Professor Campbell Harvey BA 456 Private Telecom Project in India

Agenda Background The Opportunity Telelink’s Projections Our Analysis What Happened Questions?

Background: India

Largest Democracy Second largest country - population Per capita GDP $440 (1999) Huge income disparity In the midst of economic liberalization Severe corruption

Background: Rajasthan

Second Largest State in India –10.6% of area; 5.8% of population Borders Pakistan; –militarily important –historically stable Rich in mineral resources –silver, gypsum, asbestos, feldspar, lead, zinc, emeralds and garnets

Background: Rajasthan Major tourist attraction - $350 MM annually Rapidly growing industrial sector –Ericsson, Ford, Coke, Corning, etc. Presently 13th among Indian states in FDI CAGR of 5.2% - national average 6.9% ( )

Background: Telecom Sector State owned monopoly Extremely low teledensity (2.2%) Insufficient infrastructure to meet growing demand Long wait lists for service hook up

Sector liberalized –Telecom Policy 1994 –New Telecom Policy 1999 Opened to private investment –FDI of approx. $2 BN (till Sep. 2001) Targeted teledensity: 7% (2005); 15% (2010) 20% growth over last 5 years Background: Telecom Sector

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

The Project Member of Shyam Telecom Group

The Project: Highlights Operation license valid until 2018 Currently the only competitor to state owned provider A network of convergence –traditional voice telephony services –enhanced telephony services –internet access –cable TV services

The Project: Financials Peak funding requirement of Rs 7,929 MM (US$ 177 MM) –Proposed to be financed as: EquityRs 3,524 MM (US$ 80 MM) DebtRs 4,405 MM (US$ 97 MM)

The Project: Cash Flows (click on the photo for the information)

The Project: Valuation TVCost of Equity Rev. Multiple18%20%22% 8 $500 9 $ $296 Million US$ IRR 38% Pre-money Valuation

Our Analysis: Cost of Equity ICCRC India –Assumptions: Risk Free Rate = 4% US Market Risk Premium = 4% Anchor to US –ICCRC Cost of Capital for India Cost of Equity (ICCRC)19.7% Adjustment (comp. Beta) 1.4% Adjusted Cost of Capital21.1%

Our Analysis: Valuation IRR = 31% Pre-money Valuation TVCost of Equity Const. Growth18.7%19.7%20.7%21.7%22.7% 2%$157$133$113$95$80 3%$160$136$115$97$82 4%$164$138$117$99$83 5%$168$141$119$100$84 6%$173$145$122$102$86 Million US$

What Happened A few months after the release of the IM –Hughes Telecom IPO Basic Services Licensee in Bombay and the State of Maharashtra Valued at US$ 116 MM (pre-money) Evinced a lot of foreign investor interest

What Happened Telelink valuation was way too high Talks with potential investors driven by Hughes Telecom valuation Management refused to lower valuation; decided to go it alone

Questions?