Professor Campbell Harvey

1
Private Telecom Projectin India

• Professor Campbell Harvey
• BA 456

2
Agenda

• Background
• The Opportunity
• Telelinks Projections
• Our Analysis
• What Happened
• Questions?

3
Background India
4
Background India

• Largest Democracy
• Second largest country - population
• Per capita GDP 440 (1999)
• Huge income disparity
• In the midst of economic liberalization
• Severe corruption

5
Background Rajasthan
6
Background Rajasthan

• Second Largest State in India
• 10.6 of area 5.8 of population
• Borders Pakistan
• militarily important
• historically stable
• Rich in mineral resources
• silver, gypsum, asbestos, feldspar, lead, zinc,
  emeralds and garnets

7
Background Rajasthan

• Major tourist attraction - 350 MM annually
• Rapidly growing industrial sector
• Ericsson, Ford, Coke, Corning, etc.
• Presently 13th among Indian states in FDI
• CAGR of 5.2 - national average 6.9 (1995-98)

8
Background Telecom Sector

• State owned monopoly
• Extremely low teledensity (2.2)
• Insufficient infrastructure to meet growing
  demand
• Long wait lists for service hook up

9
Background Telecom Sector

• Sector liberalized
• Telecom Policy 1994
• New Telecom Policy 1999
• Opened to private investment
• FDI of approx. 2 BN (till Sep. 2001)
• Targeted teledensity 7 (2005) 15 (2010)
• 20 growth over last 5 years

10
The Opportunity 2000
Acquire a stake in Shyam Telelink, the basic
services licensee in the state of Rajasthan
11
The Project

• Member of Shyam Telecom Group

12
The Project Highlights

• Operation license valid until 2018
• Currently the only competitor to state owned
  provider
• A network of convergence
• traditional voice telephony services
• enhanced telephony services
• internet access
• cable TV services

13
The Project Financials

• Peak funding requirement of Rs 7,929 MM (US 177
  MM)
• Proposed to be financed as
• Equity Rs 3,524 MM (US 80 MM)
• Debt Rs 4,405 MM (US 97 MM)

14
The Project Cash Flows
(click on the photo for the information)
15
The Project Valuation

• IRR 38
• Pre-money Valuation

Million US
TV Cost of Equity Cost of Equity Cost of Equity
Rev. Multiple 18 20 22
8 500 500 500
9 384 384 384
10 296 296 296
16
Our Analysis Cost of Equity

• ICCRC India
• Assumptions
• Risk Free Rate 4
• US Market Risk Premium 4
• Anchor to US
• ICCRC Cost of Capital for India
• Cost of Equity (ICCRC) 19.7
• Adjustment (comp. Beta) 1.4
• Adjusted Cost of Capital 21.1

17
Our Analysis Valuation

• IRR 31
• Pre-money Valuation

Million US
TV Cost of Equity Cost of Equity Cost of Equity Cost of Equity Cost of Equity
Const. Growth 18.7 19.7 20.7 21.7 22.7
2 157 133 113 95 80
3 160 136 115 97 82
4 164 138 117 99 83
5 168 141 119 100 84
6 173 145 122 102 86
18
What Happened

• A few months after the release of the IM
• Hughes Telecom IPO
• Basic Services Licensee in Bombay and the State
  of Maharashtra
• Valued at US 116 MM (pre-money)
• Evinced a lot of foreign investor interest

19
What Happened

• Telelink valuation was way too high
• Talks with potential investors driven by Hughes
  Telecom valuation
• Management refused to lower valuation decided to
  go it alone

20
Questions?