Management Discussion And Analysis ReportSector Growth
The year was marked by the uncommonly large new service launches by new licensees,leading to an over-crowded sector. Resultant hyper-competitive market conditions led to asteep decline in tariffs and introductory offerings of free minutes. Consequently, whilesubscriber growth was high, the sector revenue growth slowed to 5.1% compared to 22.3% inthe preceding year.
Regulatory
Some major regulatory developments for the period were:
TRAI on MNP Regulation and porting charges
The TRAI on November 20, 2009 issued the Mobile Number Portability (MNP) portingcharges regulation. As per it, the porting charges (paid by the subscriber to theRecipient Operator) should not exceed Rs. 19 per request. The per port transaction charges(payable by the Recipient Operator to the Mobile Number Portability Service Provider) forprocessing the porting request of a mobile number, has been fixed at Rs. 19.
Extension of timeline for implementation of MNP
The DoT, keeping in view the complexity and enormity of the testing involved before MNPis implemented, and the present status of implementation by some operators, has extendedthe timeline for implementation of MNP from June 30, 2010 to October 31, 2010.
Amendment in licensing conditions on equipment purchase
The DoT, vide its letter of December 03, 2009 and subsequent clarifications, issued anamendment in the licensing conditions (valid for CMTS, UASL, NLD & ILD) for telecomequipment purchase. Licensees, before issuing purchase orders relating to telecomequipment, are required to make an application giving details of the original equipmentmanufacturer / supplier for security clearance from the DoT. The revert from the DoT onapplications is to come within 30 days, failing which the licensee can take it as a deemedapproval.
Auction of 3G and BWA Spectrum
The DoT, on February 25, 2010 issued Notice Inviting Applications (NIA), fromprospective bidders to participate in the auction of 3G and BWA spectrum. As per the NIA,3 slots of 3G spectrum were available in 17 service areas and 4 slots were available in 5service areas, while in the case of BWA, 2 slots were available in each service area forauction. The NIA included auctioning rules, timelines and other procedural requirements.The 3G auction started on April 09, 2010 and concluded on May 19, 2010 after 183 rounds ofbidding. The BWA auction started on May 24, 2010 and concluded on June 11, 2010 after 117rounds of bidding.
WPC order to increase spectrum charges and Petition against the same
The WPC, on February 25, 2010 revised the spectrum charges, with effect from April 1,2010 for GSM and CDMA operators as under:
| GSM Spectrum | CDMA Spectrum | Existing Charges (% of AGR) | Revised Charges (% of AGR) |
| Upto 2X4.4 MHz | Upto 2X5 MHz | 2% | 3% |
| 2X6.2 | 2X6.25 | 3% | 4% |
| 2X8.2 | 2X7.5 | 4% (for up to 10 MHz | 5% |
| | GSM and CDMA | |
| 2X10.2 | 2X10 | spectrum) | 6% |
| 2X12.2 | 2X12.5 | 5% (for 12.5 MHz | 7% |
| | GSM spectrum) | |
| 2X15.2 | 2X15 | 6% | 8% |
The Company, along with other aggrieved operators, filed a joint petition against theWPC order. The Hon’ble TDSAT vide its order dated 26th March, 2010, was pleased togrant an interim stay, subject to the condition that in the event the petition isdismissed, the petitioner shall pay the spectrum charges along with interest at such rateas may be determined. The TDSAT order included direction to the petitioners to continuepaying spectrum charges at the applicable rate till further orders. The respondent (DoT)was directed not to give effect to the above impugned notification till the matter isdisposed off. The TDSAT also directed for separate petitions to be filed by each of thepetitioners. The Company has complied by filing a separate petition.
TDSAT order on Carriage Charges
The TDSAT, vide its judgment dated May 21, 2010 has upheld the BSNL stand and allowedthe distance based carriage charging with effect from May 11, 2005 while stating, interalia, that the impugned orders of the TRAI cannot be sustained and consequently settingthem aside.
Discussion on Consolidated Financial Statements and Operational Performance
Subscriber Base
As on March 31, 2010, the company had 63.82 mn subscribers representing a 48.4%increase compared to the subscriber base of 43.02 mn on March 31, 2009.
Revenues
Revenues and Other Income for the year ended March 31, 2010, stood at Rs. 124,990 mn,as compared to Rs. 101,544 mn during the previous year, showing a growth of 23.1%, in asector which grew at 5.1%. VAS Revenues grew at 43.2% over the previous year. Revenuesfrom Long Distance services, and from Passive Infrastructure, forming part of totalrevenues after inter segment eliminations, were Rs. 858 mn, and Rs. 677 mn respectively.Growth in Other Income was predominantly due to reversals arising from conversion of leaseagreements from finance lease to operating lease.
Operating Expenses
Operating Expenses stood at Rs. 90,399 mn vis--vis Rs. 73,180 mn for the previousyear. The contributors to the total Operating Expense of 72.3% were Personnel Expenditure5.2%, Network Operating Expenses 25.0%, License and WPC charges 10.8%, Roaming and AccessCharges 14.4%, Subscriber Acquisition and Servicing Expenses 9.3%, Advertisement &Business Promotion Expenditure 3.4% and Administration & Other Expenditure 4.3%.
Profit before Interest, Depreciation and Amortisation
The Company generated a Profit before Interest, Depreciation and Amortisation of Rs.34,591 mn for the year ended March 31, 2010, a growth of 22% compared to the previousyear. The operating profit margin for the current financial year stood at 27.7 % comparedto 27.9% for the previous year.
Depreciation, Amortisation and Finance Charges
Depreciation & Amortisation expenses increased to Rs. 20,149 mn for the year endedMarch 31, 2010 showing an increase by 43.6%, as against Rs. 14,028 mn for the previousyear. Net finance charges for the year decreased by 19% from Rs. 4,945 mn to Rs. 4,005 mn,mainly due to foreign exchange fluctuations.
Profits and Taxes
For the year ended March 31 2010, Cash Profit from operations stood at Rs. 30,555 mn, agrowth of 31.1% over the previous year. The Profit before Tax for the year stood at Rs.10,754 mn, an increase of 14.5% over the previous year. The tax charge for the year,mainly consisting of deferred tax liability, stood at Rs. 1,215 mn. The Net Profit for theyear ended March 31, 2010 was Rs. 9,539 mn, resulting in a net profit margin of 7.6%.
Capital Expenditure
During the year ended March 31, 2010, the Company (including the erstwhile SpiceCommunications Limited) incurred a capital expenditure of Rs. 39,814 mn.
Balance Sheet
During the year, the paid-up equity share capital of the company increased by Rs.1,997.43 mn, due to issuance of 199.15 mn equity shares to the shareholders of erstwhileSpice Communications Limited upon its amalgamation with the Company and issuance of 0.59mn equity shares to the employees pursuant to exercise of stock options granted underEmployee Stock Option Scheme, 2006. The total shareholders’ funds stood at Rs.113,704 mn as at March 31, 2010.
The Gross Block stood at Rs. 270,585 mn, and Net Block including Capital Work inProgress (CWIP) stood at Rs. 187,143 mn as at March 31, 2010. Treasury investments inmutual funds decreased by Rs. 9,148 mn during the year and stood at 11,304 mn as at March31, 2010. During the year, Current Assets decreased due to utilization of surplus fundslying in fixed deposits, and hence the net Current Liabilities as at March 31, 2010 stoodat Rs. 4,050 mn.
Human Resources
The Company, through its participative work environment, skill development activities,and by championing the values of commitment, integrity, passion, seamlessness and speed,promotes strong bonding with its employees. During the year, it has again undertakensharing of value creation by granting another tranche of Employee Stock Options to theeligible employees.
The findings of the Organisation Health Study (OHS) have been analysed, which are veryencouraging, and concern areas are being suitably addressed. The employee strength onrolls stood at 6,763 as on March 31, 2010.
Risk Management
The Risk Management framework of the Company ensures, amongst others, compliance withthe requirements of Clause 49 of the Listing Agreement. The framework establishes riskmanagement across all service areas and functions of the Company, and has in placeprocedures to inform the Board Members about the risk assessment and minimization process.These processes are periodically reviewed to ensure that the management of the Companycontrols risks through a defined framework. The various risks, including the risksassociated with the economy, regulations, competition, foreign exchange, interest rateetc., are monitored and managed effectively.
Internal Control Systems
The Company has appropriate internal control systems for business processes, coveringoperations, financial reporting and compliance with applicable laws and regulations.Clearly defined roles and responsibilities for all managerial positions drive adherence ofdefined processes. Process controls are reviewed periodically and strengthened given theinherent nature of operational fraud risks in telecom sector. The operating parameters arealso monitored and controlled. Regular internal audits and checks ensure that theresponsibilities are executed effectively. The audit committee of the Board of Directorsactively reviews the adequacy and effectiveness of internal control systems and suggestsimprovements for strengthening them, as appropriate.
Opportunities, Risks, Concerns and Threats
The Indian wireless sector is going through a testing phase of over-capacity ledhyper-competition. Lower tariff and high introductory offers have resulted in multiple SIMownership, reduced realization per minute of use and the conversion of paying minutes tonon-paying minutes, leading to slowing down of revenue growth for the sector. Themultiplicity of SIM ownership has made the subscriber numbers and related metricsmeaningless to gauge the strength of the business. However, the Company has been able toexploit its incumbency strengths and drive efficiencies through evolved processes, and hasdemonstrated enhanced competitive strength during this testing phase.
The telecom sector is characterised by technology changes. Competition from newtechnologies is an inherent threat.
However, your Company, with the spectrum in 900/1800 MHz and in 2100 MHz, has anattractive spectrum footprint to adapt to future technology changes. This, along with thestrong balance sheet, and a power brand, positions the company to make the best of futureopportunities in a growth sector.
The Company requires certain approvals, licenses, registrations and permissions foroperating its business. In addition, regulators may amend license conditions, norms forspectrum allocation, spectrum charges, merger and acquisition rules etc. which may have asignificant impact on the Company’s business. The Company, however, is hopeful thatthe policy changes will be equitable.
The Company’s business is dependent on key vendors to supply critical networkequipment and services. Besides, its ability to provide quality mobile network andexpanding its area of operations and the subscriber base is also dependent on the spectrumallocation by the government. The Company believes in partnering with vendors who are ofinternational repute, and with whom it builds long term relationships.
Outlook
The business models of telecom operators are being stress-tested by overcapacity ledhyper-competition. With several licensees operating at tariffs lower than cost, theeventual phasing out of this period of over-capacity is inevitable. The Company, with afocus on strengthening its leadership position in its incumbent service areas, and acalibrated and measured approach to newer service areas, is well placed to emergecompetitively stronger. The telecom sector provides lucrative long term opportunities forstrong operators, of which the Company is one of a handful.
Cautionary Statement
Statements in the Management Discussion and Analysis describing the Company’sobjectives, projections, estimates, expectations may constitute a "forward-lookingstatement" within the meaning of applicable securities laws and regulations. Actualresults could differ materially from those expressed or implied. Important factors thatcould make a difference to the Company’s operations include economic conditionsaffecting demand/supply and price conditions in the domestic markets in which the Companyoperates, changes in the Government Regulations, tax laws and other statutes and otherincidental factors.