Indian Telcos

For a top down approach of top line, the three most important factors to be considered would be:
- GDP growth
- Income growth
- Affordability where cheaper handsets and all the regulation factors come into play.
Some more data - for European and US telcos, ARPU is caluclated on the basis of average revenues of the last two years. However in India, because of the rapid rate of growth, the revenue of the trailing 12 months is divided by the current suscribers for the ARPU. Another way is to multiply the minutes of usage per subscriber per month with the minute rate.
An eye on some of the major cost heads:
Entry fee - A one time charge for entry forlicense to operate (Rs 25 million)
Access deficit charge - 1.5% of non-rural annual gross revenues to subsidise BSNL in the rural markets
License fee - 6% of AGR as license fee to operate
SG&A expenses
Personal expenses

And now we come to identify telcom stock for investment purposes, some of the macro issues to be considered are Management depth of vision, Coverage area, Capex (after operating expenses there should be sufficient cash flow to fund the required network expansion - and enfin, the financial metrics. Some of the key ratios for consideration:
Sales growth ------ Average revenue per user ------ Subscriber growth

EBIDTA margins or Operating margins [(Sales - Operating expenditure)/Sales)]
Interest coverage [Profit before interest and tax/Interest]
Net profit margins [Net profits/Sales]

Earnings per share
EBIDTA per share
Debt to equity
Return on equity [PAT/Equity or Net worth]
Return on capital employed [PBIT/Capital employed, which is Equity + Debt]
Free cash flow [Profit after tax + Depreciation - Dividend & Dividend Tax - Capex -Working capital changes]

Recievable days, working capital turnover and asset turnover should also be considered for a holisitic view of the company.

And finally valuation - P/E, P/CF and EV/ subscriber.

NB: A tit bit gleaned today, regarding some of the IT acquisitions seen during the boom days, the Price/ Sales ratio was typically in the range of 2.2-5.
-The way out from the high debt levels that telcos experienced in 2002 was through the issue of equity rights issues, to try and reduce the cost of debt and prevent downgrading from the fall in coverage ratios.

It sounds like prattle

An interesting website. They threw some light on the focus areas for telecom valuation. The firm undertakes valuation exercises for telcos with special focus on:
1. Physical assets - wireline and wireless networks
2. Intangible assets - eg spectrum liceses. In fact they had undertaken a study to determine the revenues that will flow to the treasury with the auction of a particular spectrum.
3. Contracts in place and competitive strategies
4. And finally the entire business.

For the revenues generated from issue of new licenses, some of the factors considered were:
Previous revenues generated in Mhz-pop. They could use an income approach or a comparables approach. The differences in the parameters for the income approach, the least of which is the diverse WACC, lead to a preference for the comparables approach. The argument is that the comparables have already taken into account present value of future cash flows.
Technology differences
Drop in price with the issue of new licenses
Lower price if the spectrum is encumbered.
The price quoted was 1.65 dollars per MHz-pop. The revenue is then calculated as 1.65 into the total bandwidth being auctioned and the population of the coverage area (in this case the population of the US) in a base year.