ABCXL Teleservice sCase.

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ABCXL Teleservices Ltd.

ABCXL Teleservices Ltd.(ABCXL), a company engaged in providing cellularservices has been recently awarded licenses for setting up fixed lineoperations 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 costdomestic and foreign debt. The company has high-accumulated losses andalso requires significant funds for undertaking the fixed line and internationaltelephony operations. The promoters are strapped for funds and haveapproached you to help them reduce their cost of funds and raise additionalresources for taking up the capital expenditure.

Profile of three telecom circlesABCXL Teleservices Ltd was awarded licenses for three category B circles ofAlpha, 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 itspopulation. They also account for 14.9% of the total number of telephonelines in the country.

The following table summarises the demographic indicators for the threecircles:

Alpha Beta Gamma

Population (million) (1999estimates)

17.6 56.1 30.7

YOY growth rate (%) 10 12 8

Urban Population (%) 24.6% 26.5% 26.4%

Area ('000 sq kms) 44.2 123.5 38.9

Literacy rate % 56% 42% 65%

The total number of subscribers with the company at the end of FY1999 is asfollows:

Circle No of SubscribersAlpha 35876

Beta 43121Gamma 26909

Total 105906



Competition

As mentioned earlier, the CMTS licences were awarded to two operators percircle on a non-exclusive basis. ABCXL faces competition in all the threecircles.

Alpha : Comp eti tor – Bloom Telecom

The consortium of a leading domestic industrial house and a swiss telecomgiant has promoted Bloom Telecom Limited (BTL). This consortium also hasother cellular licenses in two other circles. BTL commenced operations inApril 1997, 4 months after ABCXL launched its services. BTL is currentlyproviding services in 7 cities as against 17 cities covered by ABCXL. ABCXLhas already established a backbone of 400 Kms. in the state whereas BTL hasimplemented only 200 Kms. of backbone network. As on March 1999, BTLhad a market share of 25%.

Beta: Competito r – Konark Telecom

A consortium of Industries India Group and a leading telecom player fromSouth East Asia has promoted Konark Telecom Limited (KTL). KTL also holdscellular licenses in various circles other than the Alpha circle. In comparisonto 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 hasimplemented about 650 km of backbone.

KTL is currently under severe liquidity constraints and has consequently notbeen in a position to pay the license fees and interconnect charges to DoT.

Gamm a: Com petitor – BigBang Cellular Lim ited

BigBang Cellular Limited (BCL) has been promoted by the BigBang group andMediagroup Inc. BCL commenced operations in February 1997. BCL iscurrently providing services in 36 cities as against 43 cities covered byABCXL. Further ABCXL has established backbone of 600 Kms. in the state incomparison to 650 Kms. by BCL. As on March 1999, BCL had a market shareof 49%. However, in case direct inter circle connectivity is allowed, BCL willhave the advantage of operating its service in the contiguous circles ofGamma and Kappa. Further, ABCXL is expected to face strong competitiondue 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 byIMRB. The demand for CMTS has been estimated through a survey of socio-economic classes (SEC) viz. SEC A and SEC B households and extrapolatingthe responses to the population. The addressable market essentiallycomprises the potential cellular subscribers in the long term. The estimationof addressable market requires the overall market to be segmented into



different SEC, so that potential users of cellular service from each categorycan be identified. As per the study, the long-term addressable market wouldbe a function of cellular coverage (population covered by cellular service),income and socio-economic levels, distribution of income and socio-economic strata and the cost of cellular phone and service.

After determining the addressable market, the next step is to apply apenetration curve (expressed as a percentage of the addressable market) overtime. The shape and magnitude of the penetration curve in the early years islargely a function of awareness and entry prices (the price for the handset,deposit, and activation). Awareness is increased in the market by advertisingand promotion and by “word of mouth.” Handset prices, deposit charges andactivation costs are also expected to decline over time and as such theportion of the addressable market that can afford cellular services increasescontinuously. Over the longer term, penetration of the addressable market is afunction of the underlying market potential as defined by its demographic andeconomic characteristics.

The survey covered 24 cities in Beta, 11 in Alpha and 24 in Gamma. Thedemand growth in the successive years has been arrived at using a modeldeveloped by IMRB. The demand growth in the three circles is expected to beas under:

The year wise number of subscribers projected in each circle is shown in thetable:

Yearly Growth in Number of SubscribersCircles 1999-2001 2001-2004 2004 onwards

Alpha Between 125% -

175% p.a.

Between 50% -

70% p.a.

Between 10% -

20% p.a.Beta Between 100% -

150%Between 30% -50% p.a.

Between 10% -15% p.a.

Gamma Between 125% -150% p.a.

Around 40% p.a. Around 10% p.a.

The study also points out that annual growth in subscribers for pre-paid andpost paid segments is going to be same and the growth in the post paidsegments is primarily going to be driven by switching of pre-paid subscribersto post paid subscriptions due to the higher cost benefits upon increasedusage.

The company has a 100% market share in Beta with where the other operatoris Konark Telecom Limited (KTL). KTL’s license has been revoked by DoT fornon-payment of license fee. KTL is likely to start operations from the year2001-02. ABCXL has 75% market share in Alpha and 51% market share inGamma where it faces competition from Bloom Telecom (BTL) and BigBangCellular Limited (BCL) respectively. The NTP 99 allows for the entry of



BSNL/MTNL as the third CMTS operator. It is projected that BSNL would enterthe state cellular circles of the company by 2004-05.

The rentals being levied by ABCXL had come under pressure in the initialyears but are now expected to remain at these levels or decrease onlymarginally. The company charges installation cum activation charges of Rs.500 per new subscriber. This has come down from Rs. 1000 that it used tocharge upon launch of service. However, for prepaid subscribers there is noactivation charge.

Roaming revenue is calculated based on estimate of a percentage of inboundand outbound subscribers availing of the facility and the average incrementalminutes of use contributed by roaming. The percentage of subscribersavailing the roaming facility has been assumed to increase from 13% in 1998-1999 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 futurewith increase in subscriber numbers, as the company will derive the benefit ofeconomies of scale.

The company has made capital expenditure of Rs. 17500 per subscriber linefor its network rollout. With the global fall in prices of telecom equipment, theadditional capital cost for network expansion is expected to be Rs. 5000 only.

Revenues StreamPresently, 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 longdistance telephony, the company will generate further revenues.

Fixed line operation The company proposes to set up an extensive network to support thedemand expected in its successfully bid circles. The reserve price payable foreach circle was fixed at Rs 100 cr. Thereafter, the revenue share has beenfixed at 15% by the regulatory authority.



In telecom projects, substantial amount of capital expenditure has to beincurred upfront, whereas the subscriber growth is gradual, resulting in cashlosses in the initial period.

The initial capital expenditure is Rs 300 crore each for setting up a network of1 million subscribers across the three circles. For every subscriber addedthereafter, the capital expenditure would be Rs 1500 per line.

All circles have a monopoly presently with BSNL being the only fixed lineservice provider. The regulatory authority has stipulated only 1 other player ineach circle.

The following table provides a measure of the teledensity1 in each of thecircles.

Teledensity Figures

Circle 1998 1999Alpha 1.4% 1.8%Beta 0.9% 1.24%

Gamma 3.2% 3.7%1 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 expectedto garner a 30% market share across all three circles in its first year ofoperations itself. Thereafter, the company might face increased resistancedue 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 lowteledensity figures. The growth rate of the number of fixed line subscriberswould 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 isexpected 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 persubscriber. In addition, each subscriber pays a refundable deposit ofRs 2000. In a competitive market, these charges are being cut furiouslyby the telecom operators. It is expected that connection charges wouldcome down by 5% on an average year on year.

§ Outgoing Charges



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 partthereof. 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 thissector. These charges are also expected to come down by 10% yearon year.

§ Value Added Charges

These are the latest offerings started especially by private telecomoperators to stand out from the public sector monopoly. These are inthe form of caller identification charges, news updates, billing detailsand constitute about 5% of the total billing per subscriber. Most ofthese facilities are being offered free of cost or at a nominal charge assops to develop a nascent market and to gain marketshare but these

are expected to increase to about 20% of the total billing persubscriber.

International long distance telephony operations

The table below summarises the revenues for the last two years of operationsfor international telephony in the country.

1999 1998

Incoming (in million minutes) 120 100Outgoing (in million minutes) 30 20

Connect Charges (per minute) $ 1.2 $ 1.4Net Surplus/(Deficit) ($ mn) 108 112

The connect charges between operators are showing a decreasing trend dueto worldwide falls in tariff and better utilization of networks. The incoming andoutgoing minutes are expected to show an increase of 10% year on year.

Presently, Vee Yes Nel Ltd (VYNL), a Government of India enterprise, has amonopoly in the market. However, with liberalization, the regulatory authorityhas allowed another two players based on competitive bidding. The licensefee to be paid initially to the regulatory authority is Rs 100 crore with arevenue sharing arrangement of 10%. In addition, the cost of setting up the

network for the above is estimated to be Rs 100 crore. The annualmaintenance and operating cost of the network would entail a furtherexpenditure of around 30-40% of the network set up cost. The company isexpected 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 lastfew years. The subscriber base is estimated to have grown from a low of 11million in 1990 to 500 million by March 1999 (GSM’s share – 200 million), at aCAGR of 47%, leading to a global cellular penetration level of 7%, as againstglobal fixed line telephone penetration of 14%. As per Ericsson, the globalcellular subscriber base is forecast to continue to grow at a high rate andincrease to a level of about 580 million by the year 2001. The cellular growthprofile over the 11-year period (1990 to 2001) is profiled below:

Source: Ericsson

The explosive growth in the cellular markets has been fuelled by the decliningcost of technologies, and reduction in handset prices, thereby improving theaffordability of the service. The penetration levels vary widely across theworld, ranging from below 1% for some of the developing countries in South-East Asia, to 28-30% for USA & J apan, and upto 60-70 % for some Europeancountries.

Global Cellular Demand (Historical growth & Forecast)

11 16 23 34 55

85125

200

285

385

490

580

0

100

200

300

400

500

600

1 9 9 0

1 9 9 1

1 9 9 2

1 9 9 3

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

m i l l i o n s u b s c r i b e r s



The chart below shows a comparison of the penetration levels achieved bysome countries across the world in the years 1990 and 1999.

As mentioned above, the penetration levels have increased significantly in theperiod 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’sprojection). Further the technological innovation of mobile Internet accessthrough cellular handset is expected to further fuel the growth of this sector.

In comparison, the cellular penetration levels in some of the developingcountries in South-East Asia are very low.

0%

10%

20%

30%

40%

50%

60%

70%

Finland S Korea Japan USA Germany Hungary Mexico

Mobile Penetration 1990

Mobile Penetration 1999



Appendix 2

Demand for Cellular Services in India

The total cellular subscriber base in the country as on J anuary 1999 is estimated to

be 5 million, indicating a penetration of 0.5% which is low, in comparison to otherSouth-East Asian countries.

The total subscriber base as on that date in the four metros is estimated at 2.8million, and the penetration percentages achieved are 0.44% for Calcutta, 0.76% forChennai, 2.3% for Mumbai, and 2.8% for Delhi. It may be mentioned that the metrosachieved significant penetration levels in a very short period of over four years ofoperations, as compared to some South East Asian countries, which took about 8-10years to reach these levels of penetration.

As regards the state cellular operators, which have been in operation for around twoyears the total subscriber base as on J anuary 1999 is estimated at around 2.2 milliontranslating to a penetration level of about 0.35% of the aggregate population of thesestate circles.

Given the fact that the teledensity in India is only 2.70 per 100 population and thepenetration rates are lower than not only the developed countries but also the SouthEast Asian countries there is a huge latent demand for cellular services in thecountry.

Further with the migration to the revenue sharing regime, reduction in handsetprices, likely introduction of Calling Party Pays (CPP), expected reduction in tariffdifferential between cellular and fixed line due to impending tariff re-balancing and

increased awareness of the utility of cellular services, the demand for cellularservices is expected to increase significantly

It is estimated that demand for cellular mobile services would be around 12 millionsubscribers 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 iscurrently operating in.

Rs. M i l l i o n

FIGURES AS ON 31ST MARCH 1999 1998

LIABILITIESEquity Capital 2,000 1,500Preference Capital 1,200 500

SECURED DEBTINR Debt (Details below) 1,750 1,500Forex Debt (Details below) 2,250 1,650

UNSECURED DEBTOutstandings to Vendor 450 400Other Debt 150 50

CAPITAL EMP LOYED 7,800 5,600

ASSETSGross Block 4,500 3,150Capital Work in Progress 1,500 650Less: Accumulated Depreciation (1,250) (800)

NET BLOCK 4,750 3,000

Cash Receivables 579.1 400Less: Cash Payables (250) (180)

Accumulated Losses 1,670.9 1,230Unamortised License Fees 1,050 1,150

TOTAL 7,800 5,600

Rs. M il l ion

Details of INR Debt 1999 199816% Secured Redeemable Debenturesredeemable in 3 equal installments on 31stMarch, 2004, 2005 and 2006 respectively.Interest payable quarterly

1,050 1,050

15% Secured Loan from Fis, payable in 6annual installments starting 31st March 2002.Interest payable quarterly

450 450



13% developmental loan from World Bank.Bullet repayment on 31st March 2005.Interest payable quarterly

250 ---

TOTA L 1,750 1,500

Any prepayment of debt will entail a prepayment premium of 50 basis pointsof the amount to be prepaid. Prepayment shall be assumed as if theinstallments 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 halfyearly installments starting 31st March 2001.Interest payable quarterly. An INR-USD swapfor the tenure of the transaction at the rate of15% INR for 8% USD

30.00 30.00

3% developmental USD loan from CanadianDevelopmental Bank. The exposureunhedged. Bullet repayment on September30, 2008

11.25 11.25

Floating USD bonds at LIBOR + 3% issuedon September 30, 1998. Interest payable halfyearly at 6 month LIBOR. 6 month LIBOR onMarch 31, 1999 at 6%.

15.00 ---

TOTA L 56.25 41.25

Any prepayment of forex debt will entail a prepayment premium of 75 basispoints of the amount to be prepaid. Prepayment shall be assumed as if theinstallments payable towards the end have been prepaid first.



Appendix 4

Sw ap 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 f loating – INR f ixed)

Tenu r e o f Loan Swap Quote

3 years LIBOR vs. 11.50% payable quarterly4 years LIBOR vs. 11.75% payable quarterly5 years LIBOR vs. 12.25% payable quarterlyOver 5 years LIBOR vs. 12.75% payable quarterly

Currency Swap (USD f ixed – INR fixed)

Tenu r e o f Loan Swap Quote

3 years INR 44 / USD4 years INR 46 / USD5 years INR 49 / USDOver 5 years INR 52 / USD

INR-USD currency swap market is illiquid beyond 7 years. Any swap for alonger tenure will command a substantial premium.





Maturity profile of 5 years: The following table gives a picture of cost of financing for a correspondingrating.

Rating INR Fixed INR Floating(Spreadover 3-monthMIBOR)

USD fixed USDfloating(Spreadover 3-monthLIBOR)

AAA 13.60% 326 8.40% 340AA+ 13.60% 340 8.77% 377AA 14.25% 380 8.08% 408AA- 14.80% 445 8.50% 450

A+ 15.25% 520 10.34% 534A 15.80% 610 11.16% 616A- 16.40% 720 12.32% 732

BBB 17.00% 850 13.62% 862

All interest rates are on annually payable basis.



Appendix 6

Break up of Cellular Revenues and Expenses

1996-1997 1997-1998 1998-1999

Capacity in Lines

number of

subscribers 50,000 125,000 175,000

POSTPAID

Total number of subscribers

at the beginning of the period

number of

subscribers - 17,040 36,459

A ddition to subscribers

number of

subscribers 18,576 21,395 36,712

Churns

number of

subscribers 1,536 1,976 3,765

Closing number of subscribers

number of

subscribers 17,040 36,459 69,406

Average number of

subscribers

number of

subscribers 8,520 26,750 52,933

PREPAID

Total number of subscribers

at the beginning of the period

number of

subscribers - - 13,138

A ddition to subscribers

number of


Churnsnumber ofsubscribers - 4,396 3,421

Closing number of subscribers

(Active)

number of


Average number of

subscribers

number of


Total Subscr ibers (end of

period)

number of

subscribers 17,040 49,597 105,906

Rentals per postpaid

subscriber Rs. 395.0 395.0 395.0

Rentals per prepaid subscriber Rs. - 245.0 245.0

POSTPAID

Total airtime usage

million

minutes 36.6 88.8 138.5

Total number of cal ls million calls 28.2 74.0 115.4

A verage airtime usage per call minutes 1.3 1.2 1.2



PREPAID

Total airtime usage

million

minutes - 12.3 33.3

Total number of calls million calls - 17.6 47.6

A verage airtime usage per call minutes - 0.7 0.7

% Incoming Minutes Pre Paid % 50% 50% 50%

% Incoming M inutes Post Paid % 50% 50% 50%

Average

usage/subscriber/month (in

minutes/month) P re paid minutes - 78.0 76.0

Average

usage/subscriber/month (in

minutes/month) Post paid minutes 179.0 203.0 218.0

Price Per Minute Pre Paid

(Rs/Minute) Rs. - 5.0 4.0

Price Per M inute Post

Paid(Rs/Minute) Rs. 4.0 3.2 3.2

A irtime Charges Pre Paid Rs. million - 87.8 190.2

A irtime Charges Post Paid Rs. million 112.6 236.8 369.3

Total A irtime Revenue Rs. million 2.1 6.6 18.7

A ctivation revenue Pre Paid Rs. million - - -

Activation revenue Post Paid Rs. million 18.6 16.0 18.4

Roaming (net revenue) Pre

Paid Rs. million - - -Roaming (net revenue) Post

Paid Rs. million 12.0 23.0 51.0

Value added services Pre Paid Rs. million - - -

Value added services Post

Paid Rs. million 43.0 73.0 112.0

Net Revenue Pre Paid Rs. million - 87.8 190.2

Net Revenue Post Paid Rs. million 186.2 348.9 550.6

Net Revenue Rs. million 186.2 436.7 740.8

A verage net revenue persubscribers per month

(Prepaid)

Rs. - 1,114.3 638.7

A verage net revenue per

subscribers per month(Post

Paid) Rs. 1,821.2 1,086.9 866.8



Other income Rs. million 9.3 21.3 28.9

PSTN charges Rs. million 23.5 63.8 97.2

Rental revenue Rs. million 40.4 146.1 323.9

Total revenue Rs. million 259.4 667.9 1,190.8

License fee Rs. million

A cquisition Cost per customer

(post paid) Rs. 2,976.0 2,523.0 2,213.0

A cquisition Cost per customer

(Pre Paid) Rs. 673.0 789.0 621.0

Total Acquisition Cost Rs. million 55.3 67.8 97.9

Expenses Rs. million 103.8 253.8 416.8

EBITDA Rs. million 100.3 346.3 676.1

Interest Expense Rs. million 460.5 547.0

Depreciation Rs. million 315.0 450.0

Amortisation Rs. million 100.0 100.0 Tax Rs. million - -

Cash Flow Rs. million (114.2) 129.1

Net profit/ loss Rs. million (529.2) (420.9)

Capex per additional line Rs 17,500.0

ABCXL Teleservice sCase.

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