Management Discussion And Analysis
India is the fth largest economy in the world after the European Union, United Statesof America, China and Japan in purchasing power parity terms, with an estimated GrossDomestic Product ("GDP") (purchasing power parity) of U.S.$ 4.05 trillion in2010 (Source: CIA World Factbook 2010). India rebounded from the global financial crisis,largely because of cautious banking policies and a relatively low dependence on exportsfor growth. India recorded one of the largest global GDP gains of 2010, experiencinggrowth of 8.3% (Source: CIA World Factbook 2010). By way of comparison, the below tableillustrates the GDP growth in 2010 for certain other countries:
|Country ||GDP Growth in 2010 (%)* |
|Singapore ||14.6 |
|China ||10.3 |
|India ||8.3 |
|Brazil ||7.5 |
|Japan ||3.0 |
|United States ||2.8 |
|United Kingdom ||1.6 |
|* adjusted for in ation || |
(source : CIA World Factbook 2010)
The Indian economy witnessed robust recovery in growth in the last quarter of scal2010. The Industrial Outlook Survey of the RBI indicated further improvement in severalparameters of the business environment for the three months ended September 30, 2010. TheProfessional Forecasters Survey conducted by the RBI in June 2010 places the overall(median) GDP growth rate for scal 2011 at 8.4%, higher than 8.2% reported in the previousround of the survey. (Source: Macroeconomic and Monetary Developments: First QuarterReview Fiscal 2011)
In continuation with the growth pattern of previous years, this year also witnessed aphenomenal growth in the subscriber base in the telecom sector. Another landmark was alsoreached at the end of the financial year as the 800 million mark in total subscribershipwas reached, with mobile subscribers on their own surpassing the 800 million mark. Thegrowth trend in subscriber base experienced since mid-1990s continues to be on an upwardswing.
India continues to be fastest growing telecom market in the world. It is the secondlargest wireless network market in the world after China. Indian Telecom sector iswitnessing a resurgent growth with the addition of 225 million subscribers during 2010-11,an average monthly addition of around 19 million subscribers. During March 2011, a totalof 20.1 million subscribers were added, taking the total number of telephone connectionsto 846.3 million as at 31st March 2011. The growth in telecom sector is signi cantlycontributing to the economic growth of the country.
Growth of Subscriber base
The Telecom Subscriber base growth during the financial year 2010-11 is given below:
|(subscribers in Million) ||As on 31.03.2011 ||As on 31.03.2010 ||% change |
|Wireless ||811.59 ||584.32 ||38.9 % |
|Wireline ||34.73 ||36.96 ||(6.0%) |
|Total ||846.22 ||621.28 ||36.2 % |
Growth in Tele-density
The overall tele-density reached 70.89% at the end of March 2011, as against 52.74% inMarch 2010 and 36.98% in March 2009. Despite the impressive growth in the telecom sector,the rural tele-density in India is quite low as compared to urban tele-density. Thefollowing table depicts the penetration of telecom services in rural & urban areas inthe country:
|Tele-density as of ||Rural (%) ||Urban (%) ||Overall (%) |
|Mar-04 ||1.70 ||21.30 ||7.58 |
|Mar-05 ||1.74 ||26.20 ||9.08 |
|Mar-06 ||1.86 ||37.99 ||12.70 |
|Mar-07 ||5.78 ||47.24 ||18.22 |
|Mar-08 ||9.34 ||63.67 ||25.64 |
|Mar-09 ||14.93 ||89.44 ||36.98 |
|Mar-10 ||24.27 ||119.77 ||52.74 |
|Mar-11 ||33.79 ||157.32 ||70.89 |
Minutes of Usage ("MoU")
GSM average MoU per subscriber per month has shown steady decline from a base of 496minutes per month per subscriber for the quarter ended December 31, 2008 to 360 minutesper month per subscriber for the quarter ended December 31, 2010. Similarly, CDMA MoU hasdecreased from 371 minutes per month per subscriber to 270 minutes per month persubscriber over the same period.
|Total MoU/subs./month (minutes) ||Dec-08 ||Jun-09 ||Dec-09 ||Jun-10 ||Dec-10 |
|GSM ||496 ||454 ||411 ||401 ||360 |
|CDMA ||371 ||342 ||318 ||299 ||270 |
Note: Quarterly data
Average Revenue Per User ("ARPU")
The ARPUs in the Indian wireless telecommunications sector have seen a declining trendover the last few years. For example, the blended GSM ARPU has declined from Rs 220 permonth per subscriber for the quarter ended December 31, 2008 to Rs.105 per month persubscriber for the quarter ended December 31, 2010. During the same period, CDMA ARPU hasdeclined from Rs 111 per subscriber per month to Rs 68 per subscriber per month. The keyreasons for such a decline are increased competition, deregulation, falling tariffs, etc.
|ARPU (Rs./subs./month) ||Dec-08 ||Jun-09 ||Dec-09 ||Jun-10 ||Dec-10 |
|GSM ||220 ||185 ||144 ||122 ||105 |
|CDMA ||111 ||92 ||82 ||74 ||68 |
TELECOM INFRASTRUCTURE SERVICES
The Telecom infrastructure services are made up of three components:
1. Passive infrastructure
Passive infrastructure includes of all the passive components of the network: steeltower/antenna mounting structures, BTS room/shelter, power supply, battery bank,invertors, DG set for power backup, air conditioner, re extinguisher, security cabin,among others. These components are not dependent on the type of communication technologybeing used by the network riding atop the site, namely GSM, CDMA, 3G, WiMax, FM Radio,digital terrestrial transmission, etc. We estimate that roughly two-third of capex for awireless network is spent on passive infrastructure.
2. Active infrastructure
Active infrastructure constitute the electronics that power the network andincludes all the active components of a wireless network such as spectrum (radiofrequency), radio antenna, BTS/cell site (base transceiver station) and microwaveequipment. Each cellular operator will have to own a BTS at each tower site. A tower sitecan have 1/2/3/4 or more cell sites, depending on the occupancy level/tenancy ratio ofthat tower.
3. Transmission Media
Transmission Media is the network that connects the BTS/cell site to a base stationcontroller (BSC) that controls tens or scores of BTS in a particular area. A transmissionnetwork may work on:
Point-to-point microwave radio transmission
Point-to-multipoint microwave access technologies like LMDS, WiFi or WiMax;
Optical ber links
Digital Subscriber Line (DSL)
EMERGING TREND & GROWTH FACTORS
The continued growth in the number of cellular subscribers and service provideralong-with stabilizing minutes of usage per subscriber would require telecom operators toadd additional equipments and investment on cell sites to maintain optimum performance oftheir networks. Today, the cellular operators have to continuously increase theirfoot-print by offering services to areas where there is no coverage. In order to meet thegrowing demand of new subscribers and the market conditions, the telecom operators areresorting more and more to outsourcing their network roll out components. The activitieslike operation and maintenance are now being routinely outsourced by all major telecomoperators. Along-with Operations and maintenance, several outsourcing deals like NetworkManagement and Managed Services are being structured. At Nu Tek, we offer all outsourcedservices related to design, installation, construction, operation and maintenance oftelecom networks.
New NTP (National Telecom Policy) 2011 Roadmap
Indian Telecom Industry has gone through major transformations with the majorpolicy decisions that had taken place with the announcement of NTP 1994 and wassubsequently re-emphasized and carried forward under NTP 1999. Driven by various policyinitiatives, the Indian Telecom sector witnessed a complete transformation in the lastdecade. It has achieved a phenomenal growth during the last few years and is poised totake a big league in future also driven by NTP 2011. If voice was the essence of lastdecades Telecom revolution, then Data may very well become the de ning factor thisdecade. NTP 2011 is expected to cover issues pertaining to licensing, spectrumallocations, tariffs, linkage with roll-out obligations, spectrum sharing and trading,MVNO, as well as Mergers & Acquisitions. There is also an industry expectation ontreating the Indian Telecom Sector as a part of National critical infrastructure.
Consumer becoming Bandwidth hungry. Data services to lead the transformation
India is witnessing very interesting trends in the Telecom industry at present. 2Gwould continue to maintain the momentum with subscriber base crossing 800 million. 3Gservices are in the early stages of launch with commercial services yet to be rolled outin many service zones. 4G/LTE or WiMAX is in active consideration by winners of BWAlicensees and initial rollout can be expected towards late 2011 or early 2012. A total ofINR 39,360 crores was paid by winners of BWA auctions and the six companies that boughtBWA licenses have an interest cost of approximately USD 36 mn a month. They have to buildsomething with it if they want to see a return on their huge investment. The only answeris to launch as soon as possible. The Government too is keen to see 4G services totake-off as it is the only possible route to achieve its plans of raising broadbandsubscriber base in the country to 100 mn by 2014 from just 7 mn (penetration 0.6%) now.This is expected to boost the economy by invigorating the Telecom industry and creatingopportunities for the entire Telecom ecosystem. As per a recent World Bank estimate, a 10%growth in broadband penetration leads to a 1.3% increase in the GDP of a nation. Hence,the writing is very clear on the wall we shall be witnessing a sea-change in data servicesas what we have seen in Voice services over the past decade.
Consumer becoming more demanding Needs Quality
Although the voice traf c is still seen as a predominant contributor to revenuesfor the next couple of years, Data and Video will become the core focus areas over time,with maturing of 3G and 4G services. As new services and applications take shape, a shiftin the focus of service providers from high quantitative growth to network quality can beexpected. Although multiple technology choices will de nitely assure superior experienceand quality of service to the subscribers, however, the underlying complexities of thesevery technologies could also lead to glitches and quality issues if not attended properly.With India opting for 2.1 GHz frequency band for 3G and 2.5 GHZ frequency band for BWA,the service providers need to set-up more than 2-3 times Network infrastructure vis-a-vis2G if then plan to provide good quality experience to users and seamless services. Evenafter all this, service providers also need to focus on backhaul since this can act as achocking point for data services. Presently, majority of backhaul is on microwave, whichneeds to be upgraded to higher-end microwave or Optic Fiber based networks.
Changing usage pattern / preferences Cellphone is no more just a phone
It is now time for India to evolve from the well-established mobile messaging andcommoditized voice play to focus on customer segmentation based data play. The focus ofhigh-end mobile users presently is high speed data, video call, mobile TV, gaming, etc.,which is fast changing to killer applications w.r.t. their need for use-based applicationssuch as entertainment on the go, banking on the go, m-commerce on the go, e-health,e-education, e-governance, etc. With such a tremendous change in the usage patterns, itwould be necessary for Service Providers to provide seamless coverage to ensure consumerssatisfaction. This would necessarily transpire into an increase in demand for a hugeoutlay in terms of Network Infrastructure.
Focus on untapped Rural Telecom Infrastructure Space
In rural India, as of 31-March 2011, the tele-density was low at 33.79% compared tourban tele-density of about 157.32%. There is a big market lying untapped in rural areas.Most of the telecom companies despite the fall in average revenue per user (ARPU) due todeclining tariffs are making Profits and are ready to expand their networks in ruralareas, largely because of low penetration levels. Aggressive expansion in TelecomInfrastructure space is being witnessed in rural areas of the country.
Tower Sharing & Emergence of Third party tower companies
The separation of the tower business by the leading operators has created separateentities focused on tower sharing. A huge number of towers are expected/being built by thethird party independent Tower companies like Indus, Quippo-WTTIL, ATC-Excel, GTLInfrastructure Limited, and Essar Telecom Infrastructure Pvt. Ltd. These shared sitesgenerally have higher capital cost involved, which implies higher per unit revenue fortelecom infrastructure services companies.
We are a telecom infrastructure services company providing rollout solutions forwireless and xed telecom networks. Our strength lies in the breadth of services we offerin the telecom infrastructure space. The business offerings include services in TurnkeySite Build, Active Equipment Implementations, Technical Support Services and Operations& Maintenance. We are also registered with Department of Telecommunication asInfrastructure Provider - Category I.
In Turnkey Site Build, we provide services right from the site identi cation anddesigning, to installation of towers and other ancillary passive equipments. This includesentire Project Planning and Management Services. In Active Equipment Implementations, weprovide services like Installation, Commissioning and Integration of active telecomequipment for wireless, wire-line and optical technologies. In Technical Support Services,we provide services in high-end telecom engineering that includes Network planning,Transmission planning, Radio Network Optimization, Networks Benchmarking, and NetworkAuditing. We provide these services on activity/time basis. In Operations &Maintenance, we provide 24x7x365 maintenance services for passive telecom infrastructure(preventive and corrective maintenance on periodic contracts), and rst-line maintenance ofactive infrastructure.
We are also involved in creation of In-building Networks for the Wireless and DataApplications. The CDMA network on the underground section of the Delhi Metro Rail Corridoris one such example.
The client list constitutes of all the prominent players in the telecom industry thatincludes Third Party Infrastructure Leasing Companies (like Indus Towers, Quippo, WTTIL),Telecom operators (like Airtel, Vodafone, Idea, Reliance Communications, Aircel), andTelecom Equipment Manufacturers (like Ericsson, Nokia Siemens Network, Huawei, ZTE,Motorola).
We have considerable expertise in rolling out projects in the most dif cult of theterrains, both in India and Overseas. For our overseas clients, we provide servicesthrough Nu Tek India Ltd. and also through our subsidiary in Hong Kong, and cater to thegrowing needs of our clients in the Asia Paci c region and other Emerging Markets likeMiddle East and North Africa.
With site-offices and facilities located in major cities and having executed projectsin all the 23 telecom circles, we have the wherewithal to undertake multi-site projectspan-India.
Comparison of FY2011 with FY2010
FY2011 was a healthy growth period for the company, wherein the income from operationsincreased by 38.09% to reach Rs 257.00 crores. Project related expense for the year was Rs208.75 crores, an increase of 60.36% primarily on account of pass through of materialsupplied for the turnkey sites. The employees cost for the year was Rs 17.87 crorescompared to 21.3 crores for the previous year, an decrease of 16.10%. As a result, PBIT(Profit from operations before other income and interest) stood at Rs 19.19 crores asagainst Rs 22.6 crores for the previous year. Other income for the year was Rs 2.74crores, compared to Rs 3.2 crores in the previous year. During FY2011, the net Profit fromordinary activities after tax was lower at Rs 12.19 crores, compared to Rs 15.87 crores inFY2010.
On a consolidated basis, income from operations during FY2010 stood at Rs 283.05crores, compared to Rs 194.0 crores in FY2009. During FY2010 revenue of Rs.7.17crorescontributed by our subsidiary in Hong Kong as compared to Rs. 26.22 in the current year.The European and Indian subsidiaries do not have started business operation during theyear. The net Profit from ordinary activities after tax stood at Rs 21.01 crores, comparedto Rs 19.43 crores in FY2010.
Business Review and Outlook
During the year FY2011, your company witnessed a change in revenue mix wherein therevenue contribution from FTK services declined while the contribution from other serviceverticals (TI, TSS and O&M) saw a substantial increase. Going forward, the companyplans to continue to increase its revenue share from TI, TSS and O&M services, whichare high margin revenue streams. However, owing to intense competition in the sector andthe resultant low call rates, margins at all the verticals in the Telecom value chain areunder pressure. We expect the similar margin pressure on your company.
Your company is gradually diversifying its revenue stream and looking at businessopportunities in other geographies / sectors.
Your company plans to foray into power sector in a major way, ranging from owning rawmaterial assets to setting up power generating capacities, and has made an acquisition totie up its backend raw material supply notably the coal assets. The company recentlyacquired 45% equity in Gulf Corporation, a company having coal mines in Indonesia, for USD45 Million through its Hong Kong subsidiary. Company is actively looking to acquire bothexisting downstream projects in the conventional power generation space as well as forayinto non-conventional power generation area which appears to be a lucrative proposition inthe long run.
The company through its subsidiary is also setting-up a NOC (Network Operating Centre)facility in Kenya, capital expenses for this is funded through the proceeds of GDR issue.We have further plans to offer these services to our global clientele as we see tremendouscost arbitrage in these services.
Your company is eyeing to enter into the lucrative Defence Sector in India. With Armyrecently announcing investments of over Rs 40,000 crores for its Private CommunicationNetwork, the Defence sector looks attractive. However, owing to time consuming process ofvarious registrations and other restrictions, the company is targeting the sector at asub-contractor level. During the year FY11, the company started the execution of a projectfor BEL (Bharat Electronics Ltd.) for developing infrastructure for Communications andSurveillance of Defence unit.
The company recently (May11) commenced operations in Africa by setting up abranch in Kenya, and is in the process of registering branches in other neighboringcountries like Uganda, Malawi and Madagascar. The company won a contract with NSN for RFDrive Testing and Network Optimization Services. These services will be provided on BhartiAirtel Network, which it acquired from its recent acquisition of Zain. Your company isestablishing itself in African market, and is looking forward to leverage its Indiarelationship with Telecom OEMs like Huawei, ZTE, Ericsson, NSN, etc. All these OEMs haveample presence and signi cant market share of Network deployment in Africa.
In Apr11, the company through its subsidiary signed up a contract with Tigo, aGSM operator in Central America, to supply-construct-erect Telecom Tower sites inGuatemala. These sites would be used by Tigo to provide mobile connectivity to itssubscribers in the country. Nu Tek has developed its own design for Towers, and hasoutsourced production to a large manufacturing facility in South India. The trial orderhas been successfully delivered and the company is eyeing at receiving a big order fromTigo.
The company has set-up a branch of ce in Nepal to capture the opportunities offered bythe under-developed Telecom market in Nepal. We are looking at providing maintenanceservices for existing networks, as well as built-up services for new networks. The companyis actively bidding with Telecom OEMs like Huawei, ZTE and Ericsson, to provide Networkmaintenance and site-built services. We expect the business activities to commence in thecurrent financial year (2011-12).
SWOT Analysis Strengths
Existence for last 18 years in the Telecom industry. Having establishedrelationship with almost all OEMs, Telecom operators, and Infrastructure Providers.
Presence across the length and breadth of the Indian Telecom market. Experiencedand skilled work force of around 1,200 people.
Overseas presence (Central America, Africa, Nepal) to seize the businessopportunities in these markets.
Setting-up a Network Operating Centre (NOC) in Kenya to broad-base revenuesources
Diversi cation into power sector
Longer Working Capital Cycle
3G and LTE next big thing in the Indian Telecom Industry. New businessopportunities would be on offer.
Changing landscape owing to MNP. Requirement of Network strengthening and betterconnectivity by 2G operators.
Increasing competition putting margin pressures
Our revenues are closely aligned to the Telecom Industry. Any adverse impact onthe industry would directly affect our business