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The Indian Telecom Market Evaluated
 

The Indian Telecom Market Evaluated

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    The Indian Telecom Market Evaluated The Indian Telecom Market Evaluated Document Transcript

    • MORGAN STANLEY RESEARCH ASIA/PACIFIC JM MORGAN STANLEY JM Morgan Stanley Securities Vinay Jaising Private Limited+ Vinay.Jaising@morganstanley.com +91 22 2209 7780 Mayank Maheshwari Mayank.Maheshwari@morganstanley.com Surabhi Chandna January 10, 2007 Surabhi.Chandna@morganstanley.com Morgan Stanley Dean Witter Asia Mark S. Shuper Industry View India Limited+ Mark.Shuper@morganstanley.com +852 2848 5477 In-Line Telecommunications What’s Changed Ringing Louder What's Changed Rs. Old New % change Bharti Airtel Ltd. Price Target From Rs587 to Rs752 Bharti Airtel Ltd. RCOM Price Target From Rs421 to Rs508 MW EPS FY07 19.62 20.3 3.6% MW EPS FY08 26.29 30.6 16.2% MW EPS FY09 29.75 35.2 18.4% Conclusion: We raise our pan-India wireless Reliance Communications Ltd. subscriber estimates as of March 2009 by 7%, to 314 (RCOM) mn. Indian wireless penetration has risen 81% in the MW EPS FY07 12.4 14.3 15.4% last year and yet is still only 13%, versus China at 34%. MW EPS FY08 18.8 20.2 7.6% Stable regulation, innovative products, increased capex MW EPS FY09 24.8 29.6 19.2% by operators and falling equipment prices are key growth drivers. Overall telecom revenues should rise 25% p.a., from US$15.5 billion in F2006 to US$30.0 billion in F2009E, driven by a 35% CAGR in wireless revenues, and a 42% CAGR in data revenues. The greatest bottleneck to growth is spectrum availability; we believe the government is looking to solve this issue. We expect strong F3Q07 for the wireless operators, driven by higher net additions; up 15% sequentially at 20 mn and surprisingly stable ARPUs. We expect Bharti F3Q07 EBITDA to grow 71% YoY and 12% QoQ; net profits to grow 88% YoY and 10% QoQ. We expect RCOM’s F3Q07 EBITDA to grow 80 % YoY and 13% QoQ; net profits to grow 154% YoY and 10% QoQ. Our F2009 net profit estimate for Bharti (BRTI.BO, Rs633.0, Overweight) rises 18% and target price moves to Rs752. Our revised EBITDA estimates stem from higher net adds and higher ARPUs. We project Morgan Stanley does and seeks to do business with F2006-09 EBITDA and net profit to grow at 43% pa. companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the Our F2009 net profit estimate for Reliance (RLCM.BO, objectivity of this report. Investors should consider Rs435, Overweight) rises 19% and target price to Rs508. this report as only a single factor in making their Our new EBITDA estimate comes from higher net adds, investment decision. Customers of Morgan Stanley ARPUs, and higher data revenue. We project F2006-09 in the U.S. can receive independent, third-party operating and net profit to rise 69.3% and 157.5% pa. research on the company covered in this report, at no cost to them, where such research is available. Customers can access this independent research at www.morganstanley.com/equityresearch or can call 1-800-624-2063 to request a copy of this research. For analyst certification and other important disclosures, refer to the Disclosure Section. += Analysts employed by non-U.S. affiliates are not registered pursuant to NASD/NYSE rules.
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY January 10, 2007 India Telecommunications Investment Case Summary: On a Roll b) The CDMA operators that were earlier offering a subsidy on handsets have now either reduced the We continue to view the Indian wireless sector as an attractive overall subsidies or totally stopped providing them investment for regional and global investors. We rate Bharti because of the decline in CDMA handset prices. and RCOM Overweight as the two most direct plays on the industry’s growth. Our revised price target of Rs752 (up from c) The introduction of calling party pays (CPP) has Rs587) for Bharti, implies 20% upside potential, from the latest enabled wireless operators to secure additional close. Our revised price target of Rs508 (up from Rs421) for sources of revenue – i.e., not just average revenue RCOM, implies 15% upside potential, from the latest close. per user (ARPU). d) Telecom equipment prices have declined for 2G GSM In this report, we update our view on the industry, specifically: equipment, especially with the emergence of superior technologies like Adaptive Multi Rate systems and 1. We are raising our wireless subscriber estimates for with India becoming perhaps the world’s biggest India from 293mn as of March 2009 to 314mn (+7%), consumer of 2G GSM. increasing our overall penetration estimates to 27.3% (Exhibit 1). Indian telecom is on a strong growth trajectory. e) Sharing of networks amongst operators incrementally During 3Q06, the industry witnessed the highest ever lowers their capex per subscriber base. wireless net adds of 20 million, driven by the highest ever f) If the government were to cut its license fees or net adds by most private operators. We expect net adds increase the spectrum for operators, profitability to grow at a faster rate of 6.0 mn per month in F2007-9 would rise even further, despite falling average against average growth of 3.5mn per month in F2006. We revenue per minute (ARPM). estimate that wireless penetration will expand to 27.3% by F2009, a CAGR of 45.2%. 4. We expect a strong F3Q07 for the wireless operators, driven by higher net additions; up 15% sequentially at 20 2. The biggest bottleneck to growth is spectrum availability, mn and surprisingly stable ARPUs. We expect Bharti’s and we believe the government is looking at solving this F3Q07 EBITDA to grow 71% YoY and 12% QoQ; net issue. The recently released recommendation on 3G profits to grow 88% YoY and 10% QoQ as shown in spectrum by Telecom Regulatory Authority of Indian Exhibit 5. We expect RCOM’s F3Q07 EBITDA to grow (TRAI) suggests availability of 2x32.5 MHz for 3G 80% YoY and 13% QoQ; net profit to grow 154% YoY and services, in six to nine months and the possibility of 9.9% QoQ as shown in Exhibit 14. another 2x20 MHz in the 1800 MHz band, both of which are being used by the Ministry of Defense. We believe the 5. We have revised our estimates for Bharti’s F2009 net spectrum availability could be more for GSM operators , as profit upward by 18.4%. Our new EBITDA estimates are shown in Exhibit 2. Aircel and Idea have received Letters based on higher net adds and higher ARPUs, as shown in of Intent (LOI) to operate in seven and two new circles, Exhibit 3. We project Bharti’s F2006-09 EBITDA and net respectively, in the last month from the Department of profit growth at 43% pa, respectively. Potential triggers Telecom (DoT). This, in our view, could be a prelude to include: a) strong quarterly results; and b) a lower them getting additional spectrum. government revenue share. The key concern is more competition. We also roll our DCF for Bharti to March 3. While we expect many of the new subscribers to come in 2008 to arrive at a target price of Rs752/share. lower-income circles, we still see them as highly profitable. We expect the sector profitability is set to increase 6. We have increased our F2009 net profit estimates for despite competition. We see six distinct reasons why RCOM by 19.2%. Our revised EBITDA estimates are operators’ profitability should increase despite lower based on higher net adds, ARPU’s and a higher average revenue per user: contribution from data business, as shown in Exhibit 11. We project RCOM’s F2006-09 operating and net profit a) For lower-denomination micro prepaid cards, pricing growth at 69.3% and 157.5% pa, respectively. Potential supports, or raises, operators’ incremental returns per triggers are strong quarterly performance; lowering of minute. telcos’ revenue share by the government and the award of 2
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY January 10, 2007 India Telecommunications GSM spectrum to RCOM. Key concerns in addition to the and in our view would gain the most in the next few months by company’s two-pronged strategy are that no audited capturing a higher telecom market share. If Vodafone were to financial statements will be available until March 2007. acquire 10% or a higher stake in Hutch Essar; it would have to We also roll our DCF for RCOM to March 2008 to arrive at give up its 10% ownership in Bharti - which would result in a target price of Rs508/share. Bharti having a higher float of US$ 2.8 billion at the current market price. Exhibit 1 India Telecom: What’s Changed? RCOM has stated its interest in acquiring HTIL’s stake and it F2007E F2008E F2009E has synergies with HTIL, given its interest in increasing its Wireless Subs (Million) GSM footprint. The company has applied to the Indian New 168.6 245.3 314.3 government for GSM licenses and spectrum. RCOM is present Old 165.6 233.5 293.4 across India; hence, if it were to acquire over a 10% stake in Change (%) 1.8 5.1 7.1 Hutch Essar, it may need to merge Hutch Essar with itself. W. Avg.Net ARPU (Rs/month) However there is a grey area in the regulations, which suggest New 367 325 309 that the 10% common equity ownership clause is not Old 366 322 290 applicable to licensees existing as on 11.11.2003, and both Change (%) 0.4 0.9 6.7 Hutch and RCOM have been in existence prior to that period. Source: Company data, Morgan Stanley Research On such issues, possibly the Telecom Appellate or Department of Telecom may have a final say. RCOM, Hutch combine may infringe spectrum guidelines in Kolkata, UP (East) and West 7. Hutchison Whampoa has announced that associate HTIL Bengal, assuming Reliance’s GSM and CDMA spectrum are (HK$18.84, Equal-weight) is considering several bids for considered as single promoter held companies. Hutch Essar, the fourth largest operator in India. Various press reports indicate a sales price of US$13-20 billion We do not expect RCOM to be an aggressive bidder, particularly considering the possibility of it receiving GSM If the sale were to materialize we view three scenarios: spectrum and its lack of aggressive bidding in the past to acquire stakes in other companies. a) consolidation of the industry with one of the existing players (RCOM or Maxis) acquiring Hutchison Essar - a positive for the Exhibit 2 sector. Indian Telcos Could Get Spectrum Soon! Spectrum Service b) Either Essar or Essar Vodafone acquiring a stake in HTIL Spectrum Band Timeframe Available Provider and there being no change in the number of players of the 2.1 GHz 6-9 months 2 x 25 GSM for 3G (1) industry - however there could be a valuation benchmark for 800 MHz 6-9 months 2 x 2.5 CDMA for 3G the industry. 450 MHz 6-9 months 2x5 CDMA for 3G 1800 MHz 6-9 months 2 x 20 GSM for 2G c) The sale does not materialize, leading to no change in 900 MHz 12-15 months 2 x 4.8 GSM for 2G (2) structure for the industry. (1) 2 x 3.75 MHz can be allocated to CDMA operators (2) all circles except Delhi & Mumbai Bharti is the only major player, which as per press has not Source: Company data, Morgan Stanley Research shown any interest in the sale and is focused on organic growth 3
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY January 10, 2007 India Telecommunications Bharti Airtel Ltd : Financial Summary Income Statement Cash Flow Statement Rs mn (Year ending March 31) F2006 F2007E F2008E F2009E Rs mn (Year ending March 31) F2006 F2007E F2008E F2009E Revenues Operating Activities Wireline 15,015 20,686 26,174 30,557 Profit/(Loss) before tax 25,515 44,765 67,330 77,615 Wireless 82,392 143,299 210,226 256,412 Depreciation 14,267 23,071 32,970 43,662 Long distance - Domestic 18,404 24,159 27,926 31,431 Amortization 1,343 1,498 1,498 1,498 Long distance - International 6,118 6,440 7,493 8,125 Direct Taxes Paid (1,773) (5,014) (7,541) (8,693) Data 7,076 11,025 17,301 22,238 Changes in Working Capital 12,096 12,768 (2,095) (16,205) Gross Revenues 129,005 205,609 289,120 348,762 Prior period adjustments - - - - Eliminations (12,790) (19,717) (30,694) (38,363) Operating Cash Flows 53,170 81,292 97,636 103,791 Total Operating Revenues 116,215 185,892 258,425 310,399 Investing Activities EBITDA 42,985 73,003 106,450 127,673 Purchase/(Sale) of Fixed Assets 64,081 99,948 101,943 77,381 Depreciation 14,267 23,071 32,970 43,662 Investing Cash Flows (63,697) (99,948) (101,943) (77,381) Amortization 1,343 1,498 1,498 1,498 Financing Activities Non Operating Income 879 654 822 1,016 Repayment of Long Term Borrowings (1,645) 17,319 16,526 (4,780) Interest Expenses 2,512 4,204 5,473 5,914 Change in Shareholders Equity 8,141 - - - Pre-operating Costs / Loss of JVs 227 120 - - Change in Other Non-Current Liabilities 3,634 6,071 5,983 4,707 Profit before Tax 25,515 44,765 67,330 77,615 Dividends Paid - - (10,296) (17,803) Income Tax 2,539 5,819 8,753 10,090 Dividend Tax - - (1,287) (2,225) Profit after Tax 22,975 38,945 58,577 67,525 Financing Cash Flows 7,619 19,201 5,452 (26,015) Minority Interest 260 440 662 763 Cash & Mkt. Securities Consolidated Net Profit 22,716 38,505 57,916 66,763 Beginning balance 8,828 5,921 6,466 7,611 Reported PAT 22,716 38,505 57,916 66,763 Ending Balance 5,921 6,466 7,611 8,006 Balance Sheet Ratio Analysis Rs mn (Year ending March 31) F2006 F2007E F2008E F2009E F2006 F2007E F2008E F2009E SOURCES Valuation Share Capital 18,939 18,955 18,955 18,955 ModelWare EPS 12.12 20.32 30.55 35.22 Share Premium 56,363 56,363 56,363 56,363 Adj. EPS 11.99 20.31 30.55 35.2 Reserves & Surplus 17,511 56,016 102,349 149,083 CEPS 20.1 33.1 48.9 59.4 Shareholders' Funds 92,178 130,700 177,032 223,766 Book Value 48.7 69.0 93.4 118.1 Deferred Tax Liability (1,562) (757) 455 1,852 DPS 0.0 0.0 5.4 9.4 Loan Funds 47,395 64,713 81,239 76,460 P/E 52.0 31.0 20.6 17.9 Minority Interest 957 1,397 2,059 2,821 P/BV 12.9 9.1 6.7 5.3 Other Non-Current Liabilities 11,209 17,280 23,263 27,970 Yield (%) 0.0 0.0 0.9 1.5 Total Liab/App 150,177 213,333 284,049 332,870 EV/EBITDA 28.7 17.2 11.9 9.9 Net Block 118,000 184,422 250,705 291,255 EBITDA Margin (Net Revenues) (%) 37.0 39.3 41.2 41.1 Capital Work in Progress 24,411 34,867 37,556 30,726 EBITDA Margin (Gross Revenues) (%) 33.3 35.5 36.8 36.6 Net Fixed Assets 142,411 219,289 288,261 321,981 Net Margin (%) 17.6 18.7 20.0 19.1 Goodwill 23,687 23,687 23,687 23,687 RONW (%) 30.0 34.9 38.1 33.7 License Fee 8,380 7,834 7,288 6,742 ROCE (%) 22.2 27.8 29.9 27.6 Other Non-Current Assets 6,493 5,541 4,589 3,637 Gearing Investments 190 190 190 190 Debt/Equity 0.51 0.50 0.46 0.34 Current Assets 34,520 46,177 62,889 74,395 Net Debt / Equity 0.45 0.45 0.42 0.31 Cash & Mkt, Securities 5,921 6,466 7,611 8,006 E = Morgan Stanley Research Estimates Source: Company data; Morgan Stanley Research Current Liabilities 65,504 89,384 102,855 97,762 Net Current Assets (30,984) (43,207) (39,966) (23,367) Total Assets 150,177 213,333 284,049 332,870 4
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY January 10, 2007 India Telecommunications Exhibit 3 Bharti Airtel Limited Bharti: What’s Changed in Our Forecast Summary & Conclusions F2007E F2008E F2009E We continue to view the Indian wireless sector as an attractive EPS investment for regional and global investors, and rate Bharti New 20.70 30.58 35.25 (BRTI.BO, Rs623) Overweight as a direct play on its growth. Old 19.61 26.29 29.75 We have a new, 12-month price target of Rs752 (up from Change (%) 5.6 16.3 18.5 Rs587), implying 15% upside potential from the latest close. EBITDA (Rs million) Overall, we have raised our net profit estimates by 3.6% for New 73,820 106,450 127,673 F2007, 16.2% for F2008 and 18.4% for F2009. We project Old 70,145 95,404 112,389 Change (%) 5.2 11.6 13.6 annual growth of 43.7% in Bharti’s EBITDA and 43.2% in net Capex (Rs million) profit (for the period F2006-09) Key changes incorporated in New 99,948 101,943 77,381 this report are: Old 99,069 90,757 67,939 Change (%) 0.9 12.3 13.9 1. In line with our India estimates we are raising our Cellular Subs ('000) wireless subscriber forecasts for Bharti from 60 mn as New 36,272 54,329 69,146 of March 2009 to 69 mn (+15.0%). We now expect net Old 34,430 48,759 59,986 adds to grow at a faster rate of 1.4 mn per month in Change (%) 5.4 11.4 15.3 F2007-9; up 22% from our current estimates. Net adds( ‘000/month) New 1,391 1,505 1,235 2. Higher net adds lead to higher capex and higher Old 1,238 1,194 936 depreciation, which have also been incorporated. Change (%) 12.4 26.0 32.0 Weighted Average ARPU 3. During the last two quarters Bharti’s ARPUs in line with New 418 375 339 the industry’s ARPU’s have been stable at Rs440 levels, Old 403 359 331 as against our expectation of a 2% dip every quarter. In Change (%) 3.6 4.4 2.5 E = Morgan Stanley Research Estimates Source: Company data, Morgan Stanley Research line with this trend, we have revised upward our ARPU estimates 5
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY January 10, 2007 India Telecommunications Exhibit 4 Impressive F3Q07 result for Bharti Bharti: Increasing Returns We believe F3Q07 should be another strong quarter as RONW (%) ROCE (%) the company has posted its highest ever net adds. For the quarter the company added 4.9 million wireless subs, a 40% 23% sequential and 117% YoY increase in net adds. Its 30% overall wireless subscriber base stood at 32.0 mn subs, with an estimated market share of 21.5%, up 50 bps 20% sequentially. We estimate Bharti will account for 23.6% of (%) 10% the overall wireless net adds in India this quarter. 0% On the financials, we expect Bharti’s F3Q07 EBITDA to -10% F2002 F2003 F2004 F2005 F2006 F2007E F2008E F2009E grow 71% YoY and 12% QoQ; net profit to grow 88% YoY and 10% QoQ. E = Morgan Stanley Research Estimates Source: Company data, Morgan Stanley Research Exhibit 5 Bharti: F3Q07 Earnings Estimates (Rs mn) F3Q07E F3Q06 % Chg F2Q07 % Chg (period ending) 31-Dec-06 31-Dec-05 YoY 30-Jun-06 QoQ Gross Revenues 48,705 30,256 61.0% 43,571 11.8% Operating Expenses 29,266 16,046 82.4% 22,661 29% Pre-License Fee Operating Profit 24,055 14,210 69.3% 20,910 15% License Fee 4,928 3,010 63.7% 3,886 27% EBITDA 19,127 11,200 70.8% 17,025 12.3% Pre-Operating Costs 32 8 2 Net Finance Costs 953 924 3.1% 588 62% Depreciation & Amortization 6,249 4,026 55.2% 5,926 5% Non Operating Income 169 152 10.9% 320 -47% PBT 12,062 6,385 88.9% 10,782 12% Tax 1,689 858 96.8% 1,378 23% Minority Interest 110 75 46.6% 66 67% PAT 10,263 5,452 88.3% 9,338 9.9% Reported PAT 10,263 5,452 88.3% 9,338 9.9% Bharti's Subscriber Base OPM (%) 39.3 37.0 39.1 Cellular Subs ('000)* 31,974 16,327 96% 27,061 18% Wireless Net Adds('000) 4,913 2,259 117% 3,989 23% Wireline Net Adds (1,631) 563 -390% 148 -1203% Tax of PBT 14.0 13.4 12.8 189.9 Total Subscribers('000s) 31,974 17,527 82% 28,693 11% Source: Company data, E = Morgan Stanley Research Estimates *: Actual Subscribers In the wireline space it reached 2 more cities, increasing its We expect Robust Growth F2006-09 total to 94. The company has increased its optic fibre network Bharti invested close to US$725 million in F2Q07, by 1,135 Route kms this quarter to 36,151 Route kms. increasing its gross block to US$6.3 billion. It has set up an additional 5,000 Base Terminal Stations (BTS) this quarter, During F2006-F2009 we estimate Bharti will invest an increasing its BTS to 30,000 and town coverage by 331 towns aggressive US$7.5 billion in capex to build a world class to 4,357 Census towns (and increased presence in 53,386 telecom infrastructure in the country Non-Census towns and villages to 155,000 non-census towns and villages). The company now covers 50% of India’s Valuation: Price Target Raised to Rs752 population and expects to add 3-4% of population coverage Our price target for Bharti stock remains at the mid-point of the every quarter for the next few quarters with coverage in 5,000 value derived from our DCF calculation (March 2008), census towns by end of F2007. assuming a terminal growth rate of 4% and cost of capital of 6
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY January 10, 2007 India Telecommunications 10.7% (Exhibit 6). Our new target price of Rs752/share e) Bharti has a long-term market share of 25% in the implies a F2009 P/E of 21.4, and EV/EBITDA of 11.7, which is international long distance market; 27.5% in domestic long in line with the average multiple since January 2004. We have distance, and 20% in the enterprise business market. rolled forward our DCF to March 2008 to arrive at our DCF-based price target. The resulting fair value in our base case is Rs752/share, which is also our price target. Exhibit 6 Bharti: Long-term Cost of Capital For our bull-case analysis, we assume the following: Risk Free Return (Rf) 7.6% Market Premium (Rm) 6.0% Assumed Beta 0.88 a) The decrease in ARPU is reduced by 5% to a drop of 6.8% Cost of Equity (Re) 12.8% p.a. because consumers increase their minutes of usage, Equity (%) 68.0% effectively increasing the ARPU, in comparison to our base Cost of Debt (Rd) 8.25% case. This equates to Rs42/share. Tax rate 22.5% After-tax cost of debt (Rd [1-t]) 6.4% Debt (%) 32.5% b) With Bharti increasing its subscriber base to 69.1mn and WACC 10.7% using the umbrella brand Airtel, it is able to lower its marketing Note: Net Worth taken as a proxy for equity; Source: Morgan Stanley Research Estimates and network costs by 1.25% of sales each and thereby improve its margins by 250 bps. This equates to Rs51/share. Exhibit 7 Bharti: DCF Calculation c) Since Bharti is spending the most amongst private operators, its market share increases 80 bps to 22.8%. This Aggregate Value 1,397,829 equates Rs19/share. Net debt 57,401 Equity Value Rs mn 1,340,428 Our resulting fair value under the bull case is Rs864/share. Equity Value US$mn 29,140 Shares (m) 1,895 For our bear-case analysis, we assume the following: Implied DCF value/share (Rs) 752 Source: Company data, Morgan Stanley Research Estimates a) The drop in ARPU is greater by 5% to 9.9% p.a. because Our Base, Bull and Bear Case Valuations consumers lower their minutes of usage, effectively reducing For a detailed comparison of our base, bull and bear cases, ARPUs, in comparison with our base case, and capacity see Exhibit 8 and 9. In our base-case analysis, we assume utilization falls by 15-20%. This equates to Rs39/share. the following: b) Rising competition increases marketing discounts to 2.5% of sales, thereby lowering margins. This equates to a) Bharti has a 22.0% market share in the Indian telecom Rs46/share. space by F2009 with 69.1 million subscribers c) With Reliance getting into GSM, Bharti’s market share b) Bharti invests cumulative US$7.5 billion over 2006-9 and drops 70 bps more than our base case estimate to 21.3%. turns free cash flow (FCF) positive in F2009. However, the company has to build capex with a view to gaining market share, which leads to lower capacity c) We have assumed Bharti’s ARPU’s to drop by 8.4% YoY utilization. This equates to Rs16/share. from F2006 to F2009. Our resulting fair value under the bear case is Rs651/share. d) The EBITDA margin improves 200 bps to 41.1% by F2009, driven by a 110 bps improvement in wireless business margins, due to economies of scale 7
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY January 10, 2007 India Telecommunications Exhibit 8 Bharti: Risk/Reward View Rs1,000 900 Rs864 (+39%) 800 Rs752 (+21%) 700 Rs621.40 600 500 400 Rs651 (+5%) 300 200 100 0 Jan 05 Apr 05 Jul 05 Nov 05 Feb 06 May 06 Aug 06 Dec 06 Mar 07 Jun 07 Sep 07 Jan 08 Price Target Historical Stock Performance Current Stock Price Source: Company data, Morgan Stanley Research Exhibit 9 1. Net adds continue to accelerate, leading to stronger Bharti: Bull vs Bear vs Base Case quarterly results. 1,000 900 19 2. The government lowers telcos’ revenue share pertaining 51 Indian R upee (R s) Price Target: 752 16 42 864 to license fees. We estimate that if the license fee is 800 46 39 reduced to 6% from a weighted average of 10%, as 700 752 suggested by the TRAI (Telecom Regulatory Authority of 600 651 India), and if Bharti passes on 50% of the benefit to its 500 consumers, the company’s DCF would rise by 400 Rs35/share, or roughly 6.8%. Bear ARPU Reduction Market Base ARPU Increase inIncrease in Bull Case Reduction in EBITDA share Case Increaseby EBITDA Market Case by 5% Margins by Reduction 5% Margins by share by 3. Bharti turns FCF positive – which we estimate will occur in 2.5% by 100bps 2.5% 100bps F2009 – and possibly institutes a dividend. Source: Company data, Morgan Stanley Research Potential hindrances to stock performance and, therefore, to the achievement of our price target are: Valuation looks interesting vs. Indian market Despite superior earnings growth, Bharti’s premium to the 1. Government delays implementation of its decision to market P/E multiple is 1.59x, making valuations look attractive. increase foreign holding stakes from 49% to 74%, since Assuming Bharti’s growth until F2008, this premium would FII ownership is around 48% and FII now requires RBI further narrow to 1.29x, as shown in Exhibit 10, making its approval to freely trade the stock. valuation look even better. 2. The CDMA operators resume major handset subsidies. Potential upside triggers for Bharti’s stock include: 8
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY January 10, 2007 India Telecommunications 3. Competition from regional players intensifies, leading some to exit the business or consolidate. Exhibit 10 Bharti’s Attractive Valuations: P/E Relative to Sensex 2.2 Bharti 2.0 1.8 1.6 1.4 1.2 Estimated Relative P/E 1.0 Mar-08 Dec-02 Apr-03 Aug-03 Dec-03 Apr-04 Aug-04 Dec-04 Apr-05 Aug-05 Dec-05 Apr-06 Aug-06 Dec-06 Source: Company data, Morgan Stanley Research Estimates 9
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY January 10, 2007 India Telecommunications Exhibit 11 Reliance Communications Limited RCOM: What’s Changed in Our Estimates Summary & Conclusions F2007E F2008E F2009E We continue to view the Indian wireless sector as an CDMA Subs (million) attractive investment for regional and global investors, Old 28.34 36.6 44.7 and rate RCOM (RLCM.BO, Rs423) Overweight as a direct New 29.18 40.4 51.7 play on its growth. We have a new 12-month price target of Change (%) 3 10 16 Rs508 (up from Rs421) implying 20.1 % upside potential from GSM Subs (million) the latest close. Overall, we have raised our F2009 net profit Old 4.2 7.2 12.8 estimates by 15.4% for 2007, by 7.6% for 2008 and by 19.2% New 4.3 7.8 14.4 Change (%) 2.0 8.7 12.5 for 2009. We project RCOM’s F2006-09 operating profit Wireless Subs (million) growth at 69.3% pa and net profit growth at 167.2% pa. Old 32.5 43.8 57.5 New 33.4 48.2 66.1 Key changes incorporated in this report are: Change (%) 2.8 10.0 15.0 Wireless Monthly ARPU (Rs) 1. In line with our India estimates, we are raising our Old 355 326 301 wireless subscriber estimates for RCOM from 57.5mn New 342 324 303 as of March 2009 to 66.1 mn (+15.0%). We expect RCOM Change (%) -3.6 -0.7 0.7 to get a GSM license at least with limited spectrum (5 MHZ Total EBITDA (Rs mn) pair band in the 3G space) by mid-F2008 and to be able to Old 57,101 77,865 97,030 roll out GSM services by F2009. New 58,384 82,954 111,968 Change (%) 2.2 6.5 15.4 2. We have assumed RCOM will invest US$6.8 billion in Consolidated Net Profit (Rs mn) capex from F2006-F2009 as against US$5.2 billion earlier, Old 25,380 38,401 50,731 with most of the incremental capex being invested into its New 29,290 41,301 60,460 global network, which would lead to higher data market Change (%) 15.4 7.6 19.2 share for the Company. Tax Old (%) 11.20 11.20 11.20 3. In line with the industry trend, we have revised upward our New (%) 8.00 11.00 11.00 weighted average ARPU estimates for RCOM. Change (%) -28.6 -1.8 -1.8 Capex Old 67,044 70,593 101,697 New 70,442 90,125 145,519 Change (%) 5.07 27.67 43.09 E = Morgan Stanley Research Estimates Source: Company data, Morgan Stanley Research 10
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY January 10, 2007 India Telecommunications RCOM Financial Summary Income Statement Cash Flow Statement Rs mn (Year ending March 31) F2006 F2007E F2008E F2009E Rs mn (Year ending March 31) F2006 F2007E F2008E F2009E Wireless 74,067 114,840 164,130 214,173 Operating Activities Global 58,938 55,758 61,449 68,941 Profit/(Loss) before tax 3,496 31,837 46,406 67,932 Broadband 5,128 11,876 22,209 41,923 Depreciation 16,987 25,244 32,353 41,421 Others (1) - - - Direct Taxes Paid (327) (2,547) (5,105) (7,473) Total 139,786 182,474 247,788 325,037 Changes in Working Capital - 3,740 27,876 49,575 Net Revenues 111,230 152,623 214,104 288,373 Prior period adjustments (327) (2,547) (5,105) (7,473) Total Operating Revenues Operating Cash Flows 22,377 60,394 107,529 154,558 Access / Interconnect 26,943 19,672 29,824 41,697 Investing Activities License Fees 12,627 14,516 20,533 27,289 Purchase/(Sale) of Fixed Network Charges 15,311 18,622 24,808 31,740 Assets - (70,442) (90,125) (145,519) Employee Costs 8,341 8,958 12,551 16,127 Investing Cash Flows - (70,442) (90,125) (145,519) Sales & Marketing 24,930 32,471 43,434 59,554 Financing Activities Total Operating Costs 88,152 94,239 131,151 176,405 Repayment of Long Term EBITDA 23,078 58,384 82,954 111,968 Borrowings - 26,099 (78,196) 959 Depreciation 16,987 25,244 32,353 41,421 Interest pn Long Term Loans - (2,121) (5,998) (3,102) Non Operating Income - 817 1,803 487 Dividends Paid - - 3,614 5,290 Interest Expenses 2,595 2,121 5,998 3,102 Dividend Tax - - 516 756 Profit before Tax 3,496 31,837 46,406 67,932 Financing Cash Flows 0 23,978 (80,064) 3,903 Income Tax 327 2,547 5,105 7,473 Net change in Cash & Cash Equivalents 22,377 13,931 (62,660) 12,942 Profit after Tax 3,169 29,290 41,301 60,460 Cash & Marketable Consolidated Net Profit 3,169 29,290 41,301 60,460 Securities Extraordinary Items (374) - - - Beginning balance - 60,038 73,969 11,309 Reported PAT 3,543 29,290 41,301 60,460 Ending Balance 60,038 73,969 11,309 24,251 Balance Sheet Ratio Analysis Rs mn (Year ending March 31) F2006 F2007E F2008E F2009E SOURCES F2006 F2007E F2008E F2009E Share Capital 10,223 10,223 10,223 10,223 Valuation Reserves & Surplus 107,292 136,582 173,753 228,167 ModelWare EPS 1.73 14.33 20.20 29.57 Shareholders' Funds 117,515 146,805 183,976 238,390 Adj. EPS 1.73 14.33 20.20 29.57 Loan Funds 92,976 119,075 40,879 41,838 Book Value 57.5 71.8 90.0 116.6 Other Non-Current Liabilities 0 0 0 0 DPS(Rs) 0 0 1.77 2.59 TOTAL LIABILITIES 210,491 265,880 224,855 280,228 P/E 244.30 29.55 20.96 14.31 APPLICATIONS P/BV 7.36 5.90 4.70 3.63 Net Block 182,958 232,067 284,717 371,172 Yield 0 0 0 0 Capital Work in Progress 31,305 27,393 32,516 50,159 EV/EBITDA 39.77 15.96 11.13 8.18 Net Fixed Assets 214,263 259,461 317,233 421,331 Profitability Goodwill 0 0 0 0 EBITDA Margin (Net Revenues) (%) 20.7 38.3 38.7 38.8 Investments 121 121 121 121 Net Margin (%) 2.3 16.1 16.7 18.6 Current Assets 45,316 20,759 18,270 40,021 RONW (%) 3.0 22.2 25.0 28.6 Cash & Marketable ROCE (%) 2.89 14.26 21.36 28.13 Securities 60,038 73,969 3,049 3,899 Gearing Current Liabilities 109,247 88,431 113,817 185,144 Debt/Equity 0.79 0.81 0.22 0.18 Net Current Assets (3,893) 6,298 (92,499) (141,224) Net Debt / Equity -Reliance 0.28 0.31 0.16 0.07 TOTAL ASSETS 210,491 265,880 224,855 280,228 Source: Company data, Morgan Stanley Research; Note: F2006 data is un-audited Proforma consolidated based on Company data E = Morgan Stanley Research Estimates 11
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY January 10, 2007 India Telecommunications Valuations sequential and 86.1% YoY increase in net adds. Its overall wireless subscriber base would then stand at 29.9mn subs, Valuations Look Attractive with a market share of 20.1%. We estimate RCOM to account RCOM is trading at 14.7x our F2009 EPS estimate, a discount for 19.8% of the country’s overall wireless net adds in this of 16.5% to Bharti’s P/E and 60.7% lower than HTIL’s quarter. On the financials, we estimate revenue growth of (HK$18.84, Equal-weight) multiple. On an EV/EBITDA basis, 32.2% YoY, 12.2% sequentially; operating profit up 79.7% the stock trades at 8.4x our F2009 estimate, discounts of YoY, 12.6% sequentially; and net profit up 9.9% sequentially. 16.5% to Bharti’s and 31.8% to HTIL’s EV/EBITDA. On the basis of F2007E P/E and two-year forward growth, RCOM Target Price Based on Discounted Cash Flow Analysis trades at 0.70 versus Bharti’s 0.97, HTIL’s 2.4 and an average Our price target for Reliance Communications is derived from of 1.1 for Asian wireless peers.. our DCF calculation, which assumes a terminal growth rate of 4% and a cost of capital of 12% Exhibit 12). Our new target In addition, when we include the 3-6% “premium-to-local” price of Rs508/share (resulting from us rolling forward our DCF at which Bharti’s shares change hands among FIIs to March 2008) implies a F2009E P/E of 14.7x, which is a because of liquidity restrictions, the RCOM discount 16.5% discount to our target P/E multiple for its peers. widens even further. Around 14.5% of RCOM stock is held by foreign institutional investors (including GDR), and the Potential catalysts for RCOM stock performance include company has Reserve Bank of India (RBI) approval for an FII+ the following: Foreign Direct Holding limit of as much as 74%. FIIs can, • Continued acceleration in net adds; therefore, freely trade RCOM stock without paying a liquidity • Strong quarterly performance – premium on their purchases – unlike the case of Bharti, where FIIs are essentially capped out. • Lowering of telcos’ license fees under revenue sharing agreements – We estimate that, if the license fee is RCOM is the most liquid Indian telecom stock with trades reduced to 6% from a weighted average of 10%, as averaging US$54 million daily on the Indian bourses (BSE and suggested by the TRAI (Telecom Regulatory Authority of NSE) as against US$9 million for Bharti, the second most liquid India), and if RCOM passes on 50% of the benefit to its Indian telecom stock, and US$3.5 million for HTIL (includes consumers, the company’s DCF would rise by ADR and GDR). RCOM is also an MSCI component with a Rs40/share, or roughly 8%, to Rs548. weight of 3.3%. • RCOM gets GSM spectrum in the 1800MHz band, which would lower its capex in the wireless business. Other potential stock catalysts include: continued acceleration in net adds; a reduction by the government in telcos’ revenue Potential hindrances to stock performance and, therefore, to share pertaining to license fees; and a turn to FCF positive by the achievement of our price target are as follows: RCOM – which we estimate will occur in F2010 – and possibly institution of a dividend. • The CDMA operators, including RCOM, increase handset subsidies. Among our concerns about RCOM, in addition to its two-pronged investment strategy discussed above, are its • Competition from regional players intensifies, leading short track record with no audited financial statements some to exit the business or consolidate. available until March 2007; the lumpy growth in EBITDA margins over the past five quarters; and low visibility on its • The government delays its decision to allow RCOM to retail broadband and international strategy, and the related venture into GSM in additional circles. Investors would capex outflows. likely be disturbed by any confusion about RCOM’s ability to invest incrementally in GSM. RCOM’s GSM plans hinge Impressive F3Q07 result for RCOM on receiving spectrum from the government. We expect RCOM to show the strongest growth amongst Indian telecom operators in F3Q07. For the quarter, the company is estimated to add 4.0 million wireless subs, a 14.5% 12
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY January 10, 2007 India Telecommunications Exhibit 12 Exhibit 13 RCOM: Long-term Cost of Capital (%) RCOM: DCF Calculation (Rs mn) Risk Free Return (Rf) (%) 7.70 Aggregate Value 1,016,913 Market Premium (Rm) 6.00 Net debt 45,106 Assumed Beta 1.00 Cost of Equity (Re) 13.70 Equity Value Rs mn 971,807 Equity 65.00 Equity Value US$mn 20,854 Cost of Debt (Rd) 8.25 Shares (m) 2,045 Tax rate 22.50 Implied DCF value/share (Rs) 508 After-tax cost of debt (Rd [1-t]) 6.39 Source: Morgan Stanley Research Debt 35.00 WACC 11.14 Premium due to lack of annual report/historical data 1.00 WACC assumed (%) 12.14 Source: Morgan Stanley Research 13
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY January 10, 2007 India Telecommunications Exhibit 14 RCOM : F3Q07 Earnings Estimate Rs mn F3Q07E F3Q06 YoY Change F2Q07 QoQ Change (period ending) 31-Dec-06 31-Dec-05 % 30-Sep-06 % Total Revenues 39,553 29,910 32.2% 35,260 12.2% Licence Fee and Access& IUC 10,172 10,920 -6.8% 9,068 12.2% Network Operations 4,860 4,169 16.6% 4,332 12.2% Employees 2,548 2,140 19.0% 2,271 12.2% SG&A 6,739 4,200 60.4% 6,063 11.1% Total Cost 24,319 21,430 13.5% 21,734 11.9% EBIDTA 15,235 8,480 79.7% 13,525 12.6% Net Interest 73 1,280 -94.3% 56 30.0% Depreciation and Amortisation 6,549 3,980 64.5% 6,237 5.0% Cash profit from Operations 14,433 7,200 100.5% 13,260 8.8% PBT 8,859 3,220 175.1% 7,233 22.5% Tax 974 120 712.0% 59 1540.5% PAT 7,884 3,100 154.3% 7,173 9.9% Extra-Ordinary - - NA 150 -100.0% Normalised PAT 7,884 3,100 154.3% 7,023 12.3% Revenue Breakup Wireless 29,091 19,807 46.9% 25,744 13.0% Global 14,474 13,910 4.1% 13,158 10.0% Broadband 3,252 1,270 156.0% 2,710 20.0% Others 1,128 1,103 2.2% 1,128 0.0% Interdivision revenues 8,391 6,180 35.8% 7,480 12.2% Total Net revenues 39,553 29,910 32.2% 35,260 12.2% EBITDA 15,235 8,480 79.7% 13,524 12.6% Wireless 10,317 6,364 62.1% 9,294 11.0% Global 3,615 2,113 71.1% 3,199 13.0% Broadband 1,519 250 507.6% 1,215 25.0% Others - 580 32 Elimination (216) (827) -73.9% (216) OPM Wireless (%) 35.5 28.7 23.6 36.0 Global (%) 25.0 9.0 178.3 23.0 1.95 Broadband (%) 46.7 16.7 180.3 38.9 7.85 EBITDA Margins (%) 38.5 16.9 127.5 37.1 Subscribers CDMA Subscribers('000) 26,300 15,379 71.0% 23,021 14.2% GSM Subscribers('000)* 3,641 1,665 118.7% 2,958 23.1% Wireless Subscribers('000) 29,941 17,043 75.7% 25,979 15.2% Wireless Net Adds('000) 3,962 2,126 86.3% 3,457 14.6% Wireline Subscribers('000) 487.8 204 139.1% 392 24.6% Wireline Net Adds('000) 96.2 38 154.4% 95 1.3% Total Subscribers('000) 30,429 17,247 76.4% 26,371 15.4% Source: Company data, E = Morgan Stanley Research Estimates * Actual subscriber Base for GSM Business. 14
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY January 10, 2007 India Telecommunications Our Base, Bull and Bear Case Valuations circles by mid-F2008. In the long term, it captures 15% of the For a detailed comparison of our base, bull and bear cases, incremental net adds in GSM in these circles. RCOM invests see Exhibits 15 and 16. In our base-case analysis, we assume close to US$14.0 billion over 2008-15 (our DCF period) in the following: GSM, 8.5% more than our base case, and captures 11.6 million more GSM subscribers during the period. Capex for a) RCOM has a 19.6% market share in the Indian telecom F2006-F2009 will increase by US$300 million to US$7.1 billion. space by F2009, with 66.1 million subscribers and with GSM This would enhance the DCF value by Rs20/share. accounting for 21.8% of its wireless pie. We have assumed RCOM gets 5 MHz of 3G spectrum, starts GSM operations in c) RCOM increases its market share in the enterprise market to Metros, Class A and Class B circles in F2009 and gains 8.0% 35% in the long term, as against our 25% assumption of market market share. share in the base case, because of its unique advantage of having the greatest global and domestic connectivity in India. b) RCOM invests cumulative US$6.8 billion over 2006-9 and This would enhance the DCF value by Rs14/share. turns FCF positive in F2010. d) We have added 50 bps to our cost of capital for RCOM to c) The EBITDA margin improves by 57 bps to 38.8% by F2009, capture, in addition to the risk of its two-pronged investment driven by economies of scale and an improvement in wireless strategy of GSM and CDMA, its short track record with no business margins. audited financial statements available until F2007. Assuming RCOM maintains its disclosure levels for the next two quarters d) RCOM captures a 50% market share in the ILD market, 25% and releases its annual report, we would review our in the NLD market and 30% in the domestic enterprise discounting factor. A 50-bps reduction in the cost of capital business. RCOM has India’s largest connectivity increases our target price by Rs52/share. domestically and globally: It has over 80,000 route kms of fiber optic network, more than twice that of its closest domestic Our resulting fair value under the bull case is Rs627/share. competitor, 200,000 sq ft of data center capacity, 180,000 buildings that are fiber optic connected domestically and For our bear-case analysis, we assume the following: 54,000 rkms of subsea cable capacity, which was recently expanded by 11,500 km with the commissioning of the a) RCOM invests US$40/sub as migration costs for shifting FALCON project. from CDMA to GSM in the next 12 months. RCOM invests close to US$1.20 billion in 2007. This would truncate the DCF The resulting fair value in our base case is Rs508/share, which value by Rs29/share. RCOM invests cumulatively US$8.0 is also our price target. billion over 2006-9, including migration costs. For our bull-case analysis, we assume the following: b) Increased competition lowers ARPUs for the industry by an additional 5%. This would lower the DCF value by Rs34/share. a) The decrease in ARPU is reduced by 5% to a drop of 8.8% p.a. because consumers increase their minutes of usage, c) Rising competition increases marketing discounts to 2.5% of effectively increasing the ARPU, in comparison to our base sales, thereby lowering wireless division margins by 5% to 35% case. This equates to Rs33/share. levels. This equates to Rs88/share. b) RCOM gets pair of 10 MHz in the 1800 band and starts Our resulting fair value under the bear case is Rs357/share. providing GSM services into metros, Class A and Class B 15
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY January 10, 2007 India Telecommunications Exhibit 15 RCOM: Risk/Reward View Rs700 Rs627 (+44%) 600 500 Rs508 (+17%) Rs435.35 400 300 Rs357 (-18%) 200 100 0 Mar 06 May 06 Jul 06 Sep 06 Nov 06 Jan 07 Mar 07 May 07 Jul 07 Sep 07 Nov 07 Jan 08 Price Target Historical Stock Performance Current Stock Price Source: Company data, Morgan Stanley Research Exhibit 16 RCOM: Bull vs Base vs Bear Case 850 52 Indian Rupee (Rs) 20 14 600 33 88 627 Price Target: 508 34 29 508 350 357 100 Bear GSM Reduction in EBITDA Base Increase in Increase in Increased Lower Cost Bull Case Migration ARPUs by Margins of Case ARPUS BY GSM Net Market of Capital by Case cost of 5% 35% in 5% Adds In Mid Share in 50bps US$40/sub F2010 F2008 and Enterprise F2009 Business to 35% Source: Company data, Morgan Stanley Research 16
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY January 10, 2007 India Telecommunications India – The World’s Fastest-Growing Telecom Market India: The World’s Fastest-Growing Telecom Market We Estimate Most of the Growth Will Come in GSM The Indian telecom market is in a strong growth trajectory. The RCOM, the biggest Indian CDMA operator, is incrementally number of wireless subscribers has risen an impressive 81% in focusing on increasing its investments in the wireless business the past 12 months with 6.7 million added in November 2006 via the GSM route. alone. Key growth drivers for the sector are as follows: Exhibit 17 • Stable regulatory policies; India Telecom: Evolution Indian Cellular Subscriber growth evolution 1997 - 2006 • Innovative products; Subscribers (in millions) 120 Take off High Growth Phase Recent Phase Further reduced price Reduced price points points • Increased capex by the operators, and 100 Lifelong Plans New Town Rollouts • Falling equipment prices. 80 Reliance 60 We expect overall telecom revenues to increase 24.2% p.a., Entry/Monsoon Hungama 2003 from US$15.5 billion in F2006 to US$30.0 billion in F2009, 40 4 th Cellular Licenses issued Micro Prepaid driven by an impressive 35.2% CAGR in wireless revenues. CPP Effect New Telecom We estimate the country’s wireless penetration will expand to 20 Policy (NTP 1999) 27.3% by F2009, a CAGR of 45.2%. 3 rd and 4 th operator entry 0 FY 1997 FY 1998 FY 1999 FY 2000 FY 2001 FY 2002 FY 2003 FY 2004 FY 2005 FY 2006 Growth Moves to Lower-GDP Areas Given recent increases in wireless penetration in many of Source: Company data, Morgan Stanley Research India’s larger cities and wealthier states, we expect the Exhibit 18 country’s Class B and C circles (i.e., lower-GDP per capita India Telecom: Subscriber Growth areas) to expand faster than the metros (Exhibit 19). 7,500 CDMA Launch of 999 scheme 6,500 In November 2006, in contrast to the country’s average GSM 5,500 penetration of 12.8%, the average wireless penetration for Micro Pre-Paid takeoff metros, at 53.2%, was far higher than that of Class A cities, 4,500 with 15.3%, Class B with 9.7% and Class C with 5.5%. For 3,500 F2006-09, we forecast that 56.7% of the incremental adds will 2,500 come from lower-GDP Category B and Category C circles. 1,500 500 Currently, Bharti and RCOM are the only operators in the -500 country actively servicing an all-India footprint. We believe Mar-04 Mar-05 Mar-06 Sep-03 Dec-03 Jun-04 Sep-04 Dec-04 Jun-05 Sep-05 Dec-05 Jun-06 Sep-06 Dec-06 these two companies have a 6- to 9-month lead in which to gain share in B and C circles, especially in comparison with Source: Company data, Morgan Stanley Research their private peers. 17
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY January 10, 2007 India Telecommunications Exhibit 19 • The government’s guidelines for inter-circle mergers & India: Category B and C Increasing their Shares acquisitions are a positive step to enable industry consolidation. Percent Share across Categories 100% 80% • The government has lowered license fees on long-distance 60% networks from 15% to 6% since January 2006 and has also 40% reduced entry fees. 20% • In July 2004, the government announced an increase in limits 0% on foreign holdings in telecom service providers, from 49% F2006 F2007 F2008 F2009 direct holdings to 74% overall holding. This has yet to be Metros Category A Category B Category C implemented, although it received cabinet clearance in November 2005. Source: Census of India, 2001, COAI, AUSPI, TRAI, Morgan Stanley Research estimates The key decision remaining to be taken by the government pertains to the allocation of additional spectrum and 3G licenses, and the reduction in license fees on access business. Stable Regulatory Policy Helping Growth Regulatory uncertainty on several issues has diminished over The biggest bottleneck to overall wireless growth is spectrum the years, building a more favorable environment for investing availability, and we believe the Indian government is looking to in Indian telecoms. Exhibit 24 shows the changes made by the solve this issue. The recently released recommendation on 3G regulators in the last two years. A few of the more substantial spectrum by the Telecom Regulatory Authority of India (TRAI) changes introduced by regulators are as follows: suggests the availability of 2x32.5 MHz for 3G services in six to nine months and the possibility of another 2x20 MHz in the • The introduction of the Unified Access Services License 1800 MHz band, both of which are being used by Defense. enabled operators to choose any technology with which We believe the spectrum availability could be greater for GSM they are comfortable to provide services, with regulations operators than for CDMA, as shown in Exhibit 2. being technology neutral. Innovative Products Lead to Higher Growth • Interconnect regime has been clearly spelled out, with local Increasing competition has taken India’s telecom ARPM to one termination charges set at a low 0.30 paise per minute, of the lowest in the world, accelerating subscriber growth. effective March 2006. GSM and CDMA operators have come out with innovative products in the past year-and-a-half, which has expanded the • Access deficit charges (ADC) have been reduced for market. international long-distance calls to Rs1.6/min for incoming calls and Rs0.8/minute for outgoing calls. 1) The introduction of micro-prepaid in June 2005, spear-headed by Bharti, Hutchison and Reliance, lowered the • ADC for domestic long distance calls have been shifted to monthly coupon recharge for the first time since 2002 – from 1.5% of annual gross revenue. Rs330 to Rs200 – a drop of 39%. This propelled net addition growth, as shown in Exhibit 18. • Domestic long-distance carriage tariffs charged by long-distance operators have moved to a ceiling of 0.65 2) In November 2005, Tata Teleservices launched its paise a minute. “Non-Stop Mobile” scheme, enabling users to buy a Rs2,499 CDMA mobile handset and get free incoming calls for two • Introduction of Calling Party Pays (CPP) since May 2004 has years. This scheme removed the handset subsidy issue for produced lower wireless ARPUs and increased the CDMA operators and enabled consumers to stay connected for addressable population. two years. On December 23, 2005, Bharti introduced India’s first lifetime prepaid card, which, in our view, should increase • Implementation of the new Interconnect Usage Charges the country’s addressable telecom penetration. For a one-time (IUC) has helped put in place the much-needed payment of Rs999, this card will enable users to receive free interconnection regime. incoming calls during their lifetime. Within three days, most of 18
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY January 10, 2007 India Telecommunications the other GSM operators matched this scheme. This was the discussions with various players, is that overall traffic second most innovative product that further propelled growth. has increased with the introduction of CPP, and this has become an additional revenue stream, especially Profitability Set to Increase Despite Competition from the incremental consumer. In other words, the Apart from falling capex costs, we see three distinct reasons Rs200 recharge-coupon consumer coming into the why operators’ profitability should increase despite lower system could generate as much as Rs240 for the ARPUs: operator thanks to the incoming terminating revenues. 1. For micro prepaid cards, pricing supports, if not raises, operators’ incremental returns per minute. As Based on our estimates in Exhibit 21, we believe there is a shown in Exhibit 21, although operators have lowered strong business case – even assuming US$3 of outbound the price of a micro prepaid package by 39-40% revenues from a customer – for US$0.3-0.5 additional versus “traditional” prepaid, the effective outgoing revenues as incoming revenues on a US$50 capex/subscriber. rate per minute increases between 80% and 142% based on outgoing calls. Based on certain Profitability of the “Stay Mobile for Life” Scheme assumptions for incoming calls, the effective overall The Rs999 “stay mobile for life” scheme could also be (incoming + outgoing) rate per minute rises by 34%. profitable. However, the calling pattern will be crucial. This scheme, in our view, will significantly increase system net adds Indeed, our analysis points to as much as 19% higher and reduce churn, since the card is applicable over the lifetime EBITDA margins on micro prepaid, and suggests that of the consumer. the absolute EBITDA per subscriber is only 7.5% lower than on “traditional” higher-denomination It could, however, initially lower the incremental ARPU for packages. This occurs for two reasons: higher operators. There may be a class of consumers who could administrative expenses charged by operators per technically use their phones only as an incoming device – in recharge coupon; and lower interconnect outflow – such cases, the incremental accounting return on capital virtually by the design of the card, which enables a employed could be much lower than the cost of capital. As the consumer to have a Rs50/card only as outgoing talk incoming calls increased for this group of subscribers, the time. capex would increase further, and ROCE would fall even further. Our assumption (Exhibit 22) is that accounting ROCE Other benefits of micro prepaid include lower churn could be 20%, assuming the operators can achieve an EBITDA rates, as low-income users no longer disconnect of 40% and capex is a low US$30-40/subscriber. However, as when disposable income runs thin, and lower consumers graduate to the Rs200 prepaid scheme, they distribution charges once recharge becomes fully become more profitable. electronic. The one-time payment of Rs999 charged by Bharti and the 2. The CDMA operators that were earlier offering a other operators, in our view, would be amortized over 60 subsidy on handsets have now either reduced the months (i.e., an average of 18 months, based on current churn, overall subsidies or totally stopped providing them to 100 months, based on the operating life of the equipment). because of the decline in CDMA handset prices. As We believe this one-time payment would be sufficient to fund shown in Exhibit 21, the lower the subsidy on upfront the capex of an incremental consumer. Either way, the handsets shared by operators, the higher the return vendor would initially provide credit on the capex to the big on capital employed. operators like Bharti until the consumer joined the network. Put simply, the incremental subscriber would earn a high internal 3. The introduction of calling party pays has enabled rate of return (IRR) for the operator – as long as overall capex wireless operators to secure additional sources of is under control and the vendors are initially paying for the revenue – i.e., not just ARPU, but also revenue from capex. the calling party. Our understanding, based on 19
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY January 10, 2007 India Telecommunications Exhibit 20 Calling patterns and talk time will be crucial in deciding the India Telecoms: ROCE of the incremental consumer. We believe incremental Better Margins: Micro Prepaid vs. Prepaid Indian consumers will get into the system with this scheme, Bharti Rs. Prepaid Bharti Prepaid and once they eventually switch to making outgoing calls, they will graduate into the usually highly profitable micro prepaid Rs330 Rs200 schemes offered by the operators. On the negative side, the Coupon value 330 200 risk is that the consumer starts getting more and more Less: Service Charge 36 22 ARPU from Consumer 294 178 incoming calls – the terminating revenues that the operator Plus: Termination revenue 40.1 22.5 receives are Rs0.3/minute, i.e., a quarter of incoming ARPU including incoming terminating rev 334 201 revenues, and the capex per subscriber increases. Admin Charge (% of Card Denomination) 30.1 65.7 Admin Charges 99 131 Air Time 194.6 46.7 Costs Per subscriber Commission 33 20 Interconnect 70 6 License fee 32 23.4 Network Cost 30 12 Salary 27 16.1 Other costs 23 14 Total Costs 215 91 EBITDA per subscriber 119 110 EBITDA margin (%) 36 55 MOU minutes 220 96 Outgoing minutes 86 21 Incoming minutes 134 75 Termination Rs/minute 0.3 0.3 Net Realisation per minute (I+O) 1.52 2.10 Net Realisation per outgoing minute 3.82 9.64 Net Realisation per minute (I+O) (Cents) 3.37 4.66 Net Realisation per outgoing minute (Cents) 8.48 21.42 Note: Tariffs for Maharashtra, Goa Circle. Source: Morgan Stanley Research estimates, based on company data 20
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY January 10, 2007 India Telecommunications Exhibit 21 India Telecoms: Return on Capital Employed for the Incremental Consumer Wireline Wireless (Without handset subsidy) Wireless (With handset subsidy) Incremental Capex/ Sub 400 50 60 70 80 50 60 70 80 Monthly ARPU (Rs) 225 180 225 270 315 180 225 270 315 Monthly ARPU (US$) 5.0 4.0 5.0 6.0 7.0 4.0 5.0 6.0 7.0 Incoming calls 78.0 66.0 72.6 79.9 87.8 60.0 66.0 72.6 79.9 Termination revenues per call (Rs) 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 Incoming Revenue (Rs) 23.4 19.8 21.8 24.0 26.4 18.0 19.8 21.8 24.0 Incoming Revenue (US$) 0.509 0.430 0.473 0.521 0.573 0.391 0.430 0.473 0.521 Operator Revenues per Incremental Consumer (Rs) 248.4 199.8 246.8 294.0 341.4 198.0 244.8 291.8 339.0 Operator Revenues per Incremental Consumer (US$) 5.5 4.4 5.5 6.5 7.6 4.4 5.4 6.5 7.5 Revenue per Month (US$) 5.5 4.4 5.5 6.5 7.6 4.4 5.4 6.5 7.5 Revenue per year (US$) 66.1 53.2 65.7 78.2 90.9 52.7 65.2 77.7 90.2 EBITDA Margin (%) 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 EBITDA (US$) 26.4 21.3 26.3 31.3 36.3 21.1 26.1 31.1 36.1 Interest @ 9% 18.0 2.3 2.7 3.2 3.6 2.3 2.7 3.2 3.6 Depreciation @ 10% 40.0 5.0 6.0 7.0 8.0 5.0 6.0 7.0 8.0 Handset subsidy @ 20% 16.0 16.0 16.0 16.0 Pretax Profit (US$) -31.6 14.0 17.6 21.1 24.7 -2.2 1.4 4.9 8.5 ROCE (%) -7.9 28.0 29.3 30.2 30.9 -4.3 2.3 7.0 10.6 Source: Morgan Stanley Research estimates Exhibit 22 India Telecoms: Return on Capital Employed: “Stay Mobile for Life” Scheme Rs999 scheme Incremental Capex/ Sub 30 35 40 Monthly ARPU (Rs) 50 50 50 Monthly ARPU (US$) 1.1 1.1 1.1 Incoming Revenue (Rs) 18.0 23.4 30.4 Incoming revenue (US$) 0.4 0.5 0.7 Incoming calls 60.0 78.0 101.4 Termination revenues per call (Rs) 0.3 0.3 0.3 Operator Revenues per Incremental Consumer (Rs) 68.0 73.4 80.4 Operator Revenues per Incremental Consumer (US$) 1.5 1.6 1.7 Revenue Per Month (US$) 1.5 1.6 1.7 Revenue per year 17.7 19.1 21.0 EBITDA Margin (%) 40.0 40.0 40.0 EBITDA 7.1 7.7 8.4 Interest @ 9% 1.4 1.6 1.8 Depreciation @ 10% 3.0 3.5 4.0 Handset subsidy @ 20% Pretax Profit (US$) 2.7 2.6 2.6 ROCE (%) 35.1 20.1 14.5 Source: Morgan Stanley Research estimates Increased Capex Spend by Operators Equipment Has Become Cheaper As shown in Appendix III, virtually all telecom operators have The Indian operators have had several advantages since they increased their capex for F2007 over F2006, and we expect started building their networks in the last five years. strong capex in F2008 as well. a) Capex prices have fallen as equipment vendors worldwide Arguably, only 50% of the Indian population has been covered have lowered prices in the past 4-5 years. by the operators. Higher capex should enhance coverage and lead to a higher subscriber base. 21
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY January 10, 2007 India Telecommunications b) India has had the further advantage of needing only cheaper d) Regular reductions in custom duties on telecom equipment 2G infrastructure, when the rest of the world has been moving and handsets by the government have decreased the cost of to 3G. setting up a network and increased the affordability of services. c) The Indian government has given additional spectrum to the e) Telecom equipment prices for 2G GSM equipment have operators upon crossing a threshold subscriber base – further declined, especially with superior technologies surfacing like lowering incremental capex. The more spectrum given by the Adaptive Multi Rate systems and with India becoming perhaps government, the lower the capex per erlang. the world’s biggest 2G GSM consumer. Exhibit 23 Sharing of networks amongst operators incrementally lowers Wireless Capex (US$/erlang) their capex per subscriber base. 1000 900 800 700 600 500 400 300 2.5 4.5 5.0 6.2 8.0 10.0 CDMA 1x (LS) GSM (RS) Source: Morgan Stanley Research 22
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY January 10, 2007 India Telecommunications Exhibit 24 Key Regulatory Developments Since January 2005 Unified Licensing - TRAI Releases (1) A single license for all telecom and cable TV/broadcasting services (2) Migration to ‘Unified Licensing’ Jan-05 Recommendations regime mandatory after five years (3) Lowering of annual revenue share (ex spectrum charges) to 6% Highlights: (1) reduction in per minute ADC payable by about 50% on inter-circle domestic long-distance calls Jan-05 ADC Reduction from February 1, 2005 and 30% on ILD calls; (2) ADC on all calls, except originating from fixed-line networks, paid to BSNL (1) Composite foreign holding ceiling on telcos raised from 49% to 74%. Composite foreign holding includes Ceiling on Foreign Holding in telcos raised to 74 investments via FII holdings, direct holdings, proportionate foreign investment in Indian promoters/investment Feb-05 - Cabinet Approves Hike companies (indirect holdings), NRI. Ceiling imposed on international bandwidth (1) IPLC (half circuit) tariffs to be regulated from April 1, 2006. Cost-based ceiling tariffs imposed. (2) Tariff Mar-05 tariffs. reduction from 35% for E1 lines to 70% for STM-1. (3) Regulation hints at further tariff cut in next review. (1) Domestic bandwidth tariffs to be regulated from May 1, 2005. Cost-based ceiling tariffs imposed. (2) Tariff reduction from 3% for E1 lines, 50% for sub-E1 capacity lines to 70% for E1+ capacities (3) Ceiling tariffs to be Apr-05 Ceiling imposed on domestic bandwidth tariffs. reviewed in one year. Telecom Appellate Tribunal Quashes TRAI's tariff (1) Based on appeal from VSNL, TDSAT quashes TRAI order on grounds of “non-transparency.” (2) TRAI Apr-05 order on regulating intl bandwidth prices asked to share all background calculations with VSNL and re-work tariffs. (3) Authority to regulate tariffs. (1) Lower ceiling on annual spectrum charges from 6% to 4% of adjusted revenues. (2) Immediate release of TRAI's recommendations on spectrum allocation, unutilized spectrum in 800MHz band to the existing CDMA operators. (3) Release of unutilized spectrum in May-05 pricing & related issues the 900MHz band to GSM operators Paper dwells upon (1) availability and access to undersea cable landing stations; (2) re-selling and wholesale TRAI's Consultation Paper on Competition in pricing of bandwidth; (3) options of increasing competition in the IPLC segment; (4) basis of setting Jun-05 Providing International Bandwidth in India international bandwidth tariffs. Effective January 1, 2006, the Indian government brought about the following changes: Reduction in license fee on long-distance a) Annual license fee for national long distance (NLD) license has been lowered from 15% to 6% of annual Nov-05 business gross revenue. Entry fee for new operators has been lowered from Rs1 billion to Rs25 million. Nov-05 Ceiling on international bandwidth tariffs TDSAT gives a judgment in favour of TRAI – i.e., lowering bandwidth rates with immediate effect Nov-05 ceiling on foreign holding in telcos raised Ceiling on foreign holding in telcos raised to 74% - Cabinet re-approves hike. (1) ADC reduced by 56% on incoming ILD calls and by 68% for outgoing ILD calls. (2) No ADC charge on per/minute basis on domestic calls, but all layers will have to pay 1.5% of their aggregate gross revenue Feb-06 New interconnect regime effective from Mar-06 (AGR) as ADC charge. (3) No ADC charge on rural revenue of wireline and wireless operators. The TRAI recommended that mobile operators introduce number portability before April 2007 by taking a Mar-06 Number portability one-time fee of Rs200 from subscribers. 1) The service providers offering lifetime validity shall inform subscribers of the month and year of the expiry of the current license. (2) Hike in tariff prohibited for any tariff item specified in the lifetime tariff plans during the Mar-06 Lifetime schemes regulation entire lifelong validity period. (1) Spectrum to be provided in the 450 MHz, 800 MHz and 2100 MHz frequency bands. (2)GSM to be allocated the 2100 MHz range, and five operators will be allocated spectrum in this range initially. Two CDMA TRAI issues recommendations for launch of 3G operators to be allocated the 800 MHz frequency spectrum. (3) Auction-based pricing for allocation of Sep-06 and wireless broadband services in India spectrum. (4) Base price set by TRAI for the auction on the basis of the circle category (2)The government gives three more months to comply with the conditions imposed on foreign equity, which DOT extends deadline to comply with the 74 FDI was increased to 74%. The new deadline expires on January 2, 2007. (2) This is the fourth extension, after Oct-06 limit the October 2 deadline, for three months. Source: Company data, Morgan Stanley Research, TRAI, Department of Telecom, Infraline 23
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY January 10, 2007 India Telecommunications Exhibit 25 Valuations: Asia Telecom Comparables Price/Earnings EV/EBITDA Price/Book All Data is Calenderised Price (Local) EV/Sub (US$) RNOA Key Comparables 01/05/2007 2006E 2007E 2008E 2006E 2007E 2008E 2006E 2007E 2008E 2006E 2007E 2008E 2006e 2007e 2008e Indian Telecom Service Providers Bharti Airtel Ltd. 621.4 30.6 20.3 17.6 16.9 11.8 9.8 714 486 381 9.0 6.7 5.3 27.8% 29.9% 27.6% Reliance Communication 435.4 30.4 21.6 14.7 16.4 11.4 8.4 640 440 318 6.1 4.8 3.7 14.3% 21.4% 28.1% Average Peers 30.5 20.9 16.2 16.7 11.6 9.1 677 463 350 7.5 5.7 4.5 21.0% 25.6% 27.8% HTIL 18.3 60.3 45.7 37.5 17.2 14.3 12.3 0 0 0 5.53 4.94 4.37 19.7% 14.9% 14.4% MTNL 147.0 10.3 9.5 8.9 2.4 2.0 1.4 115 92 68 0.8 0.7 0.7 10.1% 10.4% 0.0% VSNL 432.0 20.7 14.8 11.8 12.5 10.7 8.9 NA NA NA 1.7 1.6 1.5 9.7% 9.7% 0.0% Asian Wireline/Integrated China Telecom 3.7 13.5 13.1 13.2 4.8 4.5 4.3 245 228 212 1.4 1.3 1.2 7.8% 7.9% 7.8% China Netcom 19.5 12.0 11.2 10.7 4.6 4.3 4.0 194 216 202 1.7 1.5 1.4 7.7% 8.1% 7.8% Chunghwa 59.4 12.8 11.8 11.7 5.6 5.1 4.9 772 740 727 1.8 1.7 1.7 14.6% 16.7% 17.4% Dacom 19,200.0 9.4 9.2 7.8 4.4 4.1 3.6 NM NM NM 1.0 0.9 0.8 22.8% 24.2% 24.4% Hanaro 7,690.0 NM 59.7 12.5 4.5 4.0 3.4 NM NM NM na na na 1.4% 3.7% 7.4% KT Corp. 49,050.0 9.8 10.9 10.2 2.7 2.6 2.3 1,087 917 886 1.0 1.0 0.9 11.8% 10.7% 10.6% PCCW 4.7 18.7 15.5 15.9 7.1 6.6 6.3 NM NM NM 0.5 0.4 0.4 4.8% 4.7% 4.2% PLDT 2,325.0 13.6 12.2 11.5 5.8 5.3 4.9 505 404 371 5.2 4.6 4.3 22.2% 30.4% 34.3% PT Telkom 9,950.0 15.6 13.4 12.2 6.3 5.5 5.0 722 536 460 6.5 5.6 4.8 37.8% 38.6% 37.4% Singapore Telecom 3.2 16.7 15.2 14.7 9.3 8.7 8.3 3,429 3,320 3,301 2.4 2.2 2.1 14.5% 15.4% 15.5% Telecom Corp. of NZ 4.8 11.5 11.2 11.2 6.0 6.0 6.0 1,951 1,929 1,942 9.0 6.8 5.3 0.0% 0.0% 0.0% Telekom Malaysia 9.7 17.9 13.9 12.4 5.5 4.9 4.6 875 896 891 1.6 1.6 1.5 9.1% 9.9% 10.6% Telstra 4.1 13.0 13.9 15.4 6.0 6.5 6.7 2,718 2,680 2,739 3.9 4.0 4.2 18.4% 17.1% 15.0% Median 13.3 16.7 12.0 5.4 5.1 4.8 1,250 1,187 1,173 3.4 2.9 2.6 14.0% 15.2% 15.7% Average 13.3 16.7 12.0 5.4 5.1 4.8 1,250 1,187 1,173 3.4 2.9 2.6 14.0% 15.2% 15.7% Asian Wireless Far Eastone 36.8 10.8 11.0 11.5 4.8 4.6 4.4 799 748 725 1.9 1.9 1.8 17.4% 17.7% 18.1% China Mobile 64.0 18.6 16.1 15.0 7.0 5.7 4.9 531 433 362 2.1 1.9 1.8 12.1% 14.1% 14.8% Advanced Info Service 76.0 11.2 10.1 9.3 5.2 4.7 4.4 363 343 324 2.9 2.9 2.8 22.2% 23.9% 26.3% SK Telecom 227,000.0 10.7 9.6 9.0 4.6 4.5 4.2 1,087 1,034 1,034 1.6 1.5 1.3 22.9% 22.4% 22.4% KTF 30,750.0 11.8 10.4 10.5 3.7 3.3 3.3 734 609 583 1.2 1.1 1.1 9.1% 10.4% 10.7% LG Telecom 9,570.0 11.7 7.3 6.5 4.3 3.4 2.7 611 556 517 1.8 1.4 1.2 12.8% 19.9% 22.0% PT Indosat 6,300.0 19.9 16.5 15.6 6.0 5.4 5.1 261 220 206 1.9 1.8 1.7 10.3% 10.8% 10.0% Bharti Airtel Ltd. 611.5 31.2 23.3 20.6 17.4 12.9 11.0 714 486 381 9.0 6.9 5.6 30.1% 28.5% 24.6% China Unicom 10.6 22.1 19.9 20.0 4.7 4.2 4.0 154 123 113 1.7 1.6 1.5 6.3% 7.1% 7.4% Mobile One Limited 2.2 13.3 13.4 13.8 7.1 6.9 6.9 1,181 1,118 1,102 6.0 5.9 5.9 31.8% 35.3% 36.5% Total Access Comm. 4.2 15.6 14.5 14.4 6.7 6.3 6.1 270 250 242 1.8 1.7 1.6 9.3% 8.0% 7.4% Maxis Communications 10.0 13.1 13.9 14.3 7.1 7.2 6.9 789 754 749 3.6 3.3 3.1 22.8% 24.8% 25.6% SmarTone 8.1 67.4 52.5 15.5 4.2 3.5 2.9 495 463 404 1.4 1.4 1.3 3.0% 2.8% 10.9% Median 13.2 13.7 14.0 5.0 4.6 4.7 611 486 404 1.9 1.8 1.7 12.8% 14.9% 14.8% Average 21.2 17.6 14.2 5.9 5.2 5.3 615 549 519 2.6 2.4 2.2 15.3% 16.0% 16.8% Source: Company data, Morgan Stanley Research *Financial Year F2007=Calendarised Year C2006. E = Morgan Stanley Research estimates Source: Company data, Bloomberg, Morgan Stanley Research 24
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY January 10, 2007 India Telecommunications Appendix I India Telecoms: F2006-F2009E F2006 F2007E F2008E F2009E CAGR 06-09E WIRELINE SERVICES DELs (million) 41.22 44.22 46.22 47.72 5.0% YoY (%) 0.0 7.3 4.5 3.2 Net adds (million) (0.00) 3.00 2.00 1.50 Monthly ARPU (Rs) 272 266 261 257 -1.8% Penetration (%) 3.7 3.9 4.1 4.1 3.6 Commercial Consumers (million) 8.2 8.8 9.2 9.5 5.0% Residential Consumers (million) 33.0 35.4 37.0 38.2 5.0% Monthly rental (Rs/month) 205 201 197 194 -1.8% Calls in a year 2,716 2,755 2,666 2,610 -1.3% MoU (month) 226 230 222 218 -1.3% Revenues (Rs million) 134,324 141,218 144,654 147,108 3.1% YoY (%) -2.0 5.1 2.4 1.7 Revenues (US$ million) 3,025 3,030 3,014 3,019 -0.1% WIRELESS - GSM Subscribers (million) 69.19 120.09 181.01 233.93 50.1% YoY (%) 68.7 73.6 50.7 29.2 -24.8 Penetration (%) 6.25 10.70 15.92 20.30 48.1 Net Adds (million) 28.17 50.90 60.92 52.92 23.4% Prepaid as of total 81.3 86.1 89.9 91.6 4.1 Weighted Avg. Net ARPU (Rs/month) 412 367 325 309 -9.1% Revenues (Rs mn) 272,339 417,318 587,809 769,771 41.4% YoY (%) 46.4 53.2 40.9 31.0 -12.6 Revenues (US$mn) 6,134 8,955 12,246 15,800 37.1% WIRELESS - CDMA Subscribers (million) 29.45 48.54 64.32 80.36 39.7% Penetration (%) 2.7 4.3 5.7 7.0 37.9 Net Adds (million) 13.38 19.09 15.78 16.05 6.3% Prepaid as of total 80.6 87.1 89.8 91.4 4.3 Weighted Avg. Net ARPU (Rs/month) 411 363 342 331 -7.0% Revenues (Rs million) 108,797 160,321 214,224 264,849 34.5% YoY (%) 33 47 34 24 -10.5 Revenues (US$ million) 2,450 3,440 4,463 5,436 30.4% NATIONAL LONG DISTANCE Inter Circle (Rs million) 28,634 27,870 28,641 29,300 0.8% Intra Circle (Rs million) 33,662 28,329 27,539 27,372 -6.7% Wireless interconnect 23,134 31,650 45,367 57,620 35.6% Revenues (Rs million) 85,430 87,849 101,547 114,293 10.2% YoY (%) 7.2 2.8 15.6 12.6 20.5 Revenues (US$ million) 1,924 1,885 2,116 2,346 6.8% Tariff (Rs/min) 1.0 0.8 0.7 0.7 -11.2% YoY Tariff Reduction (%) 5.0 30.0 10.0 5.0 0.0 Source: Company data, E = Morgan Stanley Research Estimates 25
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY January 10, 2007 India Telecommunications Appendix II India Telecoms : F2006-F2009E F2006 F2007E F2008E F2009E CAGR 06-09E INTERNATIONAL LONG DISTANCE Total Minutes (million) 8,806 10,781 12,507 13,954 16.6% YoY (%) 31.9 22.4 16.0 11.6 -28.7 Revenues (Rs million) 40,785 29,273 34,060 36,932 -3.3% YoY (%) 6.7 -28.2 16.4 8.4 7.9 Revenues (US$ million) 919 628 710 758 -6.2% Outgoing Tariff (Rs/min) 7.8 5.3 4.9 4.6 -16.2% YoY (%) -18.0 -32.0 -7.0 -7.0 -27.0 TAR (US$/min) 0.10 0.05 0.05 0.05 -20.0% Minutes/DEL/month 837.39 854.13 792.29 736.21 -4.2% TOTAL VOICE REVENUES Rs million 641,675 835,980 1,082,294 1,332,953 27.6% YoY (%) 22.7 30.3 29.5 23.2 0.7 US$ million 14,452 17,939 22,548 27,359 23.7% DATA REVENUES Bandwidth requirement (MBPS) 136,012 213,119 318,269 434,632 47.3% E1 Lines Required 68,006 106,559 159,134 217,316 47.3% Tariff per E1 Line (Rs mn) 0.60 0.54 0.50 0.46 -8.3% Tariff dip (%) -10.0 -10.0 -7.5 -7.5 -9.1 Data Revenues (Rs mn) 45,575 71,009 101,773 130,810 42.1% YoY (%) 62.0 55.8 43.3 28.5 -22.8 Data Revenues (US$mn) 1,026 1,524 2,120 2,685 37.8% Data of total revenues 6.6 7.8 8.6 8.9 10.5 VOICE & DATA REVENUES Rs million 687,250 906,988 1,184,067 1,463,763 28.7% YoY 24.7 32.0 30.5 23.6 -1.5% US$ million 15,479 19,463 24,668 30,044 24.7% YoY 15,479 19,463 24,668 30,044 24.7% Contributions to Revenue (%) Wireline 20 16 12 10 GSM 40 46 50 53 CDMA 16 18 18 18 Domestic Long Distance 12 10 9 8 International telephony 6 3 3 3 Data 7 8 9 9 Total 100 100 100 100 Source: Company data, E = Morgan Stanley Research Estimates 26
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY January 10, 2007 India Telecommunications Appendix III India Telecoms: Capex Assumptions F2006 F2007E F2008E F2009E All India 459,947 571,085 598,504 488,925 BSNL 97,614 107,748 128,688 117,809 MTNL 9,853 12,611 9,101 8,332 VSNL 9,926 11,717 9,858 8,379 BHARTI 64,081 99,948 101,943 77,381 RCOM 70,442 90,125 145,519 96,500 TATA TELESERVICES 96,934 92,341 61,983 58,223 Source: Company data, Morgan Stanley Research E = Morgan Stanley Research Estimates 27
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY January 10, 2007 India Telecommunications Appendix IV Indian Telecoms: Teledensity Breakdown F2006 F2007E F2008E F2009E Subscribers (Million) Wireline 41.2 44.2 46.2 47.7 Wireless 98.6 168.6 245.3 314.3 GSM 69.2 120.1 181.0 233.9 CDMA 29.4 48.5 64.3 80.4 Overall 139.9 212.9 291.5 362.0 Penetration (%) Wireline 3.7 3.9 4.1 4.1 Wireless 8.9 15.0 21.6 27.3 GSM 6.3 10.7 15.9 20.3 CDMA 2.7 4.3 5.7 7.0 Overall 12.6 19.0 25.6 31.4 Net Adds Wireline (0.00) 3.00 2.00 1.50 Wireless 41.5 70.0 76.7 69.0 GSM 28.2 50.9 60.9 52.9 CDMA 13.4 19.1 15.8 16.0 Overall 41.5 73.0 78.7 70.5 Share of Net Adds (%) Wireline 0 4 3 2 Wireless 100 96 97 98 GSM 68 70 77 75 CDMA 32 26 20 23 Source: Company data E = Morgan Stanley Research Estimates 28
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY January 10, 2007 India Telecommunications Appendix V Indian Telecoms: Key Wireless Operators’ Subscriber Base F2006 F2007E F2008E F2009E Subscribers 98.6 168.6 245.3 314.3 GSM 69.2 120.1 181.0 233.9 CDMA 29.4 48.5 64.3 80.4 Net Adds 41.5 70.0 76.7 69.0 GSM 28.2 50.9 60.9 52.9 CDMA 13.4 19.1 15.8 16.0 Operator-wise (million) Bharti (GSM) 19.6 36.3 54.3 69.1 BPL (GSM) 2.6 0.0 0.0 0.0 BSNL 19.5 29.6 45.9 60.2 Hutch-Essar (GSM) 14.7 26.9 35.3 43.4 Idea Cellular (GSM) 7.4 14.2 21.2 28.3 MTNL 2.0 2.9 3.7 4.1 Reliance 20.3 33.4 48.2 66.1 CDMA 18.3 29.2 40.4 51.7 GSM 2.0 4.3 7.8 14.4 Tata Teleservices (CDMA) 9.3 16.0 20.5 25.2 Others 3.2 9.3 16.1 17.9 Operator-wise Net Adds Bharti (GSM) 8.6 16.7 18.1 14.8 BPL (GSM) 0.0 -2.6 0.0 0.0 BSNL 8.6 10.1 16.2 14.3 Hutch-Essar (GSM) 6.5 12.1 8.4 8.1 Idea Cellular (GSM) 2.3 6.8 7.1 7.1 MTNL 1.0 0.9 0.8 0.4 Reliance 8.6 13.1 14.7 17.9 CDMA 7.7 10.9 11.2 11.4 GSM 0.9 2.3 3.6 6.6 Tata Teleservices (CDMA) 7.2 6.7 4.5 4.6 Others -1.2 6.1 6.8 1.8 Market Share (%) Bharti (GSM) 19.8 21.5 22.1 22.0 BPL (GSM) 2.6 0.0 0.0 0.0 BSNL 19.8 17.6 18.7 19.1 Hutch-Essar (GSM) 14.9 15.9 14.4 13.8 Idea Cellular (GSM) 7.5 8.4 8.6 9.0 MTNL 2.1 1.7 1.5 1.3 Reliance 20.6 19.8 19.6 21.0 CDMA 18.6 17.3 16.5 16.5 GSM 2.0 2.5 3.2 4.6 Tata Teleservices (CDMA) 9.4 9.5 8.4 8.0 Others 3.3 5.5 6.6 5.7 Source: Company data, Morgan Stanley Research E = Morgan Stanley Research Estimates 29
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY January 10, 2007 India Telecommunications Appendix VI India Telecoms: Estimates of Annual Wireless Penetration by Circle (%) F2006E F2007E F2008E F2009E F2006-F2009E INDIA 8.9 15.0 21.6 27.3 45.2 Metros 40.9 55.7 71.4 78.6 24.3 Chennai 48.1 66.9 84.0 91.0 23.6 Kolkata 20.5 32.6 51.6 56.3 40.0 Mumbai 55.1 68.6 82.8 88.2 16.9 National Capital Region 45.5 62.2 75.3 86.1 23.7 Category A 10.6 17.9 24.4 29.8 41.4 Andhra Pradesh 9.6 16.9 23.0 28.1 43.1 Gujarat 12.2 20.0 26.9 31.9 37.8 Karnataka 12.1 20.8 28.1 31.3 37.3 Maharashtra 9.9 15.7 21.5 28.0 41.2 Tamil Nadu 9.9 18.3 25.2 31.9 47.7 Category B 6.4 11.8 18.5 24.6 56.9 Haryana 9.5 17.5 25.3 32.0 49.9 Kerala 14.5 25.7 36.1 43.1 43.9 Madhya Pradesh 3.9 8.2 12.2 17.7 66.2 Punjab 19.9 29.8 44.8 48.6 34.8 Rajasthan 6.3 11.0 16.8 21.0 49.0 UP [East] 4.1 9.1 14.8 21.4 73.4 UP [West] 6.4 10.9 18.1 23.8 54.7 West Bengal (incl. A&N Islands) 3.4 7.5 14.4 22.6 88.2 Category C 3.4 6.6 10.4 15.2 64.4 Assam 2.9 7.4 11.9 15.7 75.1 Bihar 2.6 4.8 7.7 11.8 65.5 Himachal Pradesh 10.7 20.3 27.0 30.1 41.3 North-East 3.1 8.0 11.8 15.6 71.0 Orissa 4.1 7.6 13.6 22.8 77.1 Jammu & Kashmir 7.1 12.1 13.7 15.1 28.6 Source: Company data, E = Morgan Stanley Research Estimates 30
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY January 10, 2007 India Telecommunications Appendix VII India Telecoms: Wireless Month-on-Month Penetration by Circle Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Metros 37.7 39.2 40.9 43.7 44.7 45.9 47.1 48.4 49.4 50.8 52.1 53.2 Chennai 43.1 44.4 45.5 48.1 49.5 50.7 52.0 53.2 54.7 56.5 57.9 60.1 Delhi (NCR) 46.4 48.4 50.9 56.1 56.9 58.1 59.7 61.7 63.5 65.3 67.0 68.3 Kolkata 17.2 18.1 19.0 20.5 21.1 22.0 22.8 23.4 24.6 25.6 26.6 27.2 Mumbai 49.0 50.8 52.9 55.1 56.7 57.9 59.4 60.4 60.2 61.5 62.7 63.7 Category A 9.0 9.5 9.9 10.5 11.0 11.4 11.9 12.5 13.1 13.8 14.5 15.3 Andhra Pradesh 7.8 8.3 8.9 9.6 9.9 10.3 10.8 11.4 12.0 12.7 13.5 14.3 Gujarat 10.5 11.0 11.5 12.2 12.8 13.3 13.8 14.5 15.2 15.9 16.7 17.6 Karnataka 10.0 10.9 11.3 12.1 12.5 13.1 13.6 14.4 15.1 15.9 16.7 17.5 Maharashtra 8.7 9.1 9.4 9.9 10.2 10.6 11.0 11.5 11.9 12.5 13.1 13.6 Tamil Nadu 8.6 8.9 9.4 9.9 10.4 10.9 11.6 12.1 12.7 13.5 14.2 14.8 Category B 5.3 5.6 5.9 6.4 6.6 6.9 7.3 7.7 8.2 8.7 9.2 9.7 Haryana 8.3 8.6 9.0 9.5 9.8 10.2 10.6 10.8 11.5 12.4 13.5 14.7 Kerala 12.1 13.1 13.8 14.5 14.8 15.1 15.7 16.4 17.3 18.4 19.2 19.9 Madhya Pradesh 3.1 3.3 3.5 3.9 4.0 4.2 4.6 4.9 5.3 5.7 6.2 6.6 Punjab 17.7 18.3 19.0 19.9 20.6 21.4 22.1 22.6 23.4 24.2 25.2 26.5 Rajasthan 5.1 5.5 5.9 6.3 6.6 6.8 7.2 7.5 8.0 8.4 9.1 9.7 Uttar Pradesh (East) 3.4 3.6 3.8 4.1 4.3 4.5 4.8 5.3 5.7 6.0 6.4 6.8 Uttar Pradesh (West) 5.3 5.6 5.9 6.4 6.8 7.1 7.5 7.9 8.8 9.1 9.6 10.2 West Bengal (incl. A&N Islands) 2.4 2.8 3.1 3.4 3.6 3.9 4.1 4.4 4.8 5.1 5.5 5.8 Category C 2.6 2.8 3.0 3.4 3.7 3.9 4.1 4.3 4.6 4.9 5.2 5.5 Assam 2.0 2.3 2.5 2.9 3.3 3.7 3.9 4.2 4.5 4.9 5.1 5.5 Bihar 1.9 2.1 2.3 2.6 2.8 3.0 3.1 3.3 3.5 3.7 3.9 4.2 Himachal Pradesh 9.8 9.9 10.2 10.7 11.0 11.4 12.0 12.7 13.6 14.5 15.7 16.4 Jammu and Kashmir 5.7 6.0 6.4 7.1 7.6 8.2 8.5 8.7 8.9 9.3 10.1 10.7 North-east 2.0 2.2 2.5 3.1 3.6 4.1 4.5 4.8 5.1 5.5 6.1 6.6 Orissa 3.1 3.4 3.7 4.1 4.3 4.5 4.8 5.0 5.2 5.5 5.8 6.1 Overall 7.5 7.9 8.3 8.9 9.3 9.6 10.1 10.5 11.0 11.6 12.2 12.8 Source: Company data, Morgan Stanley Research 31
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY January 10, 2007 India Telecommunications Appendix VIII Asian Examples of 3G Services No. of Licenses Spectrum Spectrum Subscribers Countries/ Parameters Issued Amount Paid (US$ mn) Band (MHz) Allocated ('000) Operators Singapore Three 64 2100 2x15 paired 535 Singtel, Starhub, and 5 unpaired M1 Malaysia Four US$13.5 (first twp) and US$15 (later 2100 2x15 paired 100 TM (Celcom), two) and 5 unpaired Maxis, MiTV, Time dot com Philippines Four (potential 3.5 mn p.a. for 20 MHz+US$35,000 NA NA NA Smart, Globe, for one more) p.a. for incremental 100,000 subs in Digitel, Connectivity excess of 4 mn Resources Indonesia Five Staggered payment scheme for 10 2X5 spectrum NA Telkomsel, Indosat, years - US$90-150mn NPV based on allocated Excelcom, operator bids (roughly US$20-30 mn Cyberaccess, NTS p.a. after 10 yrs) Thailand No 3G services Taiwan Four US$280 mn per license 1900-2100 2x15 paired and 5 unpaired Hong Kong Four US$6.5 mn per annum for five years 1900 -2100 2x15 paired and 5% of 3G revenue thereafter and 5 unpaired South Korea Three Two WCDMA licenses -US$1.09 bn 2100-GSM and 2X 20MHz 14,443 KTF, SK Telecom and CDMA-based 3G license at 800, 1700- US$910 mn with half of the amount EV-DO to paid upfront Australia Six A$1.17 bn for six licenses. 15-year 1900 4X 5MHz 19.3 mn Telstra, Vodafone, term starting October 2002 unpaired; Optus, Hutchison, 3X10Mhz CKW Wireless, 3G paired; Investments 6X5Mhz paired Source: Company data, Morgan Stanley Research 32
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY January 10, 2007 India Telecommunications Disclosure Section The information and opinions in this report were prepared or are disseminated by Morgan Stanley Dean Witter Asia Limited (which accepts the responsibility for its contents) and/or Morgan Stanley Dean Witter Asia (Singapore) Pte. (Registration number 199206298Z, regulated by the Monetary Authority of Singapore, which accepts the responsibility for its contents), and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H, regulated by the Monetary Authority of Singapore, which accepts the responsibility for its contents), and/or Morgan Stanley Taiwan Limited and/or Morgan Stanley & Co International Limited, Seoul Branch, and/or Morgan Stanley Dean Witter Australia Limited (A.B.N. 67 003 734 576, holder of Australian financial services license No. 233742, which accepts responsibility for its contents), and/or JM Morgan Stanley Securities Private Limited and their affiliates (collectively, "Morgan Stanley"). Analyst Certification The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Vinay Jaising. Unless otherwise stated, the individuals listed on the cover page of this report are research analysts. Global Research Conflict Management Policy This research has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies. Important US Regulatory Disclosures on Subject Companies The following analyst, strategist, or research associate (or a household member) owns securities in a company that he or she covers or recommends in this report: Vinay Jaising - Reliance Communications Ltd. (common stock). 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STOCK RATINGS Different securities firms use a variety of rating terms as well as different rating systems to describe their recommendations. For example, Morgan Stanley uses a relative rating system including terms such as Overweight, Equal-weight or Underweight (see definitions below). A rating system using terms such as buy, hold and sell is not equivalent to our rating system. Investors should carefully read the definitions of all ratings used in each research report. In addition, since the research report contains more complete information concerning the analyst's views, investors should carefully read the entire research report and not infer its contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Global Stock Ratings Distribution (as of December 31, 2006) For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Underweight to hold and sell recommendations, respectively. 33
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY January 10, 2007 India Telecommunications Coverage Universe Investment Banking Clients (IBC) % of Total % of Rating Stock Rating Category Count % of Total Count IBC Category Overweight/Buy 814 37% 288 42% 35% Equal-weight/Hold 996 46% 305 45% 31% Underweight/Sell 377 17% 90 13% 24% Total 2,187 683 Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley or an affiliate received investment banking compensation in the last 12 months. Analyst Stock Ratings Overweight (O or Over) - The stock's total return is expected to exceed the total return of the relevant country MSCI Index, on a risk-adjusted basis over the next 12-18 months. Equal-weight (E or Equal) - The stock's total return is expected to be in line with the total return of the relevant country MSCI Index, on a risk-adjusted basis over the next 12-18 months. Underweight (U or Under) - The stock's total return is expected to be below the total return of the relevant country MSCI Index, on a risk-adjusted basis, over the next 12-18 months. More volatile (V) - We estimate that this stock has more than a 25% chance of a price move (up or down) of more than 25% in a month, based on a quantitative assessment of historical data, or in the analyst's view, it is likely to become materially more volatile over the next 1-12 months compared with the past three years. Stocks with less than one year of trading history are automatically rated as more volatile (unless otherwise noted). We note that securities that we do not currently consider "more volatile" can still perform in that manner. Unless otherwise specified, the time frame for price targets included in this report is 12 to 18 months. Analyst Industry Views Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below. In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below. Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below. Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index. Stock price charts and rating histories for companies discussed in this report are available at www.morganstanley.com/companycharts or from your local investment representative. You may also request this information by writing to Morgan Stanley at 1585 Broadway, (Attention: Equity Research Management), New York, NY, 10036 USA. 34
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY January 10, 2007 India Telecommunications Stock Price, Price Target and Rating History (See Rating Definitions) 35
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY January 10, 2007 India Telecommunications 36
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY January 10, 2007 India Telecommunications Other Important Disclosures For a discussion, if applicable, of the valuation methods used to determine the price targets included in this summary and the risks related to achieving these targets, please refer to the latest relevant published research on these stocks. Research is available through your sales representative or on Client Link at www.morganstanley.com and other electronic systems. This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. 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Additional information on recommended securities is available on request. 37
    • MORGAN STANLEY RESEARCH JM MORGAN STANLEY The Americas Europe Japan Asia/Pacific 1585 Broadway 25 Cabot Square, Canary Wharf 4-20-3 Ebisu, Shibuya-ku Three Exchange Square New York, NY 10036-8293 London E14 4QA Tokyo 150-6008 Central United States United Kingdom Japan Hong Kong Tel: +1 (1) 212 761 4000 Tel: +44 (0) 20 7 425 8000 Tel: +81 (0) 3 5424 5000 Tel: +852 2848 5200 Industry Coverage:India Telecommunications Company (Ticker) Rating (as of) Price (01/09/2007) Vinay Jaising Bharti Airtel Limited (BRTI.BO) O (04/11/2002) Rs623.70 Mahanagar Telephone Nigam O (05/25/2006) Rs154.65 (MTNL.BO) Reliance Communications Ltd. O-V (08/17/2006) Rs423.00 (RLCM.BO) Videsh Sanchar Nigam (VSNL.BO) U (10/22/2002) Rs434.35 Stock Ratings are subject to change. Please see latest research for each company. © 2007 Morgan Stanley