Professor Campbell HarveyProfessor Campbell Harvey

BA 456BA 456

Private Telecom ProjectPrivate Telecom Projectin Indiain India

Private Telecom ProjectPrivate Telecom Projectin Indiain India

Agenda• Background• The Opportunity• Telelink’s

Projections• Our Analysis• What Happened• Questions?

Background: India

Background: India

• Largest Democracy

• Second largest country - population

• Per capita GDP $440 (1999)

• Huge income disparity

• In the midst of economic liberalization

• Severe corruption

Background: Rajasthan

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

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)

Background: Telecom Sector

• State owned monopoly

• Extremely low teledensity (2.2%)

• Insufficient infrastructure to meet growing demand

• Long wait lists for service hook up

• 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

Background: Telecom Sector

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

The Project

• Member of Shyam Telecom Group

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

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)

The Project: Cash Flows

(click on the photo for the information)

The Project: Valuation

TV Cost of Equity

Rev. Multiple 18% 20% 22%

8 $500 $500 $500

9 $384 $384 $384

10 $296 $296 $296

Million US$

• IRR 38%

• Pre-money Valuation

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 IndiaCost of Equity (ICCRC) 19.7%Adjustment (comp. Beta) 1.4%Adjusted Cost of Capital 21.1%

Our Analysis: Valuation

• IRR = 31%

• Pre-money ValuationTV 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

Million US$

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

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

Questions?