stock
market derivatives like futures and options, or invest in commodities like gold etc. you should
know about Sharekhan. You can also open a Sharekhan Demat Account. A demat account is
an account which you need in India to buy and sell shares. Read this entire post to find out all
information you need about Sharekhan.

Sharekhan Demat Account
A Demat Account is an account which you need in India in order to buy and sell shares.
Earlier shares or stocks or a company were bought and sold in paper format. Now they are
stored electronically. Just like money is saved in your bank account, Shares are stored in your
Demat Account (sometimes also called DMAT account). You can open a Demat Account
with sharekhan. This is especially recommended if you have an online trading account with
Sharekhan. You can then link you Sharekhan trading account with your Sharekhan Demat
Account so that any shares bought with the trading account can be directly transferred to your
Demat. Here is all information you need about Sharekhan Demat Account.

Documents Needed to Open a Sharekhan Demat Account:

   1.   PAN Card. Pan card is now mandatory in order to open a Demat Account.
   2.   Address Proof. Example- your ration card, driver's licence, electricity bill, voter id or
        election card, etc.
   3.   Your recent photographs. Two or three.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                               pg. 17

  4.   A cancelled check. This may or may not be required. But carry your bank passbook
       and check book when you go to open a Sharekhan Demat Account.

Sharekhan Demat Account Charges

   1. Sharekhan Demat Account Opening Charges: NIL
   2. Sharekhan Demat Account Maintenance Charges: Rs. 75 per quarter, i.e. Rs. 300
       per anum.
   3. Sharekhan Demat Account Closing Charges: Rs. 100.
   4. Sharekhan Demat Account Charges for Buying Shares: 0.02% , Minimum Rs. 15.
   5. Sharekhan Demat Account Charges for Selling Shares: 0.04%, Minimum Rs. 15.
   6. Sharekhan Dematerialization Charges: Rs. 3 per certificate or Rs 15 per request,
       whichever is higher.
   7. Sharekhan Rematerialization Charges: Rs. 25 per certificate of 0.12% of the value
       of the securities, whichever is higher.
   8. Sharekhan Demat Account Custody Fee: NIL
   9. Charges for Requests to freeze or defreeze Sharekhan Demat Account: Rs. 25 per

Sharekhan Demat Account Charges for pledge creation/closure: 0.02%, minimum Rs. 15.


       This account enables you to buy and sell shares through our website. You get features
         a) Streaming quotes (using the applet based system).
         b) Mutltiple watchlists.
         c) Integrated Banking, demat and digital contracts..

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                         pg. 18

          d) Instant credit and transfer.
          e) Real-time portfolio tracking with price alerts and, of course, the assurance of
               secure transactions.

Features of Classic Account that enables you to invest effortlessly:

       Online trading account for investing in Equities and rivatives via
       Integration of: Online trading + Bank + Demat account
       Instant cash transfer facility against purchase & sale of shares
       Make IPO bookings

    You get Instant order and trade confirmations by e-mail

       Streaming Quotes
       Personalised Market Scan with your own customized stock ticker!
       Single screen interface for cash and derivatives

    Your very own Portfolio Tracker!

 2) TRADE TIGER TERMINAL: Cutting Edge Tools for ShareKhan:

     A single platform for multiple exchange BSE & NSE (Cash & F&O), MCX,
        NCDEX, Mutual Funds, IPOs.

     Multiple Market Watch available on Single Screen.

     Multiple Charts with Tick by Tick Intraday and End of Day Charting powered with
        various Studies.

     Graph Studies include Average, Band- Bollinger, Know Sure Thing, MACD, RSI,

     Apply studies such as Vertical, Horizontal, Trend, Retracement & Free lines.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                         pg. 19

     User can save his own defined screen as well as graph template that is, saving the
       layout for future use.

     User-defined alert settings on an input Stock Price trigger.

     Tools available to guage market such as Tick Query, Ticker, Market Summary,
       Action Watch, Option Premium Calculator, Span Calculator.

     Shortcut key for FAST access to order placements & reports.

     Online fund transfer activated with 12 Banks.

Provide Technical Assistance:

Market Summary:

   1) Pre market Update
   2) High noon Report
   3) Post market Round Up

Technical research Products:

   1) Hit list for the day
   2) Short and long calls
   3) Punters Call

Pivot Genie:

Select the stock and the genie will give you intraday levels.


Meet breed of specially trained Relationship Managers who have turned around portfolios of
many clients. Most of the client’s treat us as family members now.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                       pg. 20


Presenting ShareKhan PMS PRO Prime I, safe and sound, strategy based investment product
focused on capital protection and maximizing gains for those who want to risk high for high
returns. The PMS protech portfolio has given returns higher than the market for the past 3
years and earned the trust of thousand of HNI investors.


The Top Picks Basket contains 12 winning stock ideas picked out by our Research team, and
updated every month. So don't waste time reading company reports and analysing PE ratios.
       Covers a wide variety of risk-return and investment profiles
       A complete analysis is made of every stock
       Easy interface to handle the portfolio of 12 selected

Stock SIP is a flexible, hassle free investment product that allows you to systematically invest
in your favourite stocks

       Invest systematically every month, every week or even every day in stocks of choice.
       Set buy order for every month or every quarter in one go
       Get alerts about an upcoming instalment


We're glad to announce that you will now be able to invest in Mutual Funds through us!
We've started this service for a few mutual funds, and in the near future will be expanding
our scope to include a whole lot more. Applying for a mutual fund through us is open to
everybody, regardless of whether you are a Sharekhan customer. To invest in a fund, all you

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                            pg. 21

have to do is download the application form, print it out, fill it in and send it over to us. We'll
do the rest for you

Invest regularly in your favourite mutual funds with a Sharkehan Trading Account and see
your money grow:

      400+ Mutual Funds from 17 Fund Families to choose from
      Winning Investment Advice by Research Analysts
      SMS and Email alerts about monthly payments

Now invest in your favourite mutual not only monthly, but also daily, weekly and fortnightly.
FLEXI-SIP helps you place your orders for future date in any scheme at time intervals
specified by you:

      Invest systematically every day, every week or every fortnight
      Flexible minimum amount of investment
      Start and Stop your Flexi SIP anytime

   6) DIAL n TRADE:

Trade in Equity by using your phone!

Free with your Sharekhan Classic Account, the Dial-n-Trade service enables you to place
orders for buying and selling shares through your telephone.

All you have to do is dial any one of our two dedicated numbers (1-800-22-
7050 or 30307600), enter your TPIN number (which is provided at the time of opening your
account) and on authentication you'll be directed to a telebroker who will buy and sell
shares for you.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                               pg. 22

Features of Dial-n-Trade: that enables you to trade effortlessly

      TWO dedicated numbers for placing your orders with your cellphone or landline.
       Toll free number: 1-800-22-7050. For people with difficulty in accessing the toll-free
       number, we also have a Reliance number (Your Local STD Code) 30307600 which is
       charged at as a local call.
       Simple and Secure Interactive Voice Response based system for authentication.
       No waiting time. Enter your TPIN to be transferred to our telebrokers.
       You also get the trusted, professional advice of our telebrokers.
       After hours order placement facility between 8.30 am and 9.00 am.
       Reliable service, wherever you are.


Online Services to Suit your Needs!

With a Sharekhan online trading account, you can buy and sell shares in an instant! Anytime
you like and from anywhere you like!

You can choose the online trading account that suits your trading habits and preferences -
the Classic Account for most investors and Tradetiger for active day traders. Your Classic
Account also comes with Dial-n-Trade completely free, which is an exclusive service for
trading shares by using your telephone.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                          pg. 23


Get everything you need at a Sharekhan outlet!

All you have to do is walk into any of our 1200 share shops across 400 cities in India to get
a host of trading and investment related services.Our friendly customer service staff will also
help you with any account related queries you may have.

A Sharekhan outlet offers the following services:

       Online BSE and NSE executions (through BOLT & NEAT terminals)
       Free access to investment advice from Sharekhan's Research team
       Sharekhan ValueLine (a monthly publication with reviews of recommendations,
       stocks to watch out for etc)
       Daily research reports and market review (High Noon & Eagle Eye)
       Pre-market Report (Morning Cuppa)
       Daily trading calls based on Technical Analysis
       Cool trading products (Daring Derivatives and Market Strategy)
       Personalised Advice
       Live Market Information
       Depository Services: Demat & Remat Transactions
       Derivatives Trading (Futures and Options)
       Commodities Trading
       IPOs & Mutual Funds Distribution
       Internet-based Online Trading: SpeedTrade



      Complete online support.
      Cutting edge analysis of the most relevant news in commodities.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                           pg. 24

       An excellent information facility through SMS messages provides you with
        appropriate market information as well as buy/sell calls.
       A team of dedicated Relationship Managers/Dealers provide you non-stop support
        through messenger. You will be assisted on market information, buy/sell
        recommendation and other information to guide you through.


Product Offerings:

Ideal for investors looking at steady and superior returns with low to medium risk appetite.
This portfolio consists of a blend of quality bluechip and growth stocks ensuring a balanced
portfolio with relat vely medium risk profile. The portfolio will mostly have large
capitalization stocks based on sectors & themes who have medium to long term growth

Product Approach:

Investment are based on 3 tenets:
     Consistent, steady and sustainable returns
     Margin of Safety
     Low Volatility

Product Characteristics:

       Bottom up stock selection
       In-depth, independent fundamental research
       High quality companies with relatively large capitalization.
       Disciplined valuation approach applying multiple valuation measures
       Medium to long term vision, resulting in low portfolio turnover

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                         pg. 25

Product Details:

>   Minimum Investment: Rs 5 lakhs
>   Lock in period: 6 Months
>   Reporting: Online access to portfolio holdings, quaterly repeorting of portfolio
>   Charges: 2.5% per annum AMC charged every quarter, 0.5% brokerage 20% profit
    sharing after 15% hurdle is crossed-chargeable at the end of the fiscal year.
>   Profit withdrawal in multiples of 25000 after lock in period.

    4) PMS PRO TECH:

Protech uses the knowledge of technical analysis and the power of derivatives market to
identify trading opportunities in the market. The Protech line of products are designed around
various risk/reward/volitality profiles for different kinds of investment needs.

Protech is based on:

       Long Short strategies
       Focus on absolute returns
       Timing the market

Product Approach:

       Superior performance can be achieved through sheer market timing, by picking
        Stocks/Nifty before the infection points in their trading cycles
       Linear returns are possible from having sell market positions in downtrends and by
        using the options market to change the portfolio beta

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                            pg. 26

      Money management rules will be in place.

Product Characteristics:

      Using swing based index -trading systems, stop and reverse, trend following and
       momentum trading techniques.
      Nifty based products for low impact cost and low product volatity.
      Both long anf short strategies to earn returns even in falling markets.
      The use of options to enhance the risk reward profile of the product and therefore
       offers a higher Beta.

Product Details:

> Minimum Investment: Rs 5 lakhs

> Lock in: 6 months

> AMC fees: 0%

> Reporting: Monthly reporting of transactions, brokerage 0.05% for derivatives, 20% profit
  sharing on booked profits on quaterly basis.

> Profit withdrawal in multiples of 25000 after lock in period.


Dematerialisation and trading in the demat mode is the safer and faster alternative to the
physical existence of securities. Demat as a parallel solution offers freedom from delays,
thefts, forgeries, settlement risks and paper work. This system works through depository

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                         pg. 27

participants (DPs) who offer demat services and the securities are held in the electronic form
for the investor directly by the Depository.

Sharekhan Depository Services offers dematerialisation services to individual and corporate
investors. We have a team of professionals and the latest technological expertise dedicated
exclusively to our demat department, apart from a national network of franchisee, making our
services quick, convenient and efficient.

At Sharekhan, our commitment is to provide a complete demat solution which is simple, safe
and secure.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                          pg. 28

Before Moving to main Analysis Part we need to understand the basics of stock market. After that we
can easily understand the concept of Equity Analysis. Introduction includes working of stock market,
Stock exchanges, financial sector of India, etc.

1.2.1 Stock Market:
A stock market (also known as a stock exchange) has two main functions. The first function is to
provide companies with a way of issuing shares to people who want to invest in the company. This
can be illustrated by an example: Suppose a company has a mining lease over an area with some rich
ore deposits. It wants to exploit these deposits, but it doesn’t have any equipment. To buy the
equipment it needs money. One way to raise money is through the stock market. The company issues
a prospectus, which is a sort of advertisement informing people about the prospects of the company
and inviting them to invest some money in it. When the company is ‘floated’ (established) on the
stock market, interested investors can become part-owners of the company by buying ‘shares’. If the
company operates at a profit, shareholders benefit in two ways – through the issuing of dividends in
the form of cash or more shares, and through growth in the value of the shares. On the other hand, if
the company does not operate at a profit (e.g., if the price of the product dips), the shareholders will
probably lose money. The second function of the stock market, related to the first, is to provide a
venue for the buying and selling of shares.

Stock Exchange:

An exchange is an institution, organization, or association which hosts a market where stocks,
bonds, options and futures, and commodities are traded. Buyers and sellers come together to
trade during specific hours on business days. Exchanges impose rules and regulations on the
firms and brokers that are involved with them. If a particular company is traded on an
exchange, it is referred to as "listed". Companies that are not listed on a stock exchange are
sold OTC (short for Over-The-Counter). Companies that have shares traded OTC are usually
smaller and riskier because they do not meet the requirements to be listed on a stock

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                                   pg. 29

What Is A Share:

In finance a share is a unit of account for various financial instruments including stocks,
bonds, mutual funds, limited partnerships. In simple Words, a share or stock is a document
solely to stocks is so common that it almost replaces the word stock itself. It is issued by a
company, which entitles its holder to be one of the owners of the company. A share is issued
by a company or can be purchased from the stock market. By owning a share you can earn a
portion in the firm and by selling shares you get capital gain. So, your return is the dividend
plus the capital gain. However, you also run a risk of making a capital loss if you have sold
the share at a price below your buying price.


There are two ways for investors to get shares from the Primary and Secondary Markets.
In Primary markets, securities are bought by way of public issue directly from the company.
In Secondary market share are traded between two investors.

Primary Market:

Market for new issues of securities, as distinguished from the Secondary Market, where
previously issued securities are bought and sold. A market is primary if the proceeds of sales
go to the issuer of the securities sold.

Secondary Market:

The market where securities are traded after they are initially offered in the primary market is
known as secondary market. Most trading is done in the secondary market. Generally, most
shares have a face value (i.e. the value as in a balance sheet) of Rs.10 though not always
offered to the public at this price. Companies can offer a share with a face value of Rs.10 to
the public at a higher price. The difference between the offer price and the face value is called
the premium. As per the SEBI guidelines, new companies can offer shares to the public at a
premium provided:

      The promoter company has a 3 years consistent record of profitable working.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                             pg. 30

      The promoter takes up at least 50 per cent of the shares in the issue.
      All parties applying to the issue should be offered the same instrument at the same
       terms, especially regarding the premium.
      The prospectus should provide justification for the propose premium.

On the other hand, existing companies can make a premium issue without the above
restrictions. A company’s aim is to raise money and simultaneously serve the equity capital.
As far as accounting is concerned, premium is credited to reserves and surplus and it does not
increase the equity. Thus the companies seek to make premium issues. In a buoyant stock
market when good shares trade at very high prices, companies realize that it’s easy to
command a high premium.

The biggest difference between them is the length of time you hold onto the assets. An
investor is more interested in the long-term appreciation of his assets, counting on that
historical rise in market equity.

Investor is not generally concerned about short-term fluctuations in prices, because he’ll ride
them out over the long haul. An investor relies mostly on Fundamental Analysis, which is the
analytical method of predicting long-term prospects of a particular asset. Most investors
adopt a “buy and hold” approach to assets, which simply means they buy shares of some
company and hold onto them for a long time. This approach can be dangerous, even
devastating, in an extremely volatile market such as today’s BSE or NSE Indexes Show.

What most investors need to remember is: investing is not about weathering storms with your
“beloved” company – it’s about making money. Traders, on the other hand, are attempting to
profit on just those short-term price fluctuations. The amount of time an active trader holds
onto an asset is very short: in many cases minutes, or sometimes seconds. If you can catch
just two index points on an average day, you can make a comfortable living as a Trader.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                           pg. 31

1.2.3 SEBI (Securities and Exchange Board of India):

In 1988 the Securities and Exchange Board of India (SEBI) was established by the
Government of India through an executive resolution, and was subsequently upgraded as a
fully autonomous body (a statutory Board) in the year 1992 with the passing of the Securities
and Exchange Board of India Act (SEBI Act) on 30th January 1992. In place of Government
Control, statutory and autonomous regulatory boards with defined responsibilities, to cover
both development & regulation of the market, and independent powers have been set up.
Paradoxically this is a positive outcome of the Securities Scam of 1990-91.

The basic objectives of the Board were identified as:

            To protect the interests of investors in securities;
            To promote the development of Securities Market;
            To regulate the securities market and
            For matters connected therewith or incidental thereto.

Since its inception SEBI has been working targeting the securities and is attending to the
fulfilment of its objectives with commendable zeal and dexterity. The improvements in the
securities markets like capitalization requirements, margining, establishment of clearing
corporations etc. reduced the risk of credit and also reduced the market.

SEBI has introduced the comprehensive regulatory measures, prescribed registration norms,
the eligibility criteria, the code of obligations and the code of conduct for different
intermediaries like, bankers to issue, merchant bankers, brokers and sub-brokers, registrars,
portfolio managers, credit rating agencies, underwriters and others. It has framed bye-laws,
risk identification and risk management systems for Clearing houses of stock exchanges,
surveillance system etc. which has made dealing in securities both safe and transparent to the
end investor.

Another significant event is the approval of trading in stock indices (like S&P CNX Nifty &
Sensex) in 2000. A market Index is a convenient and effective product because of the
following reasons:

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                           pg. 32

            It acts as a barometer for market behavior;
            It is used to benchmark portfolio performance;
            It is used in derivative instruments like index futures and index options;
            It can be used for passive fund management as in case of Index Funds.

Two broad approaches:

SEBI is to integrate the securities market at the national level, and also to diversify the
trading products, so that there is an increase in number of traders including banks, financial
institutions, insurance companies, mutual funds, and primary dealers etc. to transact through
the Exchanges. In this context the introduction of derivatives trading through Indian Stock
Exchanges permitted by SEBI in 2000 AD is a real landmark.

SEBI appointed the L. C. Gupta Committee in 1998 to recommend the regulatory framework
for derivatives trading and suggest bye-laws for Regulation and Control of Trading and
Settlement of Derivatives Contracts. The Board of SEBI in its meeting held on May 11, 1998
accepted the recommendations of the committee and approved the phased introduction of
derivatives trading in India beginning with Stock Index Futures. The Board also approved the
"Suggestive Bye-laws" as recommended by the Dr LC Gupta Committee for Regulation and
Control of Trading and Settlement of Derivatives Contracts.

SEBI then appointed the J. R. Verma Committee to recommend Risk Containment Measures
(RCM) in the Indian Stock Index Futures Market. The report was submitted in November

However the Securities Contracts (Regulation) Act, 1956 (SCRA) required amendment to
include "derivatives" in the definition of securities to enable SEBI to introduce trading in
derivatives. The necessary amendment was then carried out by the Government in 1999. The
Securities Laws (Amendment) Bill, 1999 was introduced. In December 1999 the new
framework was approved.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                           pg. 33

Derivatives have been accorded the status of `Securities'. The ban imposed on trading in
derivatives in 1969 under a notification issued by the Central Government was revoked.
Thereafter SEBI formulated the necessary regulations/bye-laws and intimated the Stock
Exchanges in 2000. The derivative trading started in India at NSE in 2000 and BSE started
trading in the year 2001.

1.2.4 NSE (National Stock Exchange):

The National Stock Exchange of India Limited (NSE), is a Mumbai-based stock exchange.
It is the large stock exchange in India in terms daily turnover and number of trades, for both
equities and derivative trading. Though a number of other exchanges exist, NSE and the
Bombay Stock Exchange are the two most significant stock exchanges in India, and between
them are responsible for the vast majority of share transactions.

NSE is mutually-owned by a set of leading financial institutions, banks, insurance companies
and other financial intermediaries in India but its ownership and management operate as
separate entities. As of 2006, the NSE VSAT terminals, 2799 in total, cover more than 1500
cities across India. In October 2007, the equity market capitalization of the companies listed
on the NSE was US$ 1.46 trillion, making it the second largest stock exchange in South Asia.
NSE is the third largest Stock Exchange in the world in terms of the number of trades in
equities. It is the second fastest growing stock exchange in the world with a recorded growth
of 16.6%.

The National Stock Exchange of India was promoted by leading financial institutions at the
behest of the Government of India, and was incorporated in November 1992 as a tax-paying
company. In April 1993, it was recognized as a stock exchange under the Securities Contracts
(Regulation) Act, 1956. NSE commenced operations in the Wholesale Debt Market (WDM)
segment in June 1994. The Capital Market (Equities) segment of the NSE commenced
operations in November 1994, while operations in the Derivatives segment commenced in
June 2000.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                          pg. 34


Currently, NSE has the following major segments of the capital market:

               Equity
               Futures and Options
               Retail Debt Market
               Wholesale Debt Market

NSE Indices:

               S&P CNX Nifty
               CNX Nifty Junior
               CNX IT
               Bank Nifty
               Mininifty
               CNX 100 CNX Midcap

1.2.5 BSE (Bombay Stock Exchange):

Bombay Stock Exchange Limited is the oldest stock exchange in Asia with a rich heritage. Popularly
known as "BSE", it was established as "The Native Share & Stock Brokers Association" in 1875. It is
the first stock exchange in the country to obtain permanent recognition in 1956 from the Government
of India under the Securities Contracts (Regulation) Act, 1956.The Exchange's pivotal and pre-
eminent role in the development of the Indian capital market is widely recognized and its index,
SENSEX, is tracked worldwide. Earlier an Association of Persons (AOP), the Exchange is now a
demutualised and corporatized entity incorporated under the provisions of the Companies Act, 1956,
pursuant to the BSE (Corporatization and Demutualization) Scheme, 2005 notified by the Securities
and Exchange Board of India (SEBI).

Of the 22 stock exchanges in the country, Mumbai's (earlier known as Bombay), Bombay Stock
Exchange is the largest, with over 6,000 stocks listed. The BSE accounts for over two thirds of the
total trading volume in the country. Approximately 70,000 deals are executed on a daily basis, giving
it one of the highest per hour rates of trading in the world. There are around 3,500 companies in the

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                                 pg. 35

country which are listed and have a serious trading volume. The market capitalization of the BSE is
Rs.5 trillion. The BSE ‘SENSEX’ is a widely used market index for the BSE.

With demutualization, the trading rights and ownership rights have been de-linked effectively
addressing concerns regarding perceived and real conflicts of interest. The Exchange is professionally
managed under the overall direction of the Board of Directors. The Board comprises eminent
professionals, representatives of Trading Members and the Managing Director of the Exchange. The
Board is inclusive and is designed to benefit from the participation of market intermediaries.

In terms of organization structure, the Board formulates larger policy issues and exercises over-all
control. The committees constituted by the Board are broad-based. The day-to-day operations of the
Exchange are managed by the Managing Director and a management team of professionals.

The Exchange has a nation-wide reach with a presence in 417 cities and towns of India. The systems
and processes of the Exchange are designed to safeguard market integrity and enhance transparency in
operations. During the year 2004-2005, the trading volumes on the Exchange showed robust growth.

The Exchange provides an efficient and transparent market for trading in equity, debt instruments and
derivatives. The BSE's On Line Trading System (BOLT) is a proprietary system of the Exchange and
is BS 7799-2-2002 certified. The surveillance and clearing & settlement functions of the Exchange are
ISO 9001:2000 certified.

BSE - Other Indices:

Apart from BSE SENSEX, which is the most popular stock index in India, BSE uses other stock
indices as well:

             BSE 100
             BSE 200
             BSE PSU
             BSE MIDCAP
             BSE SMLCAP
             BSE BANKEX
             BSE CAPITAL GOODS

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                                   pg. 36

             BSE AUTO
             BSE DOLLEX 200
             BSE REALTY
             BSE TECH

As a long term investor, one needs to understand several different kinds of risk:

Market Risk:

Market risk is the risk associated with fluctuations in stock prices. This is the first risk many
people think of when they think of the stock market. Many factors can cause stock prices to
fluctuate. Examples include actual or anticipated developments within a particular company
or industry; changes in the outlook for the economy as a whole; or shifts in investor attitude
toward the stock market in general. Downward and upward trends in stock prices can occur
over short or extended periods, and can have a very significant affect on the value of an

There are two ways to reduce market risk. One is to diversify your investments among
different kinds of assets: divide your money among fixed-income and growth investments,
for example. The second way is to steadily invest on a regular basis and ignore market ups
and downs and focus on long-term results.

Inflation Risk:

Inflation, defined as a persistent increase in prices, is a serious risk for any long-term
investor. Historically, inflation in the United States has averaged 3.1%, offsetting most of the
returns from investment in cash reserves and bonds, but less than half of that of stocks.
Because stocks' real returns are often generally higher than inflation, stocks offer a way to
help protect your money against inflation risk. If your principal doesn't grow, you can't
possibly stay ahead of inflation. A good way to reduce inflation risk is to invest in growth
assets like stocks.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                               pg. 37

Business Risk:

Business risk is the risk of losing your money in an investment that seemed like a winner but
wasn't. It is the specific risk associated with the underlying business of the issuer of a
particular stock, bond, or other investment. If the company's product suddenly loses value,
the value of your investment declines. You can reduce business risk by diversifying your

Currency Risk:
Currency risk is the risk associated with the price fluctuations in the dollar value of
international stocks due to changing currency exchange rates. To an American, the value of
any stock held internationally is not what the stock is worth in its domestic market, but what
the stock is worth in terms of dollars.

This refers to how a stock moves vs. the market. If a stock moves more than the market, it has
a high beta. If it moves less than the market it has a low beta. Technology generally has a
high beta while Utilities have low betas. A portfolio of high beta stocks in a down market can
create extreme downward movements, while up-markets can cause tremendous performance.
If a market is demonstrating extreme risk, it is wise to raise cash, lower the beta of your
portfolio, and even consider some hedging of exposure.

All above are different types of risks that influence the stock market. After looking at all the
risks one thing is very clear that controlling price fluctuations is not in our hand. Our major
job is to maximize our returns keeping all the above risks in mind. This is done by hedging
funds in market in way that maximizes the returns. Creating portfolios wisely is another
method of risk hedging, apart from that there are other methods with the help of which risk is

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                               pg. 38


   1.3.1 INDIAN ECONOMY OVERVIEW (2009): INTRODUCTION: Indian economy has been witnessing a phenomenal growth since
the last decade. The country is still holding its ground in the midst of the current global
financial crisis. In fact, global investment firm, Moody’s, says that driven by renewed growth
in India and China, the world economy is beginning to recover from the one of the worst
economic downturns in decades.

The growth in real Gross Domestic Product (GDP) at factor cost stood at 6.7 per cent in
2008-09. While the sector-wise growth of GDP in agriculture, forestry and fishing was at 1.6
per cent in 2008-09, industry witnessed growth to 3.9 per cent of the GDP in 2008-09.

The Prime Minister, Dr Manmohan Singh, on August 15, 2009, in his address to the nation on
its 63rd Independence Day, said that the Government will take every possible step to restore
annual economic growth to 9 per cent.
Further, the World Bank has projected an 8 per cent growth for India in 2010, which will
make it the fastest growing economy for the first time; overtaking China’s expected 7.7 per
cent growth.

A number of leading indicators, such as increase in hiring, freight movement at major ports
and encouraging data from a number of key manufacturing segments, such as steel and
cement, indicate that the downturn has bottomed out and highlight the Indian economy's
resilience. Recent indicators from leading indices, such as Nomura's Composite Leading
Index (CLI), UBS' Lead Economic Indicator (LEI) and ABN Amro Purchasing Managers'
Index (PMI), too bear out this optimism in the Indian economy.

Industrial output as measured by the index of industrial production (IIP) clocked an annual
growth rate of 6.8 per cent in July 2009, according to the Central Statistical Organisation.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                             pg. 39

Significantly, among the major economies in the Asia-Pacific region, India's private domestic
consumption as share of GDP, at 57 per cent in 2008, was the highest, according to an
analysis by the McKinsey Global Institute.

Meanwhile, foreign institutional investors (FIIs) turned net buyers in the Indian market in
2009. FIIs inflows into the Indian equity markets have touched US$ 10 billion in the April to
September period of 2009-10.

Foreign direct investments (FDI) into India went up from US$ 25.1 billion in 2007 to US$
46.5 billion in 2008, achieving a 85.1 per cent growth in FDI flows, the highest across
countries, according to a recent study by the United Nations Conference on Trade &
Development (UNCTAD).

According to the Asian Development Bank's (ADB) 'Asia Capital Markets Monitor' report,
the Indian equity market has emerged as the third biggest after China and Hong Kong in the
emerging Asian region, with a market capitalisation of nearly US$ 600 billion. THE ECONOMIC SCENARIO:

Indian investors have emerged as the most optimistic group in Asia, according to the
Quarterly Investor Dashboard Sentiment survey by global financial services group, ING. As
per the survey, around 84 per cent of the Indian respondents expect the stock market to rise in
the third quarter of 2009.

With foreign assets growing by more than 100 per cent annually in recent years, Indian
multinational enterprises (MNEs) have become significant investors in global business
markets and India is rapidly staking a claim to being a true global business power, according
to a survey by the Indian School of Business and the Vale Columbia Centre on Sustainable
International Investment.

In its optimistic report on Macroeconomic and Monetary Development of the economy in
2009, the Reserve Bank of India (RBI) said overall business sentiment was slated for a sharp
improvement from that in the April-June 2009 quarter.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                           pg. 40

Further, India and China will soon emerge as the preferred destinations for foreign investors,
revealed, the research arm of global rating agency Moody's.

      The country's foreign exchange reserves rose by US$ 1.28 billion to touch US$
       277.64 billion for the week ended September 4, 2009, according to figures released in
       the RBI’s Weekly Statistical Supplement.
      Net inflows through various non-resident Indians (NRIs) deposits surged from US$
       179 million in 2007-08 to US$ 3,999 million in 2008-09, according to the RBI. The
       most recent World Bank update on migration and remittances reveals that the
       remittances of US$ 52 billion by overseas Indians in 2008 makes it India's largest
       source of foreign exchange. India, along with China and Mexico, retained its position
       as one of the top recipients of migrant remittances among developing countries in
      FDI inflows into India in April-May 2009-10 have surged by 13 per cent at US$ 4.2
       billion as against the previous two months driven by recovery in the global financial
       markets. Cumulative FDI in India from April 2000 to March 2009 stood at about US$
       90 billion.
      FIIs inflows into the Indian equity markets have touched US$ 10 billion in the April
       to September period of 2009-10.
      Venture Capital firms invested US$ 117 million over 27 deals in India during the six
       months ending June 2009, according to a study by Venture Intelligence in partnership
       with the Global-India Venture Capital Association.
      The private equity (PE) investment into the country reached US$ 1.03 billion during
       April-June 2009—registering an increase of 17 per cent sequentially—according to
       data compiled by SMC Capitals, an equity research and analysis firm.
      The year-on-year (y-o-y) aggregate bank deposits stood at 21.2 per cent as on January
       2, 2009. Bank credit touched 24 per cent (y-o-y) on January 2, 2009, as against 21.4
       per cent on January 4, 2008.
      Since October 2008, the RBI has cut the cash reserve ratio (CRR) and the repo rate by
       400 basis points each. Also, the reverse repo rate has been lowered by 200 basis

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                           pg. 41

      points. Till April 7, 2009, the CRR had further been lowered by 50 basis points, while
      the repo and reverse repo rates have been lowered by 150 basis points each.
     Exports from special economic zones (SEZs) rose 33 per cent during the year to end-
      March 2009. Exports from such tax-free manufacturing hubs totalled US$ 18.16
      billion last year up from US$ 13.60 billion a year before.
     India Inc's order book has more than doubled to an all-time high of US$ 15.32 billion
      in the second quarter of the current financial year, compared to the first quarter. On a
      year-on-year basis, the increase is 21 per cent.
     Advance tax collections for the second quarter of the current financial year (2009-10)
      have shown robust growth of 35 to 40 per cent across industries.
     The domestic mutual fund industry registered a moderate growth of 5 per cent in its
      assets under management (AUM) in August 2009 at US$ 15,702, due to good
      performance by debt funds.
     India exported a total of 230,000 cars, vans, sport utility vehicles (SUVs) and trucks
      between January and July 2009, a growth of 18 per cent owing to its liberal
      investment policies and high quality manufacturing that stems from its growing
      prowess in research and development.
     India's gems and jewellery exports regained momentum and aggregated to US$ 1.9
      billion in July 2009 as compared to US$ 1.7 billion in June 2009.
     The total Merger and acquisition (M&A) deals registered during the first seven
      months of this year stand at 158 with a value of US$ 5.91 billion, while PE deals
      stand at 114, totalling a value of US$ 4.89 billion, according to consulting firm, Grant
     Investments in the Indian stock market through participatory notes (PNs) crossed US$
      20.65 billion-mark in May 2009.
     Sustainable energy investment in India went up to US$ 3.7 billion in 2008, up 12 per
      cent since 2007, according a report titled 'Global Trends in Sustainable Energy
      Investment 2009'.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                          pg. 42

The Indian growth story is spreading to the rural and semi-urban areas as well. The next
phase of growth is expected to come from rural markets with rural India accounting for
almost half of the domestic retail market, valued over US$ 300 billion. Rural India is set to
witness an economic boom, with per capita income having grown by 50 per cent over the last
10 years, mainly on account of rising commodity prices and improved productivity.
Development of basic infrastructure, generation of employment guarantee schemes, better
information services and access to funding are also bringing prosperity to rural households.


Per capita income of Indian individuals stood at US$ 773.54 in 2008-09, according to Central
Statistical Organisation data. The per capita income in India stood at US$ 687.03 in 2007-08
and has risen by over one-third from US$ 536.79 in 2005-06 to US$ 773.54 in 2008-09. ADVANTAGE INDIA:

      According to the World Fact Book, India is among the world's youngest nations with
       a median age of 25 years as compared to 43 in Japan and 36 in USA. Of the BRIC—
       Brazil, Russia, India and China—countries, India is projected to stay the youngest
       with its working-age population estimated to rise to 70 per cent of the total
       demographic by 2030, the largest in the world. India will see 70 million new entrants
       to its workforce over the next 5 years.
      India has the second largest area of arable land in the world, making it one of the
       world's largest food producers—over 200 million tonnes of food Grains are produced
       annually. India is the world's largest producer of milk (100 million tonnes per annum),
       sugarcane (315 million tonnes per annum) and tea (930 million kg per annum) and the
       second largest producer of rice, fruit and vegetables.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                           pg. 43

      With the largest number of listed companies - 10,000 across 23 stock exchanges,
       India has the third largest investor base in the world.
      India's healthy banking system with a network of 70,000 branches is among the
       largest in the world.
      According to a study by the McKinsey Global Institute (MGI), India's consumer
       market will be the world's fifth largest (from twelfth) in the world by 2025 and India's
       middle class will swell by over ten times from its current size of 50 million to 583
       million people by 2025.
      India, which recorded production of 22.14 million tonne of steel during April-August
       2009, is likely to emerge as the world's third largest steel producer in the current year.
      India continues to be the most preferred destination—among 50 top countries—for
       companies looking to offshore their information technology (IT) and back-office
       functions, according to global management consultancy, AT Kearney.
      The Indian stock markets have risen to be amongst the best performers globally across
       the emerging and developed markets in 2009 year-to-date, according to an analytical
       study by MSCI Barra indices.
      India has reclaimed its position as the most attractive destination for global retailers
       despite the downturn, according to the Global Retail Development Index (GRDI)
       brought out by US-based global management consulting firm, A T Kearney. GROWTH POTENTIAL:

      According to the CII Ernst & Young report titled 'India 2012: Telecom growth
       continues,' India's telecom services industry revenues are projected to reach US$ 54
       billion in 2012, up from US$ 31 billion in 2008. The Indian telecom industry
       registered the highest number of subscriber additions at 15.84 million in March 2009,
       setting a global record.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                              pg. 44

      A McKinsey report, 'The rise of Indian Consumer Market', estimates that the Indian
       consumer market is likely to grow four times by 2025, which is currently valued at
       US$ 511 billion.
      India ranks among the top 12 producers of manufacturing value added (MVA)—
       witnessing an increase of 12.3 per cent in its MVA output in 2005-07 as against 6.9
       per cent in 2000-05— according to the United Nations Industrial Development
       Organisation (UNIDO).
      In textiles, the country is ranked fourth, while in electrical machinery and apparatus it
       is ranked fifth. It holds sixth position in the basic metals category; seventh in
       chemicals and chemical products; 10th in leather, leather products, refined petroleum
       products and nuclear fuel; twelfth in machinery and equipment and motor vehicles.
      In a development slated to enhance India's macroeconomic health as well as energy
       security, Reliance Industries (RIL) has commenced natural gas production from its D-
       6 block in the Krishna- Godavari (KG) basin.
      India has a market value of US$ 270.98 billion in low-carbon and environmental
       goods & services (LCEGS). With a 6 per cent share of the US$ 4.32 trillion global
       market, the country is tied with Japan at the third position.
      PE players are planning to raise funds for the infrastructure sector. Presently, around
       US$ 1.42 billion is being raised by India-dedicated infrastructure funds, according to
       data released by Preqin, a global firm that tracks PE and alternative assets.
      Infrastructure, including roads, power, highways, airports, ports and railways, has
       emerged as an asset class with long-term growth that can provide relatively stable
       returns, said an Assocham- Ernst & Young survey on Private Equity in Indian
       Infrastructure: Strengthening the Nexus.
      NASSCOM has estimated that the IT-BPO industry will witness an export growth of
       4-7 per cent and domestic market growth of 15-18 per cent in 2009-10. Further, it has
       projected that around 40,000 students will be absorbed by IT companies this fiscal.
      With the availability of the 3G spectrum, about 275 million Indian subscribers will
       use 3G-enabled services, and the number of 3G-enabled handsets will reach close to
       395 million by 2013-end, estimates the latest report by Evalueserve.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                               pg. 45


      India has one of the biggest telecom markets in the world. It has more GSM
       subscribers than fixed-line subscribers.
      Total telecom subscribers – 494.07 million (August 2009)
      Teledensity – 42.27 per cent (August 2009)
      Addition of mobile subscribers (July–August 2009) – 15.08 million
      Annual growth rate of telecom subscribers (June 2008–June 2009) – 42.68 percent
      Average Revenue Per User (ARPU) for GSM (as on 30 June 2009) – US$ 3.80
      Telecom equipment market (2008–09) – US$ 24.99 billion
      Handset market (2008-09) – US$ 5.82 billion
      Expected mobile subscriber base (2013) – About 771 million.

Telephony Services (Mobile and Basic) and Internet Services:

      The Indian telecom industry generated revenues of approximately US$ 32 billion in
       2007–08 with a growth rate of 60 percent 1 over 2006–07.
      It witnessed a compound annual growth rate (CAGR) of approximately 29 per cent
       from 2002–03 to 2007–08.
      The CAGR is expected to stabilize at 16 per cent between 2007–08 and 2009–10.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                       pg. 46

               Source: TRAI Report
                                        Figure: 1
                               Telecom Industry Revenues:

        Source: TRAI Report
                                       Figure: 2
                          Business Model (Telecom companies):


      The Indian telecom industry can be primarily divided into basic, cellular mobile and
       internet services. It also has smaller segments such as radio paging services, Very
       Small Aperture Terminals (VSATs), Public Mobile Radio Trunked Services (PMRTS)
       and Global Mobile Personal Communications by Satellite (GMPCS).
      The mobile services in India are growing more than basic wire line services.

Telecom Subscriber Base:

      The subscriber base grew to 494.07 million (August 2009), registering a growth of
       approximately 42.67 per cent over last year. It grew at a CAGR of 45.21 per cent
       from June 2004 to June 2009.
      Teledensity in India is still low as compared to that in some countries. As on August
       2009, India had a teledensity of 42.27 per cent as compared to the previous year’s
       figure of 29.83 per cent.

                Source: TRAI Report
                                        Figure: 3
                             Telecom Subscriber Base in India:

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                          pg. 48

                Source: TRAI Report
                                           Figure: 4
                                      Teledensity in India:

      The telecom subscriber base in India is likely to reach 500 million by 2010. Wireless Service Operators:

      Wireless services have led to significant growth in the Indian telecom industry.
      Currently, there are 11 players—Bharti Airtel, Reliance, Vodafone, BSNL, Tata Tele
       Services Ltd, Idea, Aircel, MTNL,BPL, HFCL and Shyam—active in this segment.
      As compared with 2007–08, the subscriber base of most wireless service providers
       has increased leading to an increase in their revenues.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                           pg. 49

               Source: TRAI Report
                                       Figure: 5
                            Market Share of Wireless network:

      The subscriber base of Bharti Airtel, a leader in this market, increased from 69.38
       million in 2007–08 to 102.37 million in 2008–09, followed by Reliance (79.62
       million subscribers) and Vodafone (76.45 million subscribers).

                  Source: TRAI Report
                                       Figure: 6
                              Indian Mobile Services Share:

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                       pg. 50
                               SECTORAL ANALYSIS OF TELECOMMUNICATION INDUSTRY GSM and CDMA Services Providers:

      Bharti has the largest market share in the GSM segment. During 2008–09, out of the
       total subscriber base of 328.83 million, private layers accounted for approximately 84
       per cent, while the public sector operators (BSNL and MTNL) accounted for the
       remaining share (16 per cent).
      Reliance Communications dominates the Indian CDMA mobile services segment with
       a subscriber base of 54.19 million.

              Source: TRAI Report
                                        Figure: 7
                              Market shares of GSM Players:

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                          pg. 51

              Source: TRAI Report
                                        Figure: 8
                             Market shares of CDMA Players:

13.2.4 Other Services Provided by Telecom Sector :

Radio Paging Services:

Radio paging services were launched in India in 1995. This service, however, could not
compete well with cellular services in general and SMS technology in particular and is
shrinking continuously. At present, all but four radio paging service providers have been
marginalized in the Indian market.

Very Small Aperture Terminals (VSATs):

At present, there are 8 VSAT service providers in India including BSNL, Bharti Airtel,
Hughes Communication and HCL Comnet Ltd. The number of subscribers of VSAT services
increased on a quarterly basis by 6,108 to 108,328 in June 2009. The market for VSAT
services registered a 5.98 per cent growth for the quarter ending June 2009. Hughes
Communication is the market leader, with a market share of 29.4 per cent, followed by Bharti
Airtel with 25.9 per cent.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                         pg. 52

Public Mobile Radio Trunked Services (PMRTS):

PMRTS services have been showing a negative growth. PMRTS’ subscriber base decreased
by 2.06 per cent during the quarter ending June 2009. High license fee for this service leaves
low margin for 1 services providers, thereby inhibiting its growth. In India, 12 operators are
offering this service to a total of more than 30,951 subscribers.

Global Mobile Personal Communication by Satellite (GMPCS):

GMPCS2 services were launched in India in 1999. These services allow a subscriber to
communicate with others from any point on earth through a hand-held terminal. Moreover, the
telephone number remains unchanged, irrespective of the subscriber’s location. Iridium India
Telecom Limited is the pioneer in GMPCS services in India. The Government of India has
restricted foreign equity participation in this segment to 74 per cent.

Internet Services:

      The total number of internet subscribers increased at a CAGR of approximately 21.09
       per cent from 2000–01 to 2008–09.

                                           Figure: 9
                                       Internet Services:

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                          pg. 53

      The total revenue from internet services increased 4.32 per cent from US$ 400.6
       million in March 2009 to US$ 417.9 million in June 2009.
      Broadband contributed 250.20 million to the total revenue from the internet services,
       whereas share of leased line was 93.04 million in quarter ending June 2009.

               Source: TRAI Report
                                          Figure: 10
                                     Internet Subscribers:

      The total number of internet subscribers grew from 11.66 million in June 2008 to
       14.05 million in June 2009. This is primarily attributed to an increase in broadband
       subscriber base from 4.38 million in June 2008 to 6.62 million at the end of June
      BSNL is the biggest player in this market with 7.6 million subscribers, followed by
       MTNL, Bharti Airtel, Reliance and Sify Technologies.
      Internet services can also be accessed through mobile phones (CDMA and GSM).
       Bharti Airtel is the leader among the wireless internet operators with a market share of
       approximately 24 per cent in June 2008.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                           pg. 54

                 Source: TRAI Report
                                        Figure: 11
                           Top Five Internet Service Providers: India – An Ideal Destination for Investments:

      Third-largest telecom network in the world, second-largest among the emerging
       economies after China.
      On an average, approximately 8 million users are added per month, making India the
       world’s fastest growing telecom market.
      Liberal Foreign Investment Regime: FDI limit increased from 49 per cent to 74 per
       cent; the rural telecom equipment market also open to large investments.
      Among countries offering the highest rates of return on investment.
      The large untapped potential in India’s rural markets revealed by 9.21 per cent
       teledensity in rural markets as compared to the national level of 28 per cent in 2008.
      The government is promoting telecom manufacturing by providing tax sops and
       establishing telecom-specific Special Economic Zones.
      Fully repatriable dividend income and capital invested in telecom equipment

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                            pg. 55
                                SECTORAL ANALYSIS OF TELECOMMUNICATION INDUSTRY Regulatory Framework of Telecom Sector :

       The Department of Telecommunications (DoT) governs the Indian telecom industry.
        DoT, in coordination with its arm, Telecom Commission, looks after licensing, policy
        making,    frequency    management,    administrative   monitoring,   research    and
        development, equipment standardisation and validation along with private
       Telecom Regulatory Authority of India (TRAI) was established in 1997 by DoT to
        streamline policy reforms and safeguard consumer interests.
       The Telecom Disputes Settlement and Appellate Tribunal (TDSAT).

       Source: TRAI Report
                                          Figure: 12
                             Indian Telecom Industry Framework:

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                         pg. 56

The Regulatory Framework - A Level-Playing Field for All Operators:

Unified Access Licensing Regime (UALR):

      The establishment of the UALR (2003) eliminated the need for separate licences for
       different services. This regime allowed players to offer both mobile and fixed-line
       services under a single licence after paying an additional entry fee. The regime does
       not take into account the national and international long-distance services and Internet
       access services.
      Between February and March 2008, DoT granted 120 new licences to provide Unified
       Access Services to various companies, including Datacom Solutions PvtLtd, Aska
       Projects Ltd, Swan Telecom Pvt Ltd, Loop Telecom Pvt Ltd and S Tel Ltd.

Universal Service Obligations (USO):

      The USO policy was implemented along with National Telephone Policy (NTP) 1999
       to widen the reach of telephony services in rural India. All telecom operators are
       bound to contribute 5 per cent of their revenues to this fund. This system was put in
       place to bridge the wide gap between urban and rural teledensity, bringing it down
       from the current 31 per cent. Initially, only basic service providers were under the
       purview of USO. Later, its scope was expanded to include mobile services also.
       Although it increases the cost burden for telecom companies, USO helps in building
       the telecommunication infrastructure in rural areas.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                           pg. 57

                                     Figure: 13
                Impact of policy change on Indian Telecom Industry:

                              SECTORAL ANALYSIS OF TELECOMMUNICATION INDUSTRY Various Faces in Indian Telecom Industry Post Liberalisation Era:

Up to 2003:

Till 2009:

        Source: TRAI Report
                                     Figure: 14
                                    Growth Story


Major Player in Telecom Sector:

                                          Table: I
                            No. Of Subscribers of Major Players:

        Service Provider      No. of CDMA Subscriber     No. of GSM Subscriber

          RELIANCE                     2.7CR

             TATA                      1.07CR

            AIRTEL                                                 3.37 CR

             MTNL                                             24.98 LAKH

             BSNL                                                  2.44 CR

         VODAFONE                                                  2.44 CR

             IDEA                                                   1.3 CR

             SPICE                                            25.56 LAKH

              BPL                                             10.62 LAKH

           AIRCEL                                                  48 LAKH

      Source: TRAI Report

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                     pg. 60

Lowest Tariffs in the World:


    0.2                    0.19



                                                0.11   0.11   0.11

    0.1                                                              0.09

                                                                            0.05   0.05
   0.05                                                                                   0.04

                      y      K      e      l
                                           i      s      n      a      a      g      d      n      a      a
               m      l             c      z      e      a      n      i      n      n      a      n      i
               i      a
                      t      U      n      a      n             i
                                                                t      s      o      a      t      i      d
               g      I             a      r      i      w
                                                         i      n      a             l
                                                                                     i      s
                                                                                            i      h      n
               l                    r      B      p      a      e      y      K      a      k      C
               e                    F             p
                                                  i      T      g      a
                                                                       l      g      h      a
               B                                  l
                                                  i             r      a      n      T      P
                                                  h             A      M      o
                                                  P                           H

                                           Figure: 15
                           Comparisons of Tariffs with other Countries: FDI in Indian Telecom Sector :

The Indian government allows FDI of up to 74 per cent, subject to licensing and security
requirements, in the following categories:

          Basic and cellular services

          National/international long distance services

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                                     pg. 61

      Value-added services such as PMRTS and GMPCS

      Radio paging service

      Internet services (providing service gateway)

Infrastructure providers (Category-II) The Indian government allows FDI of up to 100 per
cent in the following categories:

      Manufacturing of telecom equipment

      Internet services (not providing international gateways)

      Infrastructure providers providing dark fibre, right of way, duct space, tower (IP

      Electronic mail

      Voice mail

               Source: TRAI Report
                                       Figure: 16
                      FDI Investments in Telecommunication Sector:

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                      pg. 62
                              SECTORAL ANALYSIS OF TELECOMMUNICATION INDUSTRY Growth Avenues in Telecom Industry:

3G Services:

      The Indian government plans to auction the spectrum for 3G services by inviting bids
       from domestic as well as foreign players. The 3G spectrum is among the major
       investment opportunities and is expected to attract investments worth US$ 8–10
       billion during 2008–11.
      International and foreign players can enter this segment through joint-ventures with
       Indian companies with a stake of not more than 74 per cent. They will also have to
       pay an additional entry fee of US$ 344 million to acquire Unified Services Access
       Licence (USAL).4Companies such as AT&T and NTT DoCoMo are planning to enter
       this sector.

                                        Figure: 17
                                     Growth Avenues:

      The Telecom Ministry would auction four licences for 3G services including one
       reserved licence for US$ 4.09 billion.5

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                        pg. 63

      BSNL launched 3G services under the proposed 'India-Golden 50' scheme that allows
       customers to make long-distance calls for 50 paise(About US 1cent) per minute. The
       subscribers also get additional features such as video telephony, Internet access, video
       on demand, mobile TV and others facilities.


Mobile Number Portability (MNP) allows subscribers to retain their existing telephone
number when they switch from one access service provider to another irrespective of mobile
technology or from one technology to another of the same or any other access service
provider. The applicable Guidelines for grant of MOBILE NUMBER PORTABILITY
(MNP) SERVICE LICENCE in the country have been announced by the Government on
01.08.2008. The bid document containing detailed terms and conditions are being issued
separately. The salient features are as below:

      MNP Zones: For the purpose of grant of Licenses for MNP operation in India, the
       whole country is divided into 2 MNP zones (Zone 1 & zone 2) consisting of 11
       Licensed Service Areas (LSAs) each with 2 Metro service areas in each zone.
      There shall be only one licence for MNP services in each MNP zone.
      Initially MNP is to be implemented in all Metro and category ‘A’ service areas within
       6 month of award of the Licence for MNP services.
      Paid up Capital: The applicant Company shall have a minimum paid up capital of an
       amount Rs.10 Crores on the date of the application.
      Net Worth: The applicant Company and its equity holders shall have a combined
       networth of at least Rs.100 Crores (in proportion to their direct equity).
      Experience: The Applicant / bidder should have implemented and operating
       successfully NP solution for a mobile subscriber base of not less than 25 million in
       one or more countries for at least 2 years. Either the applicant Company or its share
       equity holders having direct equity of 26 % or more in the Company shall have
       required experience.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                            pg. 64

      In case of successful award of license, the equity holder(s) whose experience has been
       taken into account for fulfilling the eligibility conditions and evaluation purpose, shall
       not be allowed to dilute its equity shareholding in the Company below 26% equity
       share capital for at least four years from the date of submission of bid.
      Entry Fee: One time, non-refundable, Entry Fee of Rs. 1 (one) Crore is required to be
       paid for grant of MNP services licence.
      Licence Fees: The Licensee shall also pay Licence fee annually @ 1 (one) % of
       Adjusted Gross Revenue (AGR) of the licensee Company. There shall be a
       moratorium of licence fee payment for first two years from effective date of the

      Method of Selection: The pre-qualified applicant(s)/bidder(s) shall be subjected to a
       ‘Techno-Economic Evaluation’ for final selection.

Infrastructure Sharing:

In order to curtail their network deployment costs, many service providers are considering
infrastructure sharing. It is a major step towards India’s ambitious target of 500 million
subscribers by 2010.

Infrastructure Sharing Promises several advantages. Some of which are:

      Significant reduction in initial set up costs
      Increased environmental aesthetics
      Lower operating costs for service providers
      Improved service quality
      Increased affordability for customers
      Faster roll out of services in rural and remote areas

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                             pg. 65

New Guidelines for Infrastructure Sharing in Mobile Telephony:

      TRAI has recommended all mobile service providers in India to share infrastructure
       so as to meet the requirements of the flourishing telecom industry.
      Its proposal to Department of Telecommunications (DoT) states that the mobile
       telephony service providers should have better cooperation among them and have
       least regulatory interventions.
      The service providers can share active infrastructure if they have entered into a
       mutual agreement.
      The sharing of infrastructure includes sharing of antenna, feeder cable, nodes, radio
       access network and transmission system only.

Value Added Services:

The VAS industry in India generated revenue of US$ 1.2 billion in 2007–08 and is expected
to reach US$ 4.0 billion by 2015.

Major growth drivers for VAS in India:

      Increasing focus on localisation and availability of content in local languages
      Development of M-commerce applications, such as booking tickets and making bill
      Availability of mobile TV and development of shows, films, images, news, etc.,
      Availability of complete subscriber data has helped in reaching niche audience
       leading to a growth in advertising revenue through M-marketing
      Development of video-based applications, such as video SMS and podcasts

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                            pg. 66

           Source: TRAI Report
                                       Figure: 18
                       Classifications of Value-Added Services:


Threat of Substitutes – LOW:

      Some Substitutes:

       o VOIP (Skype, Messenger etc.)

       o Online Chat

       o Email

       o Satellite phones

      None of the above a major threat in current scenario, but a potential threat for near


Threat of Entrants – LOW:

      Declining Average Revenue Per User.

      Infrastructure tenancy costs.

      Brand pull exists to some extent for brands like Airtel / Idea/ Vodafone.

      Extremely high infrastructure setup costs

      Spectrum License cost- Lotteries, auctions.

      Incumbent Advantages: Established brand image, Reliability of network

Power of Suppliers – LOW:

      Large number of suppliers.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                           pg. 68

      Shared tower infrastructure.

      Limited pool of skilled managers and engineers especially those well versed in the
       latest technologies.

      Medium cost of switching since changing their hardware would lead to additional cost
       in modifying the architecture.

      Overall influence on the industry - medium

Bargaining power of Customers – HIGH:

      Lack of differentiation among the service provider

      Cut throat competition

      Customer is price sensitive

      Low switching costs

      Number portability to have negative impact

Rivalry Among Competitors – HIGH:

          High Exit Barriers

          High Fixed Cost

          6-7 players in each region

          3 out of 4 BIG, present in each region

          Very less time to gain advantage by an innovation (Eg. Caller tunes, life time


          Price wars

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                        pg. 69

The Indian telecommunications industry is one of the fastest growing in the world and India
is projected to become the second largest telecom market globally.

According to the Telecom Regulatory Authority of India (TRAI), the number of telecom
subscribers in the country increased to 562.21 million in December 2009, an increase of 3.5
per cent from 543.20 million in November 2009. With this the overall tele-density
(telephones per 100 people) has touched 47.89.

The telecom industry notched up US$ 8.56 billion in revenues during the quarter ended
December 31, 2009 helped by a recovery in earnings from both mobile and landline services.

Moreover, according to a study conducted by Nokia, the communications sector is expected
to emerge as the single largest component of the country's GDP with 15.4 per cent by 2014.
The Indian equipment market was estimated at US$ 24 billion in FY09. Finnish giant Nokia
is the market leader, with over US$ 3.4 billion revenues in 2008-09, followed by Ericsson at
US$ 2.11 billion.

With the availability of the 3G spectrum, about 275 million Indian subscribers will use 3G-
enabled services, and the number of 3G-enabled handsets will reach close to 395 million by

Moreover, in an attempt to boost auction of 3G spectrum, the government has allowed
prospective bidders to raise short-term funds from domestic market, which could be
refinanced through external commercial borrowings (ECBs) within 12 months.

State-run telecom operator BSNL has rolled out 3G services in 318 cities with 856,000
subscribers. BSNL has plans to cross 400 cities by March 31, 2010 and this will be increased
to 760 cities by September 2010. And even as debate on 3G continues, TRAI has started
consultation on the next level of telecom services. Fourth generation or 4G offers download
at faster speeds.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                         pg. 70

Value-Added Services Market:

Currently, mobile value-added services (MVAS) in India accounts for 10 per cent of the
operator's revenue, which is expected to reach 18 per cent by 2010. According to a study by
Stanford University and consulting firm BDA, the Indian MVAS is poised to touch US$ 2.74
billion by 2010.

In a bid to increase revenue from add-on services, India's top two mobile firms, Bharti Airtel
Limited and Reliance Communications both plan to launch online mobile applications stores.
Bharti Airtel will provide more than 1,250 applications across 25 categories including games,
books and social networking on its applications store.

Reliance Communications’ first version of its applications store would go live for GSM
customers by the end of February 2010, and by the end of March 2010 an expanded version
would be available to its code division multiple access (CDMA) customers as well.

Policy Initiatives:

The government has taken many proactive initiatives to facilitate the rapid growth of the
Indian telecom industry.

      100 per cent foreign direct investment (FDI) is permitted through the automatic route
       in telecom equipment manufacturing.
      FDI ceiling in telecom services has been raised to 74 per cent.
      Introduction of a unified access licensing regime for telecom services on a pan-India
      Introduction of mobile number portability in a phased manner, starting in the fourth
       quarter of 2008.
      The government is implementing a program of connecting 66,822 uncovered villages
       under the Bharat Nirman programme.
      The Department of Telecommunications (DoT) has stated that foreign telecom
       companies can bid for 3G spectrum without partnering with Indian companies. Only

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                           pg. 71

       after winning a bid, would they need to apply for unified access service licence
       (UASL) and partner with an Indian company in accordance with the FDI regulations.

The Road Ahead:

The target for the 11th Plan period (2007-12) is 600 million phone connections with an
investment of US$ 73 billion. Apart from the basic telephone service, there is an enormous
potential for various value-added services.

According to report titled 'India 2012: Telecom growth continues', revenue from India's
telecom services industry is projected to reach US$ 54 billion in 2012, as against US$ 33
billion in 2009.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                       pg. 72


Bharti is one of Asia’s leading providers of telecommunication services with presence in all
the 22 licensed jurisdictions (also known as Telecom Circles) in India, and in Srilanka. It
served an aggregate of 121,852,576 customers as of December 31, 2009, in India; of whom
118,864,031 subscribe to our GSM services and 2,988,545 use Telemedia Services either for
voice and/or broadband access delivered through DSL. Bharti is the largest wireless service
provider in the country, based on the number of customers as of December 31, 2009. It offers
an integrated suite of telecom solutions to enterprise customers, in addition to providing long
distance connectivity both nationally and internationally. Bharti also offer DTH and IPTV
Services. All these services are rendered under a unified brand “Airtel”.

The company also deploys, owns and manages passive infrastructure pertaining to telecom
operations under its subsidiary Bharti Infratel Limited. Bharti Infratel owns 42% of Indus
Towers Limited. Bharti Infratel and Indus Towers are the two top providers of passive
infrastructure services in India.


                                      Mobile Services Nokia Siemens, Ericsson, Huawei
Network Equipment                     Telemedia &
                                                        Nokia Siemens, Wipro, Cisco, Alcatel
                                      Long Distance
                                                        Lucent, ECI, Tellabs
Information Technology                                  IBM
                                                        IBM Daksh, Hinduja TMT,
Call Centre Operations                                  Teleperformance,
                                                        Mphasis, Firstsource & Aegis
Equity Partner {Strategic}                              Singtel

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                           pg. 73

Investment Highlights:

Q2 FY10 Results Update:

Bharti Airtel, India`s leading provider of telecommunications services disclosed a rise in
consolidated net profit after for the quarter ended Sep 2009. During the quarter, the profit of
the company rose 35.13% to Rs 22,541.70 million from Rs 16,681.30 million in the last year.
Net sales for the quarter rose 16.04% to Rs 103,551.60 million, while total income for the
quarter rose 16.09% to Rs 103,930.60 million compared with the prior year period. It posted
earnings of Rs 5.94 a share during the quarter, registering 35.12% growth over prior year

                                         Table: II
                              Segment Wise Revenue Break Up:

Source: SMC Research Report

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                           pg. 74


      Bharti Airtel has more than 65 million customers (July 2008). It is the largest cellular
       provider in India, and also supplies broadband and telephone services - as well as
       many other telecommunications services to both domestic and corporate customers.

      Other stakeholders in Bharti Airtel include Sony-Ericsson, Nokia - and Sing Tel, with
       whom they hold a strategic alliance. This means that the business has access to
       knowledge and technology from other parts of the telecommunications world.
      The company has covered the entire Indian nation with its network. This has
       underpinned its large and rising customer base.


      Until recently Airtel did not own its own towers, which was a particular strength of
       some of its competitors such as Hutchison Essar. Towers are important if your
       company wishes to provide wide coverage nationally.

      The fact that the Airtel has not pulled off a deal with South Africa's MTN could signal
       the lack of any real emerging market investment opportunity for the business once the
       Indian market has become mature.


      The company possesses a customized version of the Google search engine which will
       enhance broadband services to customers. The tie-up with Google can only enhance
       the Airtel brand, and also provides advertising opportunities in Indian for Google.
      Global telecommunications and new technology brands see Airtel as a key strategic
       player in the Indian market. The new iPhone will be launched in India via an Airtel

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                           pg. 75

       distributorship. Another strategic partnership is held with BlackBerry Wireless
      Despite being forced to outsource much of its technical operations in the early days,
       this allowed Airtel to work from its own blank sheet of paper, and to question industry
       approaches and practices - for example replacing the Revenue-Per-Customer model
       with a Revenue-Per-Minute model which is better suited to India, as the company
       moved into small and remote villages and towns.
      The company is investing in its operation in 120,000 to 160,000 small villages every
       year. It sees that less well-off consumers may only be able to afford a few tens of
       Rupees per call.
      Bharti Airtel is embarking on another joint venture with Vodafone Essar and Idea
       Cellular to create a new independent tower company called Indus Towers. This new
       business will control more than 60% of India's network towers. IPTV is another
       potential new service that could underpin the company's long-term strategy.


      Airtel and Vodafone seem to be having an on/off relationship. Vodafone which
       owned a 5.6% stake in the Airtel business sold it back to Airtel, and instead invested
       in its rival Hutchison Essar. Knowledge and technology previously available to Airtel
       now moves into the hands of one of its competitors.
      The quickly changing pace of the global telecommunications industry could tempt
       Airtel to go along the acquisition trail which may make it vulnerable if the world goes
       into recession. Perhaps this was an impact upon the decision not to proceed talks
       about the potential purchase of South Africa's MTN in May 2008. This opened the
       door for talks between Reliance Communication's Anil Ambani and MTN, allowing a
       competing    Indian   industrialist   to   invest   in   the   new   emerging   African
       telecommunications market.
      Bharti Airtel could also be the target for the takeover vision of other global
       telecommunications players that wish to move into the Indian market.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                           pg. 76

Reliance Communications Limited (RCL) is the flagship company of the Anil Dhirubhai
Ambani Group (ADAG), is India's largest private sector information and communications
company with over 48 million subscribers. It was established in the year 2004 as Reliance
Infrastructure Developers Private Limited, Reliance Communications started laying 60,000
route kilometres of a pan-India fibre optic backbone with high capacity, integrated (wireless
and wireline), convergent (voice, data and video) digital network and to offer services
spanning the entire infocomm value chain. It is capable of delivering a range of services
spanning the entire infocomm (information and communication) value chain, including
infrastructure and services for enterprises as well as individuals, applications, and consulting.

The Company's business encompasses a complete range of telecom services covering mobile
and fixed line telephony. It includes broadband, national and international long distance
services and data services along with an exhaustive range of value-added services and
applications. During the year 2004, International wholesale telecommunications service
provider, FLAG Telecom amalgamates with Reliance Gateway, a wholly owned subsidiary
of Reliance Infocomm, the company launched RIM Prepaid with attractive offer, Reliance
Infocomm introduced World Card - a Prepaid International calling card for affordable and
convenient ISD calls from India, the first regional Customer Contact Centre was launched in
Chennai. In the same year the company made partnership with MCI to offer India's First
MPLS Global VPN Solution. Introduced Railway Ticket booking from R World data
applications suite of Reliance India Mobile.

In 2005, RCL only the company introduced, first e-recharge facility in CDMA in India, the
company has had joins hands with Air Deccan to offer air ticket booking facility at Reliance
WebWorld. Reliance Infocomm rolls out international roaming facility across several
countries to become the first Indian CDMA operator to offer its customers such a service.
The company tied-up with the Bombay Stock Exchange to make available livestock quotes
on its mobile phones during the same year 2005. The status of the company was changed to
Public Limited in July 2005. Name of the company was changed from Reliance Infrastructure

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                              pg. 77

Developers Private Limited to Reliance Communication Ventures Limited in August 2005.
RCL, UK launched Reliance IndiaCall service in England and Wales enabling callers to make
high-quality calls to India from any landline or mobile phone at economical rates. Reliance
Infocomm and China Telecom signed agreement for telecom services to provide direct
telecommunication service, including a global hubbing service, to subscribers in the both two

India's first Talking Message Service (TMS) enabling the mobile users to send voice
messages to not only other mobiles but also fixed wireless phones (FWP) and landlines in
Reliance communications network were launched during the year 2006. In the same year
2006, RCL listed on the Bombay Stock Exchange and National Stock Exchange, the
company ties up with Disney to offer on Reliance Mobile World India's first 3D animation on
mobile, launched 'Hello Capital Plan' to enable its subscribers in 19 state capitals to call each
other at the local call rate of 40 paise per minute, T-Com signs contract with FLAG Telecom
for Europe-US bandwidth, Reliance Communications' FALCON Cable System was initiated
in the same year. RCL launched Free Group Term Life Cover for its CDMA subscribers.
RCL and Nokia have joined hands to market the Nokia 1255 mobile handset in India at a
price of Rs 1,999 during the period of 2006.

Reliance Infocomm Limited, Ambani Enterprises Private Limited, Reliance Business
Management      Private   Limited,    Formax     Commercial      Private    Limited,     Reliance
Communications Technologies Limited, Reliance Software Solutions Private Limited,
Reliance Communications Solutions Private Limited and Panther Consultants Private Limited
was amalgamated and the Network division of the Reliance Communications Infrastructure
Limited was demerged with the Company during the year 2006. The name of the Company
was changed from Reliance Communication Ventures Limited to Reliance Communications
Limited with effect from 7th June 2006. The Company joined Lenovo and Intel for 'Internet
on the Move' in the year 2007. Also in the same year, RCL ties up with for
Search Jobs & Classified Ads from Reliance Mobile World. The demerger of Passive
Infrastructure division Reliance Communications & Reliance was approved in March of the
year 2007.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                               pg. 78

Sunny Days And Nights For Reliance Mobile Subscribers as Reliance Communications ties
up with SUN TV to offer video streaming of all SUN TV programs online 24x7. In May of
the year 2007, the company bagged West Bengal E-Governance Project. RCL slashed its call
rate to US and Canada. It's now just Rs 1.99 per minute and also launched Lifetime Validity
Recharge @ Just Rs.499. The tie up was made with Cisco to launch Business Internet
Services for SMEs in Pune in the year. After, in July of the same year 2007, the company and
QUALCOMM was made collaboration on CDMA2000 Expansion. The biggest acquisition
deal so far, the company bought US data Communication Company Yipes Holdings' in an all-
cash deal for 4300 million (Rs 1200 crore) in July 2007. RCL came forwarded to sale of
equity stake in its Tower Company-Reliance Telecom Infrastructure Limited in July of the
year. For air and hotel bookings, the company has had joins hands with The
money transfer also available in the RCL, such facility was started in September of the year
2007. The company made strategic partnership with Vanco.

As on April 2008, RCL launched Exam Guru, the educational portal, which provides
information on exam result, college admissions, exam schedules, admission deadlines, mock
tests and also tips for bettering performance. RCL made ties up with International Cricket
Council for rankings in the next eight years. During the same month and same year, the
company has acquired UK based eWave World, which offers wireless telephony services
using WIMAX technology. In May 2008, Reliance Globalcom, a subsidiary of the company,
has acquired London based managed network services provider, Vanco Group, for about $77
million (Rs 324 crore).

Key Investment Arguments:

      RCom’s GSM expansion has increased its addressable market, driving higher
       subscriber momentum. Revenue traction should build progressively on increased
       visibility and availability of the GSM service.
      Revenue growth and profitability has remained under pressure due to hyper-
       competition and cost push due to GSM expansion.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                         pg. 79

      Growth rates and margins to normalize from FY12 as new rollouts are through and
       competitive intensity recedes.

Key Investment Risks:

      Key risks stem from significant cost increase led by aggressive expansion, downward
       pressure on wireless RPM, upward risk to finance costs given significant net debt,
       adverse findings in the investigation on licence fee calculations, and aggressive
       bidding for 3G auctions.

Recent Developments:

      RCOM launched “Simply Reliance” plan in wireless offering tariff of 1p/s, Rs/min,
       and Re1/ 3 min for all calls
      RCOM’s subsidiary Reliance Infratel received SEBI’s approval for IPO.

Some of the key Highlights of the Quarterly Results are as Follows:

      RCom reported a 9.2% YoY and 6.9% QoQ degrowth in revenues to Rs. 5,309.8 cr.
      PBIT margins dipped QoQ by 190 bps whereas on YoY basis they fell by 190 bps to
       21.2% in Q3FY10.
      Broadband segment revenues sharply improved by 7.7% YoY but dropped by 8.5%
       QoQ to Rs.704.5 cr with ARPL flat YoY and down by 8.5% QoQ to Rs. 1,642. PBIT
       margins declined to 39.1% from 41.5% in Q2FY10.
      Consolidated EBIDTA margins dipped by 610 bps YoY and 130 bps QoQ to 34.1%
       on the back of high network operating costs. Network costs increased by 1160 bps
       YoY and 360 bps as a percentage of sales to 31.5%.
      Depreciation and amortization charges dropped sharply by 18% YoY due to assumed
       increase in useful life of certain telecommunication equipment to 18 years. Q3FY10
       witnessed interest income of Rs.407.5 cr vis-à-vis income of Rs.149.6 cr in Q1FY10.
      RCom has guided for a capex of Rs.4,500 cr excluding of a provision for cash outgo
       towards the upcoming auction of 3G spectrum in FY10. Excluding 3G spectrum and

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                        pg. 80

       Wi-max, the capex for FY11 stands at Rs. 3,000 cr. RCom’s net debt now stands at
       Rs. 189 bn and cash at Rs. 43.8 bn.
      The ‘Simply Reliance’ plan launched in October 2009 is doing well and was initially
       launched as a 50 paise plan. Now RCom is customizing plans as per needs of
       customers and plans to target GSM and postpaid users i.e. those with high ARPU.
      RCom, which has got the market regulator's approval for its proposed initial public
       offering (IPO) of its tower unit Reliance Infratel, has initiated pre-IPO talks with
       strategic and financial investors.
      Industry consolidation could take 12-18 months to take effect given the high pressure
       on tariffs due to hyper competition.
      The management believes that MNP could be a growth driver given its reach in GSM
       and CDMA and its need based Simply Reliance plan made available to suit all

                                        Table: III
                  Quarterly Result of Reliance Communication Limited:

        Source: Research Report

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                         pg. 81

IDEA Cellular Limited, a part of the Aditya Birla Group and an India's leading Global
System for Mobile communication (GSM) Mobile Services operator was began its journey in
the year 1995 as in the name of Birla Communications Limited for providing GSM-based
services in the Gujarat and Maharashtra Circles. Later the company has licenses to operate in
all 22 Service Areas. Presently, operations exist in 11 Service Areas covering Delhi,
Maharashtra, Goa, Gujarat, Andhra Pradesh, Madhya Pradesh, Chattisgarh, Uttaranchal,
Haryana, UP-West, Himachal Pradesh, UP-East, Rajasthan and Kerala. With a customer base
of over 24 million, IDEA Cellular's footprint currently covers approximately 60% of India's
telecom population. The company's operational 11 Service Areas are broken up into
Established and New Service Areas. The established service areas are Delhi, Andhra Pradesh,
Gujarat and Maharashtra, Haryana, Kerala, Madhya Pradesh and Uttar Pradesh (West) and
the New Service Areas are Uttar Pradesh (East), Rajasthan and Himachal Pradesh.

Changed its name to Birla AT&T Communications Limited followed by joint venture
between Grasim Industries and AT&T Corporation in the year 1996. After a year, in 1997,
commenced its operations in the Gujarat and Maharashtra. Migrated to revenues share license
fee regime under New Telecommunications Policy ('NTP') Circles in the year 1999. During
the year 2000, the company merged with Tata Cellular Limited, thereby acquired original
license for the Andhra Pradesh Circle. IDEA acquired RPG Cellular Limited and
consequently the license for the Madhya Pradesh (including Chattisgarh) Circle in the year
2001, and in the same year changed its name from Birla AT&T Communications Limited to
Birla Tata AT&T Limited. Obtained license for providing GSM-based services in the Delhi
Circle. Again in year later, in 2002, the company altered its name to Idea Cellular Limited
and launched 'Idea' brand name and commenced its commercial operations in Delhi Circle.
During the year, the company reached one million subscriber marks consecutively in the year
2003, reached two million subscriber marks.

During the year 2004, the company acquired Escotel Mobile Communications Limited
(subsequently renamed as Idea Mobile Communications Limited), reached the four million

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                          pg. 82

subscriber mark and the first operator in India to commercially launched EDGE services
2005. Reached the five million subscriber mark in the year 2005 and IDEA won an Award
for the 'Bill Flash' service at GSM Association Awards in Barcelona, Spain. The Company
became a part of the Aditya Birla Group in the year 2006, subsequent to the TATA Group
transferred its entire shareholding in the Company to the Aditya Birla Group. In the same
year 2006, IDEA acquired Escorts Telecommunications Limited (subsequently renamed as
Idea Telecommunications Limited). The Company reached the 10 million subscriber mark
and also launched New Circles for obtain more and more customers. IDEA has extended its
reach to 500 towns in Andhra Pradesh in August of the year 2006. Idea received a Letter of
Intent from the DoT for a new UAS License for both Mumbai and Bihar Circles. ABNL, the
parent of Aditya Birla Telecom Limited, agreed to transfer its entire shareholding in Aditya
Birla Telecom Limited to the Company for the consideration of Rs. 100 million. In 2007, the
company won an award for the 'CARE' service in the 'Best Billing or Customer Care
Solution' at the GSM Association Awards in Barcelona, Spain.

The Initial Public Offering aggregating to Rs. 28,187 million and the company listed in both
Bombay Stock Exchange and the National Stock Exchange during the year 2007. IDEA
merged seven of its subsidiaries and reached the twenty million subscriber mark in the same
year 2007. As on February 2008, IDEA Cellular Ltd tied up with Southern Biotechnologies
Ltd to bio-diesel for operating IDEA's gensets at all towers in the Andhra Pradesh region.
The Company with Geodesic, an innovator in communication, collaboration and
entertainment applications on mobile and Internet platforms jointly announced the launch of
'Idea Radio', a truly differentiated mobile music service for IDEA customers in the same year

Customer Service and Innovation are the drivers of this Cellular Brand. A brand known for
their many firsts, IDEA is only the operator to launch General Packet Radio Service (GPRS)
and EDGE in the country. IDEA has seen phenomenal growth since its inception, the
company's footprint idea is to first achieve critical mass, then drill deep instead of spreading
thin, however, does not increasing geographic footprint only, it also drills deep and
successfully attempts to provide excellent network coverage in all its circles of operations.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                             pg. 83

Key Investment Arguments:

      High growth visibility from increasing coverage and footprint expansion is well
       supported by aggressive capex deployment and network rollout.
      Strong incumbency advantage in 8 established circles and spectrum allocation in the
       900MHz and in 8 circles.
      Key beneficiary of tower sharing initiatives including recent formation of Indus
       Towers - a three way passive infrastructure JV between Bharti, Idea, and Vodafone

Key Investment Risks:

      Increasing competitive intensity likely from new rollouts resulting in pressure on
       yields and market share.
      Slower volume pickup in recently covered areas resulting in prolonged margin

Recent Developments:

      During 3QFY10 Idea launched operations in J&K, West Bengal, Kolkata, Assam, and
       North-East circles.
      Idea received shareholders' approval for the de-merger of tower business.

Strong 3QFY10 Results:

      Consolidated revenue grew 15.3% YoY and 5.9% QoQ to Rs31.5b vs our estimate of
      Revenue for established circles increased 9.7% YoY and 4.2% QoQ to Rs28.2b.
      Consolidated EBITDA margin declined 137bp QoQ to 25.8%; significantly ahead of
       our estimate of 22.6%.
      Consolidated PAT declined ~23% YoY and QoQ to Rs1.7b (vs est of Rs0.56b).

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                           pg. 84

      Reported PAT includes onetime provision of Rs199m (vs Rs20m in 2QFY10) for
       ESOP re-pricing.
      Net finance cost of Rs938m (Rs740m in 2QFY10) included forex gain of Rs118m
       (Rs279m in 2QFY10).
      Consolidated numbers include financials of Spice Communications (on a 41%
       proportionate basis) and Indus (16%) stake. TATA COMMUNICATION:

Tata Communications Limited along with its global subsidiaries (Tata Communications) is a
leading global provider of the new world of communications. The company leverages its Tata
Global Network, vertical intelligence and leadership in emerging markets, to deliver value
driven, globally managed solutions to the Fortune 1000 and mid-sized enterprises, service
providers and consumers.

The Tata Communications portfolio includes transmission, IP, converged voice, mobility,
managed network connectivity, hosted data centre, communications solutions and business
transformation services to global and Indian enterprises & service providers as well as,
broadband and content services to Indian consumers. The Tata Global Network encompasses
one of the most advanced and largest submarine cable networks, a Tier-1 IP network,
connectivity to more than 200 countries across 300 PoPs and more than one million square
feet data centre space. Tata Communications serves its customers from its offices in 80 cities
in 40 countries worldwide. Tata Communications has a strategic investment in South African
operator Neotel, providing the company with a strong anchor to build an African footprint.
Tata Communications Ltd. is part of the $29 billion Tata Group; it is listed on the Bombay
Stock Exchange and the National Stock Exchange of India and its ADRs are listed on the
New York Stock Exchange.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                          pg. 85

Global Industry Recognition:

      Best Market Strategy: Global Wholesale Telecommunications Awards
      Most Innovative Managed Service: 2008 Telephony Innovation Award
      Best Technology Innovation: 2008 Pilot House Award
      1 Enterprise Data Services Provider in India: Frost & Sullivan Awards, 2008
      Best Long Distance Operator; Best Internet & BB Services Operator: Tele.Net
       Awards 2008


Directly held subsidiaries of the company are:
      Tata Communications International Pvt. Ltd (Formerly known as VSNL International
       Pvt. Ltd)
      VSNL Broadband Limited
      Tata Communications Transformation Services Limited (formerly known as VSNL
       Global Services Limited)
      VSNL Internet Services Ltd. (formerly known as DIL Internet Limited)
      VSNL SNOSPV Pvt. Ltd.
      Tata Communications Lanka Limited (formerly known as VSNL Lanka Ltd.)
      Tata Communications Services (America) Inc. (Formerly known as VSNL America

Business Areas:

The Company operates under three main business segments globally. They are:

Wholesale Service Segment:

The Wholesale Voice segment provides international long distance and national long distance
voice services.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                        pg. 86

Enterprise & Carrier Segment:

The Enterprise and Carrier Data segment offers corporate data transmission services, such as
international private leased circuits, frame relay, Internet leased line circuits, and national
private leased circuits. This segment provides IP networks and wholesale IP transit services
to tier-2 ISPS, and regional carriers. It also offers mobile signalling services, such as signal
conversion and managed roaming services; ethernet services; and Internet protocol and
managed services, including Internet telephony, multi protocol label switching based virtual
private networks, Internet access, managed hosting, collaboration and conferencing services,
managed security services, and other professional services.

Other Services Segment:

The Other Services segment provides global roaming, Internet, virtual private network, and
data centre services. This segment offers various Internet services, such as connectivity,
messaging, Internet telephony, and a range of content services. Tata Communications serves
the Fortune 1000 and mid-sized enterprises, service providers, and consumers. The company,
formerly known as Videsh Sanchar Nigam Limited, was founded in 1986 and is based in
Mumbai, India. Tata Communications Limited is a part of the Tata Group.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                            pg. 87

                    CHAPTER – TWO



      Financial statement analysis has traditionally been seen as part of the fundamental
      analysis required for equity valuation. But the analysis has typically been ad hoc.
      Drawing on recent research on accounting-based valuation, this paper by Nissim and
      Penman outlines a financial statement analysis for use in equity valuation. The
      analysis of current financial statements is then seen as a matter of identifying current
      ratios as predictors of the future ratios that determine equity payoffs.

      Claessens, Stijn surveys the literature on equity portfolio investment to develop a
      research agenda that could help developing countries interested in attracting equity
      portfolio flows. He finds that a broad literature exists on equity portfolio flows, but
      that most empirical tests have focused on industrial countries.

      Although some of the analytical papers may be applicable to developing countries, the
      author identifies areas of empirical research of specific interest to developing
      countries: identifying barriers that prevent a free flow of (equity portfolio) capital
      between industrial and developing countries; quantifying the opportunity costs of
      these barriers in higher risk-adjusted cost of capital and lower flow of capital;
      analyzing the optimal amount of portfolio investment and the degree to which
      investors in industrial countries are currently (under-) invested in developing
      countries; and analyzing the efficiency of the various stock markets in developing
      countries, as inefficient stock markets could be a barrier to foreign flows.

      This research could help policymakers in developing countries make decisions about
      liberalizing capital accounts, reforming financial markets, and coping with the
      potential volatility of equity portfolio flows.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                             pg. 89

      Abarbanell and Bushee examine whether the application of fundamental analysis
      can yield significant abnormal returns. Using a collection of signals that reflect
      traditional rules of fundamental analysis related to contemporaneous changes in
      inventories, accounts receivables, gross margins, selling expenses, capital
      expenditures, effective tax rates, inventory methods, audit qualifications, and labor
      force sales productivity, we form portfolios that earn an average 12-month cumulative
      size-adjusted abnormal return of 13.2 percent. We find evidence that the fundamental
      signals provide information about future returns that is associated with future earnings

      Moreover, a significant portion of the abnormal returns is generated around
      subsequent earnings announcements. These findings are consistent with the
      underlying focus of fundamental analysis on the prediction of earnings. Significant
      abnormal returns to the fundamental strategy are not earned after the end of one year
      of return cumulation, indicating little support for the idea that the signals capture
      information about multiple-year-ahead earnings not immediately impounded in price
      or about long-term shifts in firm risk.

      Fundamental analysis of stocks links financial data to firm value in two consecutive
      steps: a predictive information link tying current financial data to future earnings and
      a valuation link tying future earnings to firm value. At each step, a large number of
      causal factors have to be factored into the evaluation.

      To effect these calculations, Cristina Abad & Joaquina Laffarga and Sten A.
      Thore proposes a new two-stage multi-criteria procedure, drawing on the techniques
      of data envelopment analysis. At each stage, a piecewise linear efficiency frontier is
      fitted to the observed data. The procedure is illustrated by a numerical example,
      analyzing some 30 stocks in the Spanish manufacturing industry in the years 1991-

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                          pg. 90

      Firms with low ratios of fundamentals (such as earning and book values) to market
      values are known to have systematically lower future stock returns. Dechow, Hutton,
      Meulbroek and Sloan documents that short-sellers position themselves in the stock
      of such firms, and then cover their positions as the ratios mean-revert. Paper also
      shows that short-sellers refine their trading strategies to minimize transactions costs
      and maximize their investment returns. The evidence is consistent with short-sellers
      using information in these ratios to take positions in stocks with lower expected future

      Study examines the usefulness of contextual fundamental analysis for the prediction of
      extreme stock returns. Specifically, Beneish, Lee and Tarpley use a two-stage
      approach to predict firms that are about to experience an extreme (up or down) price
      movement in the next quarter. In the first stage, Paper defines the context for analysis
      by identifying extreme performers; in the second stage we develop a context-specific
      forecasting model to separate winners from losers. Paper shows that extreme
      performers share many common market-related attributes, and that the incremental
      forecasting power of accounting variables with respect to future returns increases after
      controlling for these attributes. Collectively, these results illustrate the usefulness of
      conducting fundamental analysis in context.

      Managers need to go beyond traditional approaches to serving the poor, and innovate
      by taking into account the unique institutional context of developing markets.
      Practical implication says that the experience of Hutchison Essar in India provides
      some important lessons for mobile network operators (MNOs) and other firms in
      other developing markets who are hoping to serve the rural poor. Hutchison has
      recognized the value of corporate and non corporate partners. The company has

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                           pg. 91

      proactively established relationships with individual entrepreneurs, and has provided
      has provided development support to other partners such as distributors. The company
      has recognized the value of leveraging existing local institutions, and has seen gaps in
      local infrastructure or missing services as potential opportunities rather than barriers
      to growth. The company has seen the rural market as an opportunity – not just an
      obligation to be served because of universal service obligations. Also this article by
      Anderson (2008) demonstrates that MNOs can deliver availability and affordability
      to achieve increased individual or household penetration through business model

      Indian telecommunications has been zooming up the growth curve at a mounting pace
      and India is has surpassed US to become the second largest wireless network in the
      world. This growing subscriber base is basically created by tapping into rural India,
      which is an emerging market for the industry. The estimate for the next five to ten
      years is that the rural market will form 40 % of the subscriber base. Study by
      Maheshwari (July-September 2008) has analyzed the human resource management
      process of the industry, and specially the latest trends of recruitment of this massively
      growing industry.

      Article follows the methodology of studying the history of telecommunications
      approach that is conversant with the political economy tradition. It uses archival
      sources, personal correspondence, and published information as its research material.
      Findings of the paper by Thomas (2007) suggests that public service in
      telecommunication is a relatively ‘‘new’’ concept in the annals of Indian
      telecommunications and that a deregulated environment along with the Right to
      Information movement holds significant hope for making public service
      telecommunications a real alternative. Article provides a reflexive, critical account of
      public service telecommunications in India and suggests that it can be strengthened by

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                           pg. 92

      learning gained from the continual renewal of public service ideals and action by the
      postal services and a people-based demand model linked to the Right to Information
      Movement. Studies suggest that the right to information movement has contributed to
      the revitalization of participatory democracy in India and to a strengthening of public
      service telecommunications.

      Article describes the considerable attention India is taking for application of
      technology, development of infrastructure and human resource for meeting national
      needs. Basically India is building an information society. Technology has helped
      society to cut across the traditional boundaries for getting converted into an emerging
      information society. Study by Singh (2005) concludes that The Indian software and
      services industry has significantly helped to boost the Indian economy. In IT-enabled
      services too, India has been clearly perceived to be the dominant hub. The Indian
      software sector is being recognized as the single largest contributor to incremental
      market capitalization in India but the sector is still small in terms of contribution to
      GDP, especially when compared to other large sectors in the economy like agriculture
      and manufacturing. Similarly, the telecommunication sector has contributed a lot but
      still has a considerable way to go. Paper also enforces that comparisons of India’s
      telecommunication statistics with those of developed and other emerging economies
      show that the country is still far behind its contemporaries.

      Estimated contribution is distinguished between public and private sectors to highlight
      the impact of telecom privatization on economic growth. Knowledge of policy
      determinants of demand of telecom services is shown to be essential to enhance
      growth contribution of telecom services. Using a recent sample survey data from
      Karnataka State in South India by Vrmani (2000), price and income determinants of
      demand for telecom services are estimated by capacity of telephone exchanges

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                          pg. 93

      Estimation results offer evidence for significant negative own price elasticity and
      positive income elasticity of demand for telecom services.

      India in the International Context” says that Telecommunications restructuring have
      evolved differently in Asia and Latin America. While Asian governments have moved
      cautiously in bringing changes to the sector, Latin American nations have
      implemented    radical    ownership   and   market    transformations.   The   Indian
      telecommunications reform falls in between these two general regional trends. The
      choice of a high component of competition, increased private participation, and no
      privatization of the national carrier set conditions that will trigger unique
      socioeconomic effects. Article Girija (1998) identifies and highlights the likely
      implications of the Indian reform on key economic and social issues, such as the cost
      of services, cross-subsidies, network interconnection, private investments, universal
      services, employment, and the possible rise of an information-intensive economy. It
      does so by comparing and contrasting the Indian experience with dominant reform
      strategies elsewhere in the developing world.

      “India lives in villages” said the Father of the Nation, Mahatma Gandhi. With 1,000
      million people and 180 million households, India is one of the biggest growing
      economies in the world. With the advent of the Information, Communication and
      Technology (ICT) revolution, India and its villages are slowly but steadily getting
      connected to the cities of the nation and the world beyond. Owing to the late Rajiv
      Gandhi, India is now a powerful knowledge economy, and though India may have
      been slow to start, it certainly has caught up with the West and is ahead in important
      respects. The Government, the corporate sector, NGOs and educational institutions
      has supported rural development by encouraging digital libraries, e-business, e-
      learning and e-governance. The aim of Paper by Nikam, Ganesh, Tamizhchelvan
      (2004), is to touch upon and highlight some of the areas where, by using ICT, the

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                         pg. 94

      masses have been reached in this way. A follow-up paper will outline collections of
      significant cultural material which, once national IT strategies are fully achieved,
      could form part of a digitally preserved national heritage collection.

      Article provides a broad view of the role of an Internet service provider (ISP) and the
      factors to be considered before entering the ISP market. Describes the Internet/ISP
      scene within India and discusses the configuration of local, regional and national level
      ISPs, and the supporting infrastructure. Rao (2000) also identifies the various success
      factors. The global Internet scenario is discussed regarding the phases of the Internet
      in India, i.e. pre and post commercialization. The main players are described:
      ERNET, NICNET, STPI, VSNL, MTNL, Satyam Infoway and Bharti-BT. The
      financial and legal implications are highlighted in the Indian context. Many
      companies entered the nascent ISP business in India due to deregulation. Building
      local content, fore knowledge of new Internet technologies, connecting issues,
      competitiveness, etc. would help in their sustainability. Rao concludes that though
      many companies entered the nascent ISP businesses in India due to deregulation,
      many of them are unlikely to survive in the longer term.

      Paper estimates the contribution of telecom in India and the contribution has been
      distinguished between public and private sectors to highlight the impact of telecom
      privatization on economic growth. Knowledge of policy determinants of demand of
      telecom services is shown to be essential to enhance growth contribution of telecom
      services. Using a recent sample survey data from Karnataka State in South India by
      Vrmani (2000), price and income determinants of demand for telecom services are
      estimated by capacity of telephone exchanges Estimation results offer evidence for
      significant negative own price elasticity and positive income elasticity of demand for
      com services.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                          pg. 95

      The Paper by Narinder (2004) talks about the foremost benefits of Information and
      Communication Technologies (ICTs) in developing countries that can be helpful in
      improving governance including public safety and eradication of illiteracy. The
      benefits of ICTs have not reached the masses in India due to lack of ICT
      infrastructure, particularly in rural areas, where two-third of the population of the
      country lives. Even in cities and suburban areas, use of ICTs is not popular due to lack
      of awareness to its use, computer illiteracy, and absence of practical applications.
      India is the largest country in South Asia, with a population of over one billion people
      and its telecom sector is presently experiencing fast growth phases. However
      telephony penetration in villages is less than two percent of the rural population and
      about 15 percent of the villages are still without any telephony service. Universal
      access to ICTs in rural areas has been planned and is being implemented through
      Public Tele Info Centers having voice data and video, as majority of villagers in India
      cannot afford a separate home connection. Illiteracy in rural areas is as high as 40
      percent and in some tribal belts hardly about 20 percent people are literate. There are
      35 million children in age group of 6–11 years, who are out of school and one out of
      four drops out during primary classes. Education and training, therefore, must be
      given the top priority if advantages of ICTs are to be harnessed. Indian economy is
      agriculture based and employs maximum workforce. Improvement in agriculture
      productivity can help in reducing rural poverty. Adoption of ICT in agriculture will
      play an increasingly important role in crop production and natural resource
      management. The other critical factor is technological challenges for universal access
      to ICTs to bring down the network access cost.

      Article describes the contribution made by telecommunications in India by the state
      and civil society to public service, this article aims to identify the state’s initial
      reluctance to recognize telecommunications provision as a basic need as against the
      robust tradition of public service aligned to the postal services and finds hope in the

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                          pg. 96

      renewal of public service telecommunications via the Right to Information movement.
      Article follows the methodology of studying the history of telecommunications
      approach that is conversant with the political economy tradition. It uses archival
      sources, personal correspondence, and published information as its research material.
      Findings of the paper suggests that public service in telecommunication is a relatively
      ‘‘new’’ concept in the annals of Indian telecommunications and that a deregulated
      environment along with the Right to Information movement holds significant hope for
      making public service telecommunications a real alternative. Article by Thomas
      (2007) provides a reflexive, critical account of public service telecommunications in
      India and suggests that it can be strengthened by learning gained from the continual
      renewal of public service ideals and action by the postal services and a people-based
      demand model linked to the Right to Information Movement. All studies done by the
      researcher suggests that the right to information movement has contributed to the
      revitalisation of participatory democracy in India and to a strengthening of public
      service telecommunications.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                         pg. 97

                 CHAPTER – THREE



Methodology may be described as:

    1. "The analysis of the principles of methods, rules, and postulates employed by a
    2. "The systematic study of methods that are, can be, or have been applied within a

Methodology may be a description of process, or may be expanded to include a
philosophically coherent collection of theories, concepts or ideas as they relate to a particular
discipline or field of inquiry. Methodology also refers to nothing more than a simple set of
methods or procedures, or it may refer to the rationale and the philosophical assumptions that
underlie a particular study relative to the scientific method. For example, scholarly literature
often includes a section on the methodology of the researchers.


Primary Source:
      Nil

Secondary Source:
      Balance Sheet
      Profit and Loss account
      Cash flow Statement
      Technical Indicators
      Research Reports
      Annual Reports
      Newspapers

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                             pg. 99

3.2.1 Introduction:

The P/E ratio (price-to-earnings ratio) of a stock (also called its "P/E", "PER", "earnings
multiple", or simply "multiple") is a measure of the price paid for a share relative to the
annual net income or profit earned by the firm per share. It is a financial ratio used for
valuation: a higher P/E ratio means that investors are paying more for each unit of net
income, so the stock is more expensive compared to one with lower P/E ratio.

The P/E ratio has units of years which can be interpreted as "number of years of earnings to
pay back purchase price", ignoring the time value of money. In other words, P/E ratio shows
current investor demand for a company share. The Reciprocal of the PE ratio is known as
the Earnings Yield. The earnings yield is an estimate of expected return to be earned from
holding the stock if we accept certain restrictive assumptions.

Although discounted cash flows is the correct way to value a company, people naturally like
to use simpler rules of thumb. The P/E ratio is the most popular because it's easy to
understand. If you buy stock at a P/E ratio of 15, say, then it will take 15 years for the
company's earnings to add up to your original purchase price - 15 years to "pay you back".
That's assuming that the company is already in its "mature" stage, where earnings are

Let's make that last paragraph a little more accurate. If you actually use the discounted cash
flows formula on a zero growth company, you find that its fair P/E ratio equals:

Where R = Discount Rate.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                           pg. 100

So, using a discount rate of 11%, you find that the fair P/E for a mature company is 9.09.

Of course, you'd be willing to pay a higher P/E ratio if earnings were growing - the payback
time would be quicker. And you'd want to pay less if future earnings looked risky to you for
some reason.

There are various P/E ratios, all defined as:

Where: The price per share in the numerator is the market price of a single share.

          The earnings per share in the denominator depend on the type of P/E:

        "Trailing P/E" or "P/E TTM": Earnings per share are the net income of the
          company for the most recent 12 month period, divided by number of shares
          outstanding. This is the most common meaning of "P/E" if no other qualifier is
          specified. Monthly earning data for individual companies are not available, so the
          previous four quarterly earnings reports are used and earnings are updated quarterly.
        "Trailing P/E from continued operations": Instead of net income, uses operating
          earnings which exclude earnings from discontinued operations, extraordinary items
          (e.g. one-off windfalls and write-downs), or accounting changes.
        "Forward P/E", "P/EF", or "estimated P/E": Instead of net income, uses
          estimated net earnings over next 12 months. Estimates are typically derived as the
          mean of a select group of analysts. In times of rapid economic dislocation, such
          estimates become less relevant as "the situation changes" (e.g. new economic data

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                             pg. 101

         is published and/or the basis of their forecasts become obsolete) more quickly than
         analysts adjust their forecasts.

The P/E ratio can alternatively be calculated by dividing the company's market
capitalization by its total annual earnings.

For example, if a stock is trading at $24 and the earnings per share for the most recent 12
month period is $3, and then stock A has a P/E ratio of 24/3 or 8. Companies with losses or
no profit have an undefined P/E ratio (usually shown as Not Applicable); sometimes,
however, a negative P/E ratio may be shown.

By comparing price and earnings per share for a company, one can analyze the market's stock
valuation of a company and its shares relative to the income the company is actually
generating. Stocks with higher forecast earnings growth will usually have a higher P/E,
and those expected to have lower earnings growth will in most cases have a lower P/E.

Investors can use the P/E ratio to compare the value of stocks: if one stock has a P/E twice
that of another stock, all things being equal (especially the earnings growth rate). Companies
are rarely equal, however, and comparisons between industries, companies, and time periods
may be misleading.

3.2.2 The P/E Concept in Business Culture:

The P/E ratio of a company is a significant focus for management in many companies and
industries. This is because management is primarily paid with their company's stock (a form
of payment that is supposed to align the interests of management with the interests of other
stock holders), in order to increase the stock price. The stock price can increase in one of two
ways: either through improved earnings or through an improved multiple that the market
assigns to those earnings. As mentioned earlier, a higher P/E ratio is the result of a
sustainable advantage that allows a company to grow earnings over time. Efforts by
management to convince investors that their companies do have a sustainable advantage have
had profound effects on business:

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                            pg. 102

         The primary motivation for building conglomerates is to diversify earnings so that
          they go up steadily over time.
         The choice of businesses which are enhanced or closed down or sold within these
          conglomerates is often made based on their perceived volatility, regardless of the
          absolute level of profits or profit margins.
         One of the main genres of financial fraud, "Slush Fund Accounting" (hiding excess
          earnings in good years to cover for losses in lean years), is designed to create the
          image that the company always slowly but steadily increases profits, with the goal to
          increase the P/E ratio.

These and many other actions used by companies to structure themselves to be perceived as
commanding a higher P/E ratio can seem counterintuitive to some, because while they may
decrease the absolute level of profits they are designed to increase the stock price. Thus, in
this situation, maximizing the stock price acts as a perverse incentive.

Determining Share Prices:

Share prices in a publicly traded company are determined by market supply and demand, and
thus depend upon the expectations of buyers and sellers. Among these are:

        The company's future and recent performance, including potential growth;
        Perceived risk, including risk due to high leverage;
        Prospects for companies of this type, the market sector.

By dividing the price of one share in a company by the profits earned by the company per
share, you arrive at the P/E ratio. If earnings per share move proportionally with share prices
the ratio stays the same. But if stock prices gain in value and earnings remain the same or go
down, the P/E rises.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                            pg. 103

The earnings figure used is the most recently available, although this figure may be out of
date and may not necessarily reflect the current position of the company. This is often
referred to as a 'trailing P/E', because it involves taking earnings from the last four quarters.


Normally, stocks with high earning growth are traded at higher P/E values. From the ex.,
Stock A, trading at $24 per share, may be expected to earn $6 per share the next year. Then
the forward P/E ratio is $24/6 = 4. So, you are paying $4 for every one dollar of earnings.

The P/E ratio implicitly incorporates the perceived risk of a given company's future earnings.
For a stock purchase, this risk includes the possibility of bankruptcy. For companies with
high leverage (that is, high levels of debt), the risk of bankruptcy will be higher than for
other companies. Assuming the effect of leverage is positive, the earnings for a highly-
leveraged company will also be higher. In principle, the P/E ratio incorporates this
information, and different P/E ratios may reflect the structure of the balance sheet.

Variations on the standard trailing and forward P/E ratios are common. Generally, alternative
P/E measures substitute different measures of earnings, such as rolling averages over longer
periods of time or "corrected" earnings figures that exclude certain extraordinary events or
one-off gains or losses. The definitions may not be standardized.

Various interpretations of a particular P/E ratio are possible, and the historical table below is
just indicative and cannot be a guide, as current P/E ratios should be compared to current real
interest rates:

                                            Table: IV
                                Various Interpretation of P/E:

         A company with no earnings has an undefined P/E ratio. By convention, companies
         with losses (negative earnings) are usually treated as having an undefined P/E ratio,
         although a negative P/E ratio can be mathematically determined.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                                pg. 104

        Either the stock is undervalued or the company's earnings are thought to be in
0–10    decline. Alternatively, current earnings may be substantially above historic trends or
        the company may have profited from selling assets.

10–17 For many companies a P/E ratio in this range may be considered fair value.

        Either the stock is overvalued or the company's earnings have increased since the last
17–25 earnings figure was published. The stock may also be a growth stock with earnings
        expected to increase substantially in future.

        A company whose shares have a very high P/E may have high expected future
        growth in earnings or the stock may be the subject of a speculative bubble.

It is usually not enough to look at the P/E ratio of one company and determine its status.
Usually, an analyst will look at a company's P/E ratio compared to the industry the company
is in, the sector the company is in, as well as the overall market (for example the S&P 500 if
it is listed in a US exchange). Only after a comparison with the industry, sector, and market
can an analyst determine whether a P/E ratio is high or low with the above mentioned
distinctions (i.e., undervaluation, over valuation, fair valuation, etc).

3.2.4 The Equity-Risk Indicator (PE)

The Equity-Risk Indicator (PE) can be calculated by comparing the price-earnings ratio
of Standard and Poor's 500 Index with a benchmark of fifteen.

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                           pg. 105

The formula is as follows:

When the average price-earnings ratio is fifteen, the risk indicator (PE) is zero, which
signals that the current level of stock prices is in line with the typical long-term level of
price-earnings ratios.

A negative indicator would suggest that average stock prices would have to fall to bring the
average price-earnings ratio back to fifteen, while a positive indicator means that stock
prices would need to rise to reach "normal" levels.

Over a long period, price movement on the U.S. stock market has ranged between ten and
twenty times earnings.

But here the question arises how we calculate the market P/E.

3.2.5 The Market P/E:

To calculate the P/E ratio of a market index such as the S&P 500, it is not accurate to take the
"simple average" of the P/Es of all stock constituents. The preferred and accurate method is
to calculate the weighted average. In this case, each stock's underlying market cap is summed
to give the total value in terms of market capitalization for the whole market index.

The same method is computed for each stock's underlying net earnings. In this case, the total
of all net earnings is computed and this gives the total earnings for the whole market index.

The final stage is to divide the total market capitalization by the total earnings to give the
market P/E ratio. The reason for using the weighted average method rather than 'simple'

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                            pg. 106

average can best be described by the fact that the smaller constituents have less of an impact
on the overall market index.

For example, if a market index is composed of companies X and Y, both of which have the
same P/E ratio (which causes the market index to have the same ratio as well) but X has a 9
times greater market cap than Y, then a percentage drop in earnings per share in Y should
yield a much smaller effect in the market index than the same percentage drop in earnings per
share in X.

In Stocks for the Long Run, the earnings yield is a good indicator of the market performance
on the long run. The average P/E for the past 130 years has been 12.1 (i.e. earnings yield 8.3


Accuracy and context:
In practice, decisions must be made as to how to exactly specify the inputs used in the

           Does the current market price accurately value the organization?
           How is income to be calculated and for what periods? How do we calculate total
           Can these values be trusted?
           What are the revenue and earnings growth prospects over the time frame one is
            investing in?
           Were there special one-time charges which artificially lowered (or artificially raised)
            the earnings used in the calculation, and did those charges cause a drop in stock
            price or were they ignored?
           Were these charges truly one-time, or is the company trying to manipulate us into
            thinking so?

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                               pg. 107

         What kind of P/E ratios is the market giving to similar companies, and also the P/E
          ratio of the entire market?
         Are P/E ratios an accurate measure?

Historical vs. Projected Earnings:

A distinction has to be made between the fundamental (or intrinsic) P/E and the way we
actually compute P/Es. The fundamental or intrinsic P/E examines earnings forecasts. That is
what was done in the analogy above. In reality, we actually compute P/Es using the latest 12
month corporate earnings. Using past earnings introduces a temporal mismatch, but it is felt
that having this mismatch is better than using future earnings, since future earnings estimates
are notoriously inaccurate and susceptible to deliberate manipulation.

On the other hand, just because a stock is trading at a low fundamental P/E is not an indicator
that the stock is undervalued. A stock may be trading at a low P/E because the investors are
less optimistic about the future earnings from the stock. Thus, one way to get a fair
comparison between stocks is to use their primary P/E. This primary P/E is based on the
earnings projections made for the next years to which a discount calculation is applied.


The price-to-earnings ratio (P/E) is probably the most widely used -- and thus misused --
investing metric. It's easy to calculate, which explains its popularity. The two most common
ways to calculate it are:

        P/E = share price divided by earnings per share
        P/E = market capitalization divided by net income

Share price and the market cap are easy to find in the quote section of any financial website.
The earnings are usually taken from the trailing twelve months (TTM) and can be found by

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                            pg. 108

checking the income statement for the past four quarters. A P/E using TTM figures is often
called the current P/E.

Another variation is the forward P/E, which is calculated using analyst future earnings
estimates, rather than actual historical earnings. Most financial websites give both the current
and forward P/E. I find forward P/E a useful guide for cyclical companies, companies
coming out of negative earnings, and those that have significant one-time charges embedded
in current earnings. You may also encounter the diluted P/E, which accounts for a company's
diluted shares.
You'll often find slightly different P/E values for the same company on different financial
sites because some sites normalize earnings for one-time items, which distorts the P/E ratio.
These small variations are immaterial.

In essence, the P/E tells us how much an investor is willing to pay for $1 of a company's
earnings. The long-term average P/E is around 15, so on average, investors are willing to pay
$15 for every dollar of earnings. Another useful way to look at this: Turn the P/E ratio around
to look at the E/P ratio, which when expressed as a percentage gives us the earnings yield.
For instance: 1/15 gives us an earnings yield of 6.67%.


Relative P/Es have one huge drawback. A PE ratio of 12, for example, is neither good nor
bad in a vacuum. Using PE ratios only on a relative basis means that your analysis can be
skewed by the benchmark you are using (Peer, industry and market).

So, let’s try to look at the PE ratio on an absolute level. What factors would cause a firm to
deserve a higher PE ratio? Because risk, growth, and capital needs are all fundamental
determinants of a stock’s PE ratio, higher growth firms should have higher PE ratios, higher
risk firms should have lower P/E and firms with higher capital needs should have lower P/E.

Meanwhile, a firm that’s expected to grow quickly will likely have a larger stream of future
cash flows than one that’s growing slowly, so all else equal, it’s rational to pay more for the

SUMATI SETHIA/4108168168/MBF/INDIAN INSTITUTE OF FINANCE                            pg. 109

shares (thus the higher Price to earnings ratio). On the flip side, a firm that’s riskier –maybe it
has high debt, maybe it’s highly cyclical, or maybe it’s still developing its first product –has a
good chance of having lower future cash flows than we originally expected, so it’s rational to
pay less for the stock.

When you are using the Price to earnings ratio, remember that firms with an abundance of
free cash flow are likely to have low reinvestment needs, which means that a reasonable PE
ratio will be somewhat higher than for a run-of-the mill company. The same goes for firms
with higher growth rates, as long as that growth isn’t being generated using too much risk.


Analysis is a tool to determine the good and bad of one company by the way of checking
each and everything from financial statement to future prospect of that company. The
objective of the equity analysis is to determine what stock to buy and at what price and for
that investor may use one method out of two available methods or he can use both the
methods at the same time.

 1. Fundamental analysis maintains that markets may misprice a security in the short run
but that the "correct" price will eventually be reached. Profits can be made by trading the
mispriced security and then waiting for the market to recognize its "mistake" and reprice the

 2. Technical analysis maintains that all information is reflected already in the stock price,
so fundamental analysis is a waste of time. Trends 'are your friend' and sentiment changes
predate and predict trend changes. Investors' emotional responses to price movements lead to
recognizable price chart patterns. Technical analysis does not care what the 'value' of a stock
is. Their price predictions are only extrapolations from historical price patterns.

Investors can use both these different but somewhat complementary methods for stock
picking. Many fundamental investors use technical’s for deciding entry and exit points. Many

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