in2cable india ltd Management discussions

IN2CABLE (INDIA) LIMITED ANNUAL REPORT 2005-2006 MANAGEMENT DISCUSSION AND ANALYSIS Financial Review: During the year your Company posted a total income Rs.50.47 million, lower by 31% from Rs. 72.83 million in the previous year. The company took up a moderate trading in modems offering them at a concessional rates for new subscribers committing certain minimum period and value which resulted in acquiring a new subscriber for every such modem sold. The sale of modems during the year was Rs 2.00 million against Rs.1.52 million in the previous year. The Company posted a net loss of Rs. 28.83 million after providing Rs. 19.57 million towards depreciation including an amount of Rs 2.50 million on account of impairment of certain assets. Since the Company does not have any distributable profits, your Directors do not recommend any dividend for the year ended 31st March, 2006. Operations Review: Internet Access: The Company had rolled out its LAN based Broadband Internet variant IN2NET which was designed to offer cheaper solution to the customers and offer bulk sales at wholesale rates to operators who would install their own LAN network. The scheme got a very good response from the market with the Company achieving a peak of Rs 1.00 million sale and an average monthly sale of Rs 0.72 million during the year, despite the stiff competition in the overall market. Internet Bandwidth: The Company has continued the effort to optimize bandwidth by procurement of more clean bandwidth than shared bandwidth, backed by adequate Service Level Agreements (SLAs). The Company also shifted the entire intra city backhaul network from MTNL to Tata Power Broadband resulting in sizeable savings in costs. The Company continued with its efforts to reduce the number of bandwidth vendors to achieve economies of scale and stability in bandwidth. However significant reduction in the bandwidth costs could not be achieved as there were no major reductions in prices by vendors and the vendors like VSNL, Bharti themselves entering into retail distribution of internet services. Internet Telephony (VoIP): The PC based VoIP service on the Media Ring platform was continued by the Company, however the volume of activity remained static since the growth of VoIP business individually for the Company and generally in the country has been very slow. Business Development & Marketing: The Company continued to introduce pre-paid and post-paid packages suitable to various segments keeping in mind the requirements of the market. The Company had to concentrate on retention of the existing subscribers due to the continued competition from unorganized / unlicenced sectors and the larger players like VSNL, TATA, Bharti, MTNL (in metros) and BSNL (in all non-metros in the country). The Company was successful in retaining of customers generally in major operating parts, but however had to revise subscription tariffs considerably to maintain competitive rates. Technology: Your Company has maintained and improved technical expertise to offer customized solutions to its subscribers. The Company has been keeping an effective vigil on the operation of bandwidth and the users at the central NOC situated at MIDC, Mumbai. The company noticed increasing demand from consumers for internet access with low initial investment and LAN based services through the IN2NET software customized for specific requirements of the Company was introduced during the previous year. IN2NET primarily operates on prepaid module and is basically a dealer based wholesale business, met with larger success resulting in an income of Rs.12 million accounting for 24% of total revenue. Human Resource Development: Your Company continued the thrust to better its human resources. Disciplined and timely reporting from the branches about the operations and speedily solving the bottlenecks has been ensured for smoother business. All new employees are offered extensive technical training at the NOC in Mumbai before final posting. Cordial industrial relations were maintained due to the Companys pro- active HR policy. Indian Internet Market: Major Developments: Larger ISPs including MTNL and BSNL, backed by substantial investments, entered the retail Internet services during the year under review. The unhealthy competition thrown by the unlicensed/unregulated operators also continued to throw challenge to the licenced ISPs. In the light of such challenges in the market, the company has kept itself up-to-date on technological front. The operational costs for ISPs have remained high mainly due to high tariffs for international and domestic bandwidth and leased lines. Larger ISPs who kept their tariffs considerably low and also incurred high costs on acquiring a customer with a hope to get rapid increase in subscriber base, experienced considerable lower subscriber base compared to their projections. The Company reacted positively by lowering tariffs and repositioning several schemes with comparable tariffs and was able to retain the customer base intact though returning a lower value of turnover. Future Outlook: Demand for Broadband Internet is directly connected to PC growth. Government is aware that the present level of demand for Internet and broadband is low as compared to other Asian Countries. The growth of Broadband Internet will be a direct contribution to GDP. Further, bandwidth availability including international bandwidth is an essential driver for Broadband growth. Cost of the Bandwidth constitutes major cost component for Internet services. The Government and TRAI are addressing this on priority. Endeavor of DoT is to achieve a million subscribers by 2010. Keeping these aspects in view, Government has brought out new NLD and ILD Policy, which help ISPs to invest and widen their business prospects. During this financial year, your Company will continue to use Cable Modem, Ethernet and VoIP technology to strengthen and expand the Market. Your Company will consolidate Internet growth in major cities and then will plan expansion in other cities, keeping in view the Quality, Cost and Return. Risks & Concerns: Analysts of Internet Industry have brought out that Internet is a long-term business. Your Companys planning process helps in understanding the strategies to overcome the same. ISP industry continues to go through lean period and even major players are finding it difficult to break even. The continuing higher bandwidth costs combined with low retail price, due to competition results in loss. The anticipated growth to achieve necessary volumes in Internet and Broadband are not happening at the pace required is causing stagnation. Many major players with deep pockets continue to cut prices at an unrealistic rate that affects other companies directly. Share Capital: During the year the company increased the Authorised Share Capital from Rs.100 million to Rs 125 million. The company allotted 2.40 million Equity Shares of Rs 10 each at cash at par amounting to Rs 24 million to the holding company, Hinduja TMT Limited. Internal Control Systems: The Company has been operating integrated software solution consisting of Navision Financial Accounting system and the EliteCore SMS / Billing system resulting in flawless customer related financial and billing data which has enabled the company to maintain adequate control over all the commercial transactions. The Elite Core SMS and the IN2NET software have efficient controls to strictly enforce bandwidth policies to safeguard against possible misuse and leakage of bandwidth. The Companys accounts and other records are regularly audited by an independent internal auditor. The reports of internal and external auditors with comments of the management are regularly placed before the audit committee, which are discussed with the management and the auditors to satisfy about the internal control environment. Fixed Deposit: During the year under review your Company has not accepted any Fixed Deposit.