Bharti Tele-Ventures Limited

Public Issue through Book-Building Process

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Highlights of the Issue

• Tapping an Unexplored Market : The cellular and fixed-line penetration levels in India are lower than those in most developed countries in the world. Compounded annual growth of cellular subscribers in the FY97 - FY01 period was 80%. Despite that, the market is still under-penetrated and offers significant potential for growth.  According to Gartner estimates, the cellular subscribers will grow to approximately 31 million in 2005 from the present 4.8 million. Another estimate by COAI sees the numbers at 50 million. This shows the potential of the telecom industry over the next four years.

• Right Positioning of Bharti : Bharti Tele-Ventures, one of the main holding companies of unlisted Bharti Enterprises has emerged as one of the strongest players in the fast-changing and rapidly growing Indian telecommunications market. As of September 30, 2001, approximately 92% of India's total number of cellular subscribers resided in Bharti's existing and proposed cellular circles. The company is thus well placed to capitalize on the fast growing mobile phone market.

• Money comes back faster : The telecom businesses are highly capital intensive and have long gestation periods. However, we believe Bharti to see faster pay backs than any other players in the industry.

• Stock market Titan in the making : With 185 million shares on offer, Bharti is all set to make it to the top 10 Indian companies based on market cap straight on listing along with Infosys, Reliance, Wipro, HLL etc.

• Attractive Pricing : The floor pricing of the bid is likely to done at a level which will be profitable for both short and long term investors

What Market Chieftains believe about the Bharti Public issue :

• A giant in the making

• Will revive the moribund IPO markets in India

• After a long time, we have an IPO from a reputed group

• You can participate in India's growth through the Bharti issue

• Telecom sector is happening. This company really represents what the Indian telecom sector is coming to.

• One of the few fully integrated players in the Indian telecom landscape.

Issue Structure

Investment Argument

The next big story in the Indian telecom sector could be that of  Bharti Tele Ventures Limited. The company is coming out with an Initial Public Offering, with a 25% meted out only for the sake of retail investors. The issue is all set to revive the undertone of the primary market. The fundamentals of the company and the growth aspects justify investment in the scrip.

Positives

The following arguments are given in favour of an investment in the company.

• Burgeoning telecom sector -  India represents one of the world's largest, underdeveloped telecom markets. It has a strong, high-consumption middle-class population of around 300 mn. The current low telephone penetration offers telecom companies substantial growth potential in India, along with the opportunity to adapt newer technologies for the feasible and continuing change that is sweeping through the industry worldwide. According to the Cellular Operators Association of India (COAI), total number of cellular subscribers in India has increased from approximately 0.3 million in 1997 to 3.5 million in 2001. The total number of fixed-line subscribers has increased from approximately 14.5 million as of March 31, 1997 to approximately 32.4 million as of March 31,2001. The telecom sector is now witnessing renewed interest, with the government initiating steps to improve infrastructure and increase the penetration rate.

• As of March 31	1997	1998	1999	2000	2001	CAGR(%) 1997 to 2001
  Cellular Subscribers(thousands)	339	882	1,200	1,884	3,557	80.0
  Fixed-line Subscribers(thousands)	14,543	17,802	21,594	26,911	32,436	22.2

• Unique position of Bharti - Bharti Televentures is uniquely positioned to garner the maximum advantage of the growth in this sector. As of September 30,2001, approximately 92% of India’s total cellular subscribers resided in BTL’s six existing and nine proposed cellular circles. These 15 circles collectively accounted for approximately 56% of India’s land mass. They also provide fixed-line services in the Madhya Pradesh circle, which is centrally located in India, and is the only circle sharing its boundaries with eight other circles. It is also developing fixed-line networks in the circles of Delhi, Haryana, Karnataka and Tamil Nadu.

• 	India	Bharti - existing licensed area	Bharti % to all India
  Number of circles	22	6	27%
  Area of the circles (in square kilometers, in thousands)	3,278	525	16%
  Population in the licensed areas	1,027	164	16%
  Cellular subscribers in the licensed areas (in millions)	4.8	1.8	38%

• Focus on telecommunications - The company is only engaged in providing telecommunications services in India. By focussing its resources on one industry, the company is better able to anticipate industry trends and capitalize on new telecommunications-related business opportunities

• Brand recognition - The company enjoys strong brand name recognition and has a reputation for offering high quality service to is customers. These brands are widely recognized and identified with the services that the company offers. The company intends to leverage on the strength of their existing brand names to capture market share in the new markets.

• Brand	Service/Products
  Bharti	Corporate brand
  Airtel	Post-paid products
  Magic	Pre-paid (cellular) brand
  Tango	Mobile data
  Mantra Online	ISP services

• Strong strategic and financial partners - The company has strong relationships with international strategic and financial investors such as Singtel, Warburg Pincus, International Finance Corporation, Asia Infrastructure Fund Group and New York Life Insurance. SingTel is one of its key strategic partners and its position as one of Asia’s leading telecommunications service provider gives the company an access to valuable knowledge in implementing telecommunications projects and to their international expertise and managerial resources.

• Quality Management team with vision and proven execution skills - The company has a strong management team with proven ability to successfully plan and execute business strategies. The company has a team which is proactive in identifying new opportunities and capitalising on them. The company's ability to win eight additional cellular licenses in the recent competitive bid, more than any other cellular operator is an indication of the team's strong execution skills.

• Operational Advantages - Bharti is one of the few fully integrated players in the Indian telecom landscape. Although its approach is mainly focussed on developing a seamless nationwide footprint in cellular services, it has a strategic interest in fixed-line, National Long Distance and broadband services. Also a serious contender for the International Long Distance telephony services.

• Cellular business
  
  BTL’s strategic objective for cellular business is to rapidly become the leading provider of cellular services in India. To achieve this strategic objective, the company plans to: 1) Capture maximum telecommunications revenue potential with minimum geographical coverage to maximize its revenues and margins. 2) Build high quality cellular networks by deploying state-of-the art technology to offer superior services. As seen from its existing capabilities, the company is well set to meet its desired objective.
  
  The company provides cellular services in six of the 22 circles using Global System for Mobile communication (GSM) technology. It also intends to provide cellular services in nine additional circles, for which it has entered into licenses with the DoT, by the middle of next year. The six license circles are Delhi, Karnataka, Andhra Pradesh, Himachal Pradesh, Chennai and Kolkata. The nine circles in which it is in the process of developing cellular networks are Mumbai, Maharashtra, Gujarat, Tamil Nadu, Kerala, Uttar Pradesh, Madhya Pradesh, Haryana and Punjab.

• 	1999	2000	2001
  No. of cellular licenses held by Bharti	2	5	15 ( existing & prose circles )
  Total cellular subscribers in India (in millions)	1.34	2.62	4.8
  Cellular subscribers in Bharti's license areas	0.23	0.78	4.43
  % of cellular subscribers residing in Bharti's circle to total cellular subscribers	17%	30%	92%

         Source: Cellular Operators Association Of India

• Fixed-line services
  
  BTL is the first private operator of fixed-line services in India. They currently provide fixed-line services in 27 cities in the Madhya Pradesh circle. The company intends to provide fixed-line services in the four additional circles of Delhi, Haryana, Karnataka and Tamil Nadu for which it has recently entered into licenses with the DoT. The company’s strategic objective for its fixed-line business is to have a presence in data centric circles having high telecommunications revenue potential, with particular focus on high density business and industrial districts, and to become the leading provider of fixed-line services to corporate customers in the markets it serves.

• Long Distance Business

  The company is deploying an advanced fiber optic network across India to provide national long distance services for carrying voice and data services to corporate and residential customers. It presently carries international data traffic through its seven international satellite gateways located in India and operated under its broadband division.

  BTL’s strategic objective for its long distance business is to become the leading private sector provider of national long distance telecommunications services in key Indian markets. To achieve this strategic objective, the company intends to leverage its existing strengths, experiences and strong presence in its cellular and fixed-line businesses. Besides this, the company intends to commence offering national long distance services in key markets in India by the middle of next year.

• Broadband business

  The company presently provides VSAT based communications services and Internet services to corporate and residential customers in India. BTL intends to offer broadband connectivity for various end users, including data, IT-enabled services and other high bandwidth demanding services. These solutions will enhance flexibility and scalability while reducing its clients’ maintenance cost.

  BTL’s strategic objective for its broadband division is to become a leading provider of secure, reliable and customized end-to-end network solutions for data communication, especially to corporate customers. In accordance with its strategy, it has recently integrated its existing Internet and VSAT businesses with its proposed broadband business to develop a common platform for offering integrated business solutions for its customers. The primary focus of these two businesses would continue to be on corporate customers.

  The company’s strong presence in the Indian telecommunications market, the depth and quality of the telecommunications services that it currently offers and plan to offer, and its extensive knowledge of customer preferences enhances its competitive position to provide such value added services.

Concerns

• BTL has not paid any dividends since its incorporation and does not anticipate paying any dividends for the foreseeable future. The company incurred a loss of Rs 1,043 mn for FY01 as compared to Rs 454 mn in FY00. The consolidated accumulated losses for BTL was Rs 2,046 mn. Given the expansion plans of the company, BTL is expected to incur losses in the coming years as well in light of the capital-intensive nature of the business.

• Public sector majors like BSNL, MTNL and VSNL have an upper hand when compared with new players like BTL in terms of depreciated assets and large subscriber base. Following the rate cut by BTL on the Domestic Long Distance (DLD) front, BSNL also slashed DLD tariffs by more than 60%. This could adversely affect revenue and profit growth of new entrants like BTL.

• Currently foreign direct investment limit in the Indian telecom sector is capped at 49%. Already, foreign shareholders own approximately 41.7% of the company's outstanding share capital thus leaving little room for BTL to raise additional equity investments in the company from foreign investors.

• Competition from WLL technology may adversely impact the company’s revenues. Indian consumers may be willing to subscribe to limited mobility using WLL to take advantage of the lower call charges. If significant demand for these services develops in India and is successfully met by fixed-line providers, BTL’s cellular business could be adversely affected.

• The attrition or churn rate of customers in BTL’s cellular and fixed-line networks is high and this may result in additional costs. While presently the net cost of adding a new customer is substantially offset by the initial activation fee received by the company, there can be no assurance that this will continue in the future.

• There is substantial competition in the Indian telecommunications industry. Competition with existing competitors in its cellular markets has been, and will continue to be intense. In its existing fixed-line business, the company competes with BSNL. In addition, the government has permitted unlimited competition throughout India.

Financials

The consolidated revenues has grown rapidly from Rs.250 crore in 1999 to Rs.848 crore in 2001. The performance in the first half of the fiscal that ended September 2001 is even more impressive with the group reporting a revenue of Rs.625 crore. With H1 operational profits of Rs.193 crore, the company's operating margins have also jumped significantly to over 30 per cent, up from about 21 per cent in 2001. Going forward, the company is expected to show further improvement in margins given the fact that the group enjoys the first-mover advantage in some of the most lucrative cellular circles. Assuming the company is able roll-out its services in the new circles over the next one year, the topline is estimated to grow at least by over 70 per cent in next three years.

(Rs Cr)	FY99	FY00	FY01
Revenues	244.9	448.1	848.1
Other Income	15.5	37.0	55.0
Total Income	260.3	485.1	903.2
Expenditure	241.4	362.4	669.1
EBIDTA	3.5	85.7	179.1
GPM (%)	1.4%	19.1%	21.1%
Depreciation	40.9	92.1	169.0
Interest	31.9	99.0	144.8
Profit before tax	(53.9)	(68.4)	(79.7)
Extraordinary item	-	-	(11.0)
Less: Tax	10.5	8.0	4.6
Profit after tax	(43.3)	(60.3)	(86.2)
Minority Interest	(13.4)	(14.9)	18.0
Net profit	(29.9)	(45.4)	(104.2)
EBITA margin on total revenue	1.4%	19.1%	21.1%