Nu Tek India Ltd Management Discussions.

INDIAN ECONOMY

Indias GDP gained momentum in the final quarter of FY 2015 and pushed full-year growth to a five-year high. GDP grew 7.6% in FY 2015, which was up from 7.2% in the previous fiscal year and primarily reflected robust growth in private consumption, which accounts for nearly 60% of the economy. Nonetheless, ever since the Ministry of Statistics and Programme Implementation (MOSPI) introduced a new methodology last year to measure GDP doubts continue to linger regarding the reliability of the data.

According to the Ministry of Finance, the government met its budget deficit target for FY 2015, which was set at the equivalent to 3.9% of GDP The budget deficit has been shrinking for several years and is expected to narrow further in FY 2016. The government has set a goal to reduce the shortfall to 3.5% of GDP in FY 2016.

(source: Financial Express)

INDIAN TELECOM INDUSTRY CURRENT SCENARIO

India is currently the worlds second-largest telecommunications market and has registered strong growth in the past decade and half. The Indian mobile economy is growing rapidly and will contribute substantially to Indias gross domestic product (GDP), according to report prepared by GSM Association (GSMA) in collaboration with the Boston Consulting Group (BCG).

As at 31-March 2016, Indias telecom subscriber base was 1,058.86 million, which has clearly shown 6.74% up from 996 million on 31-March 2015. The overall Teledensity in India increased from 80.98 as on 30th September, 2015 to 81.83 as on31st December, 2015.

Growth of Subscriber base

Growth in Tele-density

The overall Tele-density in India increased from 82.89 at the end of Feb-16 to 83.36 at the end of Mar-16. The Urban Tele-density increased from 153.93 at the end of Feb-16 to 154.01 at the end of Mar-16. The Rural Tele-density increased from 50.76 at the end of Feb-16 to 51.37 at the end of Mar-16. The share of urban subscribers and rural subscribers in total number of subscribers at the end of Mar-16 was 57.58% and 42.42% respectively.

The following table depicts the penetration of telecom services in rural & urban areas in the country:

Tele-density as of Urban (%) Rural (%) overall (%)
Feb 2016 153.93 50.76 82.89
Mar-2016 154.01 51.37 83.36
(Source: TRAI)

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: steel tower/antenna mounting structures, BTS room/shelter, power supply, battery bank, invertors, DG set for power backup, air conditioner, fire extinguisher, security cabin, among others. These components are not dependent on the type of communication technology being used by the network riding atop the site, namely LTE, GSM, CDMA, 3G, WiMax, FM Radio, digital terrestrial transmission, etc. We estimate that roughly two-third of capex for a wireless network is spent on passive infrastructure.

2. Active infrastructure

Active infrastructure constitute the electronics that power the network and includes all the active components of a wireless network such as spectrum (radio frequency), radio antenna, BTS/cell site (base transceiver station) and microwave equipment. Each cellular operator will have to own a BTS at each tower site. A tower site can have 1/2/3/4 or more cell sites, depending on the occupancy level/tenancy ratio of that tower.

3. Transmission Media

Transmission Media is the network that connects the BTS/cell site to a base station controller (BSC) that controls tens or scores of BTS in a particular area. A transmission network may work on:

• Point-to-point microwave radio transmission

• Point-to-multipoint microwave access technologies like LMDS, WiFi or WiMax;

• Optical fiber links

• Digital Subscriber Line (DSL)

• Ethernet

Our Business

We are a telecom infrastructure services company providing rollout solutions for wireless and fixed telecom networks. Our strength lies in the breadth of services we offer in the telecom infrastructure space. The business offerings include services in Turnkey Site Build, Active Equipment Implementations, Technical Support Services and Operations & Maintenance. We are also registered with Department of Telecommunication as Infrastructure Provider - Category I.

In Turnkey Site Build, we provide services right from the site identification and designing, to installation of towers and other ancillary passive equipments. This includes entire Project Planning and Management Services. In Active Equipment Implementations, we provide services like Installation, Commissioning and Integration of active telecom equipment 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 Network Auditing. 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 first-line maintenance of active infrastructure. We are also involved in creation of In-building Networks for the Wireless and Data Applications. The CDMA network on the underground section of the Delhi Metro Rail Corridor is one such example.

The client list constitutes of all the prominent players in the telecom industry that includes Third Party Infrastructure Leasing Companies (like Indus Towers, Quippo, WTTIL), Telecom operators (like Airtel, Vodafone, Idea, Reliance Communications, Aircel), and Telecom Equipment Manufacturers (like Ericsson, Nokia Siemens Network, Huawei, ZTE, Motorola).

We have considerable expertise in rolling out projects in the most difficult of the terrains, both in India and Overseas. For our overseas clients, we provide services through Nu Tek India Ltd. and also through our subsidiary in Hong Kong, and cater to the growing needs of our clients in the Asia Pacific region and other Emerging Markets like Middle East and North Africa.

Business performance

Financial and operation performance overview

Financial Year 2015-16 was a challenging year for the company, wherein the income from operations decreased by around 53.56% to reach Rs. 3,067 Lakhs as compared to Rs. 6,605 Lakhs during the last financial year. Other income for the year also increased by Rs. 567 Lakhs, compared to Rs. 32 Lakhs in the previous year. Operational expenses for the year were Rs. 3,775 Lakhs as compared to Rs. 6,503 Lakhs in previous year. Exceptional items were nil. As a result, PBDT (Profit before Tax and Depreciation) was Rs. (179) Lakhs as against Rs. 64 Lakhs for the previous year. Consequently, PAT (Profit after Tax) was reported at Rs. (170) Lakhs as compared to Rs. 38 lakhs in last year. The main reason for decrease in Income from Operation as compared to previous year because earlier the company was executing capital intensive products with lower margin but in current year focus was on projects having more profits even if it does not have volume.

Business Review and outlook

India is currently the worlds second-largest telecommunications market and has registered strong growth in the past decade and half. The Indian mobile economy is growing rapidly and will contribute substantially to Indias gross domestic product (GDP), according to report prepared by GSM Association (GSMA) in collaboration with the Boston Consulting Group (BCG).Between FY 07-16 Indias telephone subscriber base expanded at a Compound Annual Growth Rate (CAGR) of 19.5 per cent to 1,022.61 million and teledensity to 80.98.

Driven by strong adoption of data consumption on handheld devices, the total mobile services market revenue in India is expected to touch US$ 37 billion in 2017, registering a Compound Annual Growth Rate (CAGR) of 5.2 per cent between 2014 and 2017, according to research firm IDC.

Indias mobile subscriber base is expected to cross 500 million! subscribers by the end of FY2015 from 453 million subscribers at the end of FY2014.According to a study by GSMA, smartphones are expected to account for two out of every three mobile connections globally by 2020 making India the fourth largest smartphone market. The broadband services user-base in India is expected to grow to 250 million connections by 2017, according to GSMA.India added the highest number of net mobile phone subscriptions of 13 million during the third quarter of 2015.

International Data Corporation (IDC) predicts India to overtake US as the second-largest smartphone market globally by 2017 and to maintain high growth rate over the next few years as people switch to smartphones and gradually upgrade to 4G.

In spite of only 5 per cent increase in mobile connections in 2015, overall expenditure on mobile services in India is expected to increase to US$ 21.4 billion in 2015, led by 15 per cent growth in data services expenditure, as per research firm Gartner.

The Indian telecom sector is expected to generate four million direct and indirect jobs over the next five years according to estimates by Randstad India. The employment opportunities are expected to be created due to combination of governments efforts to increase penetration in rural areas and the rapid increase in smartphone sales and rising internet usage. Business will currently focus on off-shore trade without actually importing goods into Indian shores.

SWOT Analysis

Strengths

• Existence for last 22 years in the Telecom industry. Having established relationship with almost all OEMs, Telecom operators, and Infrastructure Providers.

• Presence across the length and breadth of the Indian Telecom market. Experienced and skilled work force of around 1,200 people.

• Overseas presence (Central America, Africa, Nepal) to seize the business opportunities in these markets.

Weaknesses

• Longer Working Capital Cycle

• Client Concentration

Opportunities

• India will emerge as a leading player in the virtual world by having 700 million internet users of the 4.7 billion global users by 2025, as per a Microsoft report.

• With the governments favourable regulation policies and 4G services hitting the market, the Indian telecommunication sector is expected to witness fast growth in the next few years.

Threats

• Intense competition foreseen in the telecom industry due to delayed M&A activities: Current M&A guidelines have not been able to stimulate any consolidation in the sector despite all policymakers expressing the need for it. With new network launches expected in 2015, the rapidly growing data market will witness intense price competition and will rekindle memories of 2010 voice-led price wars.

• Our revenues are closely aligned to the Telecom Industry. Any adverse impact on the industry would directly affect our business.

BY THE ORDER OF THE BOARD
Place: Delhi Inder Sharma
Date: 06.09.2016 Chairman & Managing Director