ABCXL Teleservice sCase.
ABCXL Teleservices Ltd. ABCXL Teleservices Ltd.(ABCXL), a company engaged in providing cellular services has been recently awarded licenses for setting up fixed line operations in all the three circles wherein it currently operates cellular services and for setting an international long distance network. The company has funded the cellular operations with a mix of high cost domestic and foreign debt. The company has high-accumulated losses and also requires significant funds for undertaking the fixed line and international telephony operations. The promoters are strapped for funds and have approached you to help them reduce their cost of funds and raise additional resources for taking up the capital expenditure. Profile of three telecom circles ABCXL Teleservices Ltd was awarded licenses for three category B circles of Alpha, Beta and Gamma. The service was launched in a phased manner starting December 1996. The three circles account for 6.3% of country’s area and 11.3% of its population. They also account for 14.9% of the total number of telephone lines in the country. The following table summarises the demographic indicators for the three circles: Alpha
Urban Population (%)
Area ('000 sq kms)
Literacy rate %
Population (million) estimates) YOY growth rate (%)
The total number of subscribers with the company at the end of FY1999 is as follows: Circle Alpha Beta Gamma Total
No of Subscribers 35876 43121 26909 105906
Competition As mentioned earlier, the CMTS licences were awarded to two operators per circle on a non-exclusive basis. ABCXL faces competition in all the three circles. Alpha : Competitor – Bloom Telecom The consortium of a leading domestic industrial house and a swiss telecom giant has promoted Bloom Telecom Limited (BTL). This consortium also has other cellular licenses in two other circles. BTL commenced operations in April 1997, 4 months after ABCXL launched its services. BTL is currently providing services in 7 cities as against 17 cities covered by ABCXL. ABCXL has already established a backbone of 400 Kms. in the state whereas BTL has implemented only 200 Kms. of backbone network. As on March 1999, BTL had a market share of 25%. Beta: Competitor – Konark Telecom A consortium of Industries India Group and a leading telecom player from South East Asia has promoted Konark Telecom Limited (KTL). KTL also holds cellular licenses in various circles other than the Alpha circle. In comparison to 33 cities covered by ABCXL, KTL is currently providing services in 25 cities. ABCXL however, has a backbone of 800 Kms. in the state whereas KTL has implemented about 650 km of backbone. KTL is currently under severe liquidity constraints and has consequently not been in a position to pay the license fees and interconnect charges to DoT. Gamma: Competitor – BigBang Cellular Limited BigBang Cellular Limited (BCL) has been promoted by the BigBang group and Mediagroup Inc. BCL commenced operations in February 1997. BCL is currently providing services in 36 cities as against 43 cities covered by ABCXL. Further ABCXL has established backbone of 600 Kms. in the state in comparison to 650 Kms. by BCL. As on March 1999, BCL had a market share of 49%. However, in case direct inter circle connectivity is allowed, BCL will have the advantage of operating its service in the contiguous circles of Gamma and Kappa. Further, ABCXL is expected to face strong competition due to BCL group’s marketing strength. Demand Forecast For the three Circles The demand forecast for the three circles is based on the study conducted by IMRB. The demand for CMTS has been estimated through a survey of socioeconomic classes (SEC) viz. SEC A and SEC B households and extrapolating the responses to the population. The addressable market essentially comprises the potential cellular subscribers in the long term. The estimation of addressable market requires the overall market to be segmented into
different SEC, so that potential users of cellular service from each category can be identified. As per the study, the long-term addressable market would be a function of cellular coverage (population covered by cellular service), income and socio-economic levels, distribution of income and socioeconomic strata and the cost of cellular phone and service. After determining the addressable market, the next step is to apply a penetration curve (expressed as a percentage of the addressable market) over time. The shape and magnitude of the penetration curve in the early years is largely a function of awareness and entry prices (the price for the handset, deposit, and activation). Awareness is increased in the market by advertising and promotion and by “word of mouth.” Handset prices, deposit charges and activation costs are also expected to decline over time and as such the portion of the addressable market that can afford cellular services increases continuously. Over the longer term, penetration of the addressable market is a function of the underlying market potential as defined by its demographic and economic characteristics. The survey covered 24 cities in Beta, 11 in Alpha and 24 in Gamma. The demand growth in the successive years has been arrived at using a model developed by IMRB. The demand growth in the three circles is expected to be as under: The year wise number of subscribers projected in each circle is shown in the table: Circles Alpha Beta Gamma
Yearly Growth in Number of Subscribers 1999-2001 2001-2004 2004 onwards Between 125% - Between 50% - Between 10% 175% p.a. 70% p.a. 20% p.a. Between 100% - Between 30% - Between 10% 150% 50% p.a. 15% p.a. Between 125% - Around 40% p.a. Around 10% p.a. 150% p.a.
The study also points out that annual growth in subscribers for pre-paid and post paid segments is going to be same and the growth in the post paid segments is primarily going to be driven by switching of pre-paid subscribers to post paid subscriptions due to the higher cost benefits upon increased usage. The company has a 100% market share in Beta with where the other operator is Konark Telecom Limited (KTL). KTL’s license has been revoked by DoT for non-payment of license fee. KTL is likely to start operations from the year 2001-02. ABCXL has 75% market share in Alpha and 51% market share in Gamma where it faces competition from Bloom Telecom (BTL) and BigBang Cellular Limited (BCL) respectively. The NTP 99 allows for the entry of
BSNL/MTNL as the third CMTS operator. It is projected that BSNL would enter the state cellular circles of the company by 2004-05. The rentals being levied by ABCXL had come under pressure in the initial years but are now expected to remain at these levels or decrease only marginally. The company charges installation cum activation charges of Rs. 500 per new subscriber. This has come down from Rs. 1000 that it used to charge upon launch of service. However, for prepaid subscribers there is no activation charge. Roaming revenue is calculated based on estimate of a percentage of inbound and outbound subscribers availing of the facility and the average incremental minutes of use contributed by roaming. The percentage of subscribers availing the roaming facility has been assumed to increase from 13% in 19981999 to 38% by 2003-04 and remaining constant thereafter. Currently the expenses of the company constitute 35% of the gross revenues. The expenses as a percent of revenues are expected to come down in future with increase in subscriber numbers, as the company will derive the benefit of economies of scale. The company has made capital expenditure of Rs. 17500 per subscriber line for its network rollout. With the global fall in prices of telecom equipment, the additional capital cost for network expansion is expected to be Rs. 5000 only. Revenues Stream Presently, the company’s revenues are those from cellular operations: The revenues from cellular operations comprise mainly of the following. • Initial Activation Charges • Airtime charges • Roaming charges • Value Added Services • Rentals Appendix 6 provides a detail break up of the above. With the addition of the fixed line circles and the license for international long distance telephony, the company will generate further revenues. Fixed line operation The company proposes to set up an extensive network to support the demand expected in its successfully bid circles. The reserve price payable for each circle was fixed at Rs 100 cr. Thereafter, the revenue share has been fixed at 15% by the regulatory authority.
In telecom projects, substantial amount of capital expenditure has to be incurred upfront, whereas the subscriber growth is gradual, resulting in cash losses in the initial period. The initial capital expenditure is Rs 300 crore each for setting up a network of 1 million subscribers across the three circles. For every subscriber added thereafter, the capital expenditure would be Rs 1500 per line. All circles have a monopoly presently with BSNL being the only fixed line service provider. The regulatory authority has stipulated only 1 other player in each circle. The following table provides a measure of the teledensity1 in each of the circles. Teledensity Figures Circle Alpha Beta Gamma
1998 1.4% 0.9% 3.2%
1999 1.8% 1.24% 3.7%
Teledensity can be approximately taken as the number of fixed lines per 100 persons expressed as a percentage.
Due to the dissatisfaction amongst existing subscribers of BSNL and the ‘better alternative’ being provided by the company, the company is expected to garner a 30% market share across all three circles in its first year of operations itself. Thereafter, the company might face increased resistance due to the waking up of the ‘telecom giant’. The growth rates would be much more moderate from thereon. Beta, has the maximum potential, at the present juncture with very low teledensity figures. The growth rate of the number of fixed line subscribers would be the maximum here of around 20% every year. In the other circles, the figure would be around 10%. The average usage per subscriber is around 500 calls per month and is expected to increase by 10% every year. Revenues from fixed line operations comprise §
Initial Connection Charges These are payable by all subscribers and are equal to Rs 1000 per subscriber. In addition, each subscriber pays a refundable deposit of Rs 2000. In a competitive market, these charges are being cut furiously by the telecom operators. It is expected that connection charges would come down by 5% on an average year on year.
The outgoing charges form bulk of the revenues in this segment. Presently, they are pegged at Re 1 per call of 180 seconds or any part thereof. These charges are expected to increase by 10% every year. §
Rentals The rentals are fixed at Rs 400 per connection and are also coming under increasing pressure due to fierce competition prevailing in this sector. These charges are also expected to come down by 10% year on year.
Value Added Charges These are the latest offerings started especially by private telecom operators to stand out from the public sector monopoly. These are in the form of caller identification charges, news updates, billing details and constitute about 5% of the total billing per subscriber. Most of these facilities are being offered free of cost or at a nominal charge as sops to develop a nascent market and to gain marketshare but these are expected to increase to about 20% of the total billing per subscriber.
International long distance telephony operations The table below summarises the revenues for the last two years of operations for international telephony in the country. Incoming (in million minutes) Outgoing (in million minutes) Connect Charges (per minute) Net Surplus/(Deficit) ($ mn)
1999 120 30 $ 1.2 108
1998 100 20 $ 1.4 112
The connect charges between operators are showing a decreasing trend due to worldwide falls in tariff and better utilization of networks. The incoming and outgoing minutes are expected to show an increase of 10% year on year. Presently, Vee Yes Nel Ltd (VYNL), a Government of India enterprise, has a monopoly in the market. However, with liberalization, the regulatory authority has allowed another two players based on competitive bidding. The license fee to be paid initially to the regulatory authority is Rs 100 crore with a revenue sharing arrangement of 10%. In addition, the cost of setting up the network for the above is estimated to be Rs 100 crore. The annual maintenance and operating cost of the network would entail a further expenditure of around 30-40% of the network set up cost. The company is expected to gain atleast a 15% market share in the first year of operations.
Appendix 1 Global Cellular Market Overview The demand for cellular services has grown at a staggering pace over the last few years. The subscriber base is estimated to have grown from a low of 11 million in 1990 to 500 million by March 1999 (GSM’s share – 200 million), at a CAGR of 47%, leading to a global cellular penetration level of 7%, as against global fixed line telephone penetration of 14%. As per Ericsson, the global cellular subscriber base is forecast to continue to grow at a high rate and increase to a level of about 580 million by the year 2001. The cellular growth profile over the 11-year period (1990 to 2001) is profiled below:
Global Cellular Demand (Historical growth & Forecast) 580
Source: Ericsson The explosive growth in the cellular markets has been fuelled by the declining cost of technologies, and reduction in handset prices, thereby improving the affordability of the service. The penetration levels vary widely across the world, ranging from below 1% for some of the developing countries in SouthEast Asia, to 28-30% for USA & Japan, and upto 60-70 % for some European countries.
The chart below shows a comparison of the penetration levels achieved by some countries across the world in the years 1990 and 1999.
Mobile Penetration 1990
Mobile Penetration 1999
50% 40% 30% 20% 10% 0% Finland
As mentioned above, the penetration levels have increased significantly in the period from 1990-99. Finland has shown an increase in penetration from 4.5% to 60.5% and is expected to reach 80% within the next one year (Nokia’s projection). Further the technological innovation of mobile Internet access through cellular handset is expected to further fuel the growth of this sector. In comparison, the cellular penetration levels in some of the developing countries in South-East Asia are very low.
Appendix 2 Demand for Cellular Services in India The total cellular subscriber base in the country as on January 1999 is estimated to be 5 million, indicating a penetration of 0.5% which is low, in comparison to other South-East Asian countries. The total subscriber base as on that date in the four metros is estimated at 2.8 million, and the penetration percentages achieved are 0.44% for Calcutta, 0.76% for Chennai, 2.3% for Mumbai, and 2.8% for Delhi. It may be mentioned that the metros achieved significant penetration levels in a very short period of over four years of operations, as compared to some South East Asian countries, which took about 8-10 years to reach these levels of penetration. As regards the state cellular operators, which have been in operation for around two years the total subscriber base as on January 1999 is estimated at around 2.2 million translating to a penetration level of about 0.35% of the aggregate population of these state circles. Given the fact that the teledensity in India is only 2.70 per 100 population and the penetration rates are lower than not only the developed countries but also the South East Asian countries there is a huge latent demand for cellular services in the country. Further with the migration to the revenue sharing regime, reduction in handset prices, likely introduction of Calling Party Pays (CPP), expected reduction in tariff differential between cellular and fixed line due to impending tariff re-balancing and increased awareness of the utility of cellular services, the demand for cellular services is expected to increase significantly It is estimated that demand for cellular mobile services would be around 12 million subscribers by the year 2006.
Appendix 3 Balance Sheet The balance sheet for the company is as shown below. It has made successful bids for operating in the fixed line segments of the cellular circles it is currently operating in.
FIGURES AS ON 31ST MARCH LIABILITIES Equity Capital Preference Capital
INR Debt (Details below) Forex Debt (Details below)
Outstandings to Vendor Other Debt
CAPITAL EMPLOYED ASSETS
Gross Block Capital Work in Progress Less: Accumulated Depreciation
NET BLOCK Cash Receivables Less: Cash Payables Accumulated Losses Unamortised License Fees
TOTAL Details of INR Debt 16% Secured Redeemable Debentures redeemable in 3 equal installments on 31st March, 2004, 2005 and 2006 respectively. Interest payable quarterly 15% Secured Loan from Fis, payable in 6 annual installments starting 31st March 2002. Interest payable quarterly
Rs. Million 1998
4,500 1,500 (1,250) 4,750
3,150 650 (800) 3,000
5,600 1999 1,050
Rs. Million 1998 1,050
13% developmental loan from World Bank. Bullet repayment on 31st March 2005. Interest payable quarterly
Any prepayment of debt will entail a prepayment premium of 50 basis points of the amount to be prepaid. Prepayment shall be assumed as if the installments payable towards the end have been prepaid first. USD Million (converted at current exchange rate of INR 40 / USD) Details of FX Debt 1999 1998 8% Fixed rate USD loan, repayable in 10 half 30.00 30.00 yearly installments starting 31st March 2001. Interest payable quarterly. An INR-USD swap for the tenure of the transaction at the rate of 15% INR for 8% USD 3% developmental USD loan from Canadian 11.25 11.25 Developmental Bank. The exposure unhedged. Bullet repayment on September 30, 2008 Floating USD bonds at LIBOR + 3% issued 15.00 --on September 30, 1998. Interest payable half yearly at 6 month LIBOR. 6 month LIBOR on March 31, 1999 at 6%.
Any prepayment of forex debt will entail a prepayment premium of 75 basis points of the amount to be prepaid. Prepayment shall be assumed as if the installments payable towards the end have been prepaid first.
Appendix 4 Swap Quotes Rupee has historically been depreciating against greenbuck @ 5% per annum. The swap quotes currently available in the market are as under: Interest swap ( USD floating – INR fixed) Tenure of Loan 3 years 4 years 5 years Over 5 years
Swap Quote LIBOR vs. 11.50% payable quarterly LIBOR vs. 11.75% payable quarterly LIBOR vs. 12.25% payable quarterly LIBOR vs. 12.75% payable quarterly
Currency Swap (USD fixed – INR fixed) Tenure of Loan 3 years 4 years 5 years Over 5 years
Swap Quote INR 44 / USD INR 46 / USD INR 49 / USD INR 52 / USD
INR-USD currency swap market is illiquid beyond 7 years. Any swap for a longer tenure will command a substantial premium.
Appendix 5 Rating-Pricing Matrix Maturity profile of 2 years: The following table gives a picture of cost of financing for a corresponding rating. Rating
AAA AA+ AA AAA+ A ABBB
12.60% 12.60% 13.30% 13.75% 14.20% 14.75% 15.35% 15.95%
INR Floating (Spread over 3month MIBOR) Bps 245 270 303 347 422 512 622 752
7.50% 7.87% 8.18% 8.60% 9.44% 10.26% 11.42% 12.72%
USD floating (Spread over 3month LIBOR) 250 287 318 360 444 526 642 772
All interest rates are on annually payable basis. Maturity profile of 3 years: The following table gives a picture of cost of financing for a corresponding rating. Rating
AAA AA+ AA AAA+ A ABBB
13.05% 13.05% 13.75% 14.25% 14.70% 15.25% 15.85% 16.45%
INR Floating (Spread over 3month MIBOR) 281 293 335 392 467 557 667 797
All interest rates are on annually payable basis.
7.90% 8.27% 8.58% 9.00% 9.84% 10.66% 11.82% 13.12%
USD floating (Spread over 3month LIBOR) 290 327 358 400 484 566 682 812
Maturity profile of 5 years: The following table gives a picture of cost of financing for a corresponding rating. Rating
AAA AA+ AA AAA+ A ABBB
13.60% 13.60% 14.25% 14.80% 15.25% 15.80% 16.40% 17.00%
INR Floating (Spread over 3month MIBOR) 326 340 380 445 520 610 720 850
All interest rates are on annually payable basis.
8.40% 8.77% 8.08% 8.50% 10.34% 11.16% 12.32% 13.62%
USD floating (Spread over 3month LIBOR) 340 377 408 450 534 616 732 862
Appendix 6 Break up of Cellular Revenues and Expenses
Capacity in Lines
number of subscribers
36.6 28.2 1.3
88.8 74.0 1.2
138.5 115.4 1.2
number of subscribers
POSTPAID Total number of subscribers number of at the beginning of the period subscribers number of subscribers number of Churns subscribers number of Closing number of subscribers subscribers Average number of number of subscribers subscribers Addition to subscribers
PREPAID Total number of subscribers number of at the beginning of the period subscribers number of subscribers number of Churns subscribers Closing number of subscribers number of (Active) subscribers Average number of number of subscribers subscribers Addition to subscribers
Total Subscribers (end of period) Rentals per postpaid subscriber Rentals per prepaid subscriber POSTPAID
million Total airtime usage minutes Total number of calls million calls Average airtime usage per call minutes
PREPAID million Total airtime usage minutes Total number of calls million calls Average airtime usage per call minutes
12.3 17.6 0.7
33.3 47.6 0.7
Airtime Charges Pre Paid Airtime Charges Post Paid Total Airtime Revenue
Rs. million Rs. million Rs. million
87.8 236.8 6.6
190.2 369.3 18.7
Activation revenue Pre Paid Activation revenue Post Paid
Rs. million Rs. million
Value added services Pre Paid Value added services Post Paid
Net Revenue Pre Paid Net Revenue Post Paid Net Revenue
Rs. million Rs. million Rs. million
87.8 348.9 436.7
190.2 550.6 740.8
% Incoming Minutes Pre Paid % Incoming Minutes Post Paid Average usage/subscriber/month (in minutes/month) Pre paid Average usage/subscriber/month (in minutes/month) Post paid Price Per Minute Pre Paid (Rs/Minute) Price Per Minute Post Paid(Rs/Minute)
Roaming (net revenue) Pre Paid Roaming (net revenue) Post Paid
Average net revenue per subscribers per month (Prepaid) Average net revenue per subscribers per month(Post Paid)
Other income PSTN charges Rental revenue
Rs. million Rs. million Rs. million
9.3 23.5 40.4
21.3 63.8 146.1
28.9 97.2 323.9
673.0 55.3 103.8
789.0 67.8 253.8
621.0 97.9 416.8
346.3 460.5 315.0 100.0 -
676.1 547.0 450.0 100.0 -
License fee Rs. million Acquisition Cost per customer (post paid) Rs. Acquisition Cost per customer (Pre Paid) Rs. Total Acquisition Cost Rs. million Expenses Rs. million EBITDA Interest Expense Depreciation Amortisation Tax
Rs. Rs. Rs. Rs. Rs.
Cash Flow Net profit/ loss
Rs. million Rs. million
Capex per additional line
million million million million million