Spice Communications Ltd merged Share Price Management Discussions
SPICE COMMUNICATIONS LIMITED
ANNUAL REPORT 2008-2009
MANAGEMENT DISCUSSION AND ANALYSIS
Industry Growth:
The Indian mobility industry continues to grow at a rapid pace. During the
period under review, the number of mobility subscribers grew from 233.63 mn
as on 31st December, 2007 to 391.76 mn as on 31st March, 2009, being a
67.7% growth over 15 months. This represents a penetration level of 33.7%
and hence there is still scope for high growth. One of the trends of this
period has been the increased contribution of rural subscribers to total
net additions, and the trend is expected to gain strength.
Discussion on Financial and Operational Performance Subscriber Base:
As on 31st March, 2009, the Company has registered a growth of 8% and has
an aggregate of 4.1 mn subscribers, as against 3.8 mn as on 31st December,
2007.
Service & Sales Revenues:
During the fifteen months ended 31st March, 2009, Revenues from Services &
Sale of Trading Goods grew by 32.0% (annualized basis) to Rs 15,805 mn from
Rs 9,578 mn for the previous year ended 31st December, 2007.
Other Income:
Other income for the fifteen months ended 31st March, 2009 amounted to Rs
271 mn as against Rs 4,720 mn during the year ended 31st December, 2007,
and includes profit on sale of passive infrastructure amounting to Rs 221
mn and Rs 4,393 mn for each period respectively.
Operating Expenses:
During the fifteen months ended 31st March, 2009, the Company incurred
Operating Expenses of Rs 12,893 mn representing 81.6% of service revenues.
The break up includes Network Operating Expenditure 24.7% (including
passive infrastructure rentals on the towers taken on lease basis as
against the running and maintenance cost incurred on owned sites during
most of the previous period), Roaming & Access charges 17.9%, Subscriber
Acquisition and Servicing Expenses 13.2%, License and Spectrum charges
10.2%, Administration and Other expenditure 6.3%, Personnel Expenditure
5.3%, and Advertisement & Business Promotion expenditure 4.0%.
Profit before Interest, Depreciation and Amortisation:
During the fifteen months ended 31s1 March, 2009, the Company made a Profit
before Interest, Depreciation and Amortisation of Rs 3,183 mn against
Rs.6,947 mn for the year ended 31st December, 2007.
Finance Charges:
Net Interest & Financing Charges of Rs 3,023 mn include charges amounting
to Rs 1,241 mn for assets taken on finance lease.
Depreciation and Amortisation:
During the fifteen months ended 31st March, 2009, the Company had a
depreciation and amortization expense of Rs 4,915 mn. This included effects
for revision in the estimates of useful life and obsolescence of Rs 1,132
mn for certain asset categories.
Amortisation of miscellaneous expenses not written off of Rs 596 mn
includes an additional amount of Rs 496 mn, following the change in
accounting policy.
Impairment of License values:
The Company had made an impairment provision of Rs 4,845 mn for the license
/ entry fee paid to DOT.
Profit and Taxes:
During the fifteen months ended 31s1 March, 2009, the Loss was Rs 10,196
mn. The company had a cash profit of Rs 160 mn during fifteen month ended
31st March, 2009. The tax charge for the current period for Fringe Benefit
Tax is Rs 13 mn. Excess provision for Tax for earlier year amounting to Rs
66 mn has been written back during the year.
Balance Sheet:
The Gross Block as at 31st March, 2009 stood at Rs 32,441 mn, representing
a net increase of Rs 5,786 mn during the period. The Net Block including
Capital Work in Progress (CWIP) stood at Rs 18,254 mn as at 31st March,
2009.
The decrease in net current assets amounting to Rs 5,262 mn is largely due
to the realization of other debtors amounting to Rs 5,122 mn on account of
sale of passive infrastructure, besides the increase in creditors for
Capital Expenditure.
Total loan funds stood at Rs 20,586 mn and include amounts payable under
vendor finance of Rs 5,888 mn.
The debit balance of the Profit and Loss Account stood at Rs 13,668 mn as
at 31st March, 2009 and exceeds the Share holder funds of Rs 11,842 mn.
Human Resources:
The Company has strong HR practices and has been able to attract quality
talent. The manpower on rolls of the Company as on 31st March, 2009 stands
at 823.
Regulatory:
COAI petition/writ against DoT on crossover policy:
COAI (including Idea Cellular) had approached TDSAT on the issue of the
manner in which the cross over spectrum policy was announced by the DoT on
19th October, 2007. After the TDSAT refused to grant any stay in the
matter, COAI had approached the Honble High Court of Delhi for an interim
stay in the matter. The High Court dismissed the COAI writ petition/
application. The TDSAT also, has now given its verdict on the issue. Key
highlights are: GSM operators do not have any vested rights up to 15MHz of
spectrum and level playing field has not been disturbed by allocation of
spectrum under dual technology.
Guidelines on Active Infrastructure Sharing:
The DoT has formulated guidelines on active infrastructure sharing among
Service Providers and Infrastructure Providers. Sharing will be limited to
antenna, feeder cable, Node B, Radio Access Network (RAN) and transmission
system only. Sharing of allocated spectrum is not permitted.
TRAI Press release on phasing out of ADC:
The TRAI, on 27th March, 2008 via IXth amendment to the Interconnection
Usage Charges (IUC) regulation, decided to phase out the ADC on domestic
calls w.e.f. 1st April 2008. Further, the ADC on the international incoming
calls was made payable at a reduced rate of Rs 0.50 for the period from 1st
April 2008 to 30th Sep 2008, after which this component of ADC is also
phased out.
DoT guidelines on Intra Service Area Merger policy:
On 22nd April, 2008, the DoT released its new Intra Service Area Merger
policy. As per this, post merger, the number of players should not fall
below 4, and the market share of the merged entity should not be more then
40%, either in terms of subscriber base or AGR. The total spectrum held
post merger should be in line with applicable spectrum policy within three
months of merger.
DoT amendment on Intra Circle Roaming:
On 12th June, 2008, DoT amended the license, allowing a licensee to enter
into mutual commercial agreements with other service providers within the
same service area for the purpose of intra-circle roaming facility.
WPC order on Microwave Spectrum charges:
WPC, on 10th November, 2008, specified the microwave spectrum charges for
7th to 11th carrier. The DoT had earlier revised the microwave spectrum
charges vide its order dated November 3, 2008, wherein charges for a
maximum of 6 carriers were specified. The order was made effective w.e.f
November 3, 2006, thus increasing the charges applicable to operators
holding more than 6 access spectrum carriers (access & backbone separately)
with effect from November 3, 2006.
Guidelines for Mobile Number Portability (MNP):
The DoT on 01st August 08 issued guidelines for MNP license. As per the
guidelines, the country has been divided in two MNP zones for grant of MNP
license, with 11 licensed service areas in each zone. On 20th March 2009,
DoT signed the MNP operator license issued with M/s Syniverse Technologies
(Zone I) and M/s MNP Interconnection Telecom Solutions (Zone II) giving six
months time for MNP implementation in metro service areas and category A
service areas, and one year time for other service areas.
Amendment to Interconnect Usage Charges (IUC) regulation:
On 9th March 2009, TRAI released the Interconnection Usage Charges (IUC)
Xth Amendment and accordingly, with effect from 1st April 2009, termination
charges for incoming calls stood reduced to INR 0.20 per minute from INR
0.30 per minute, while the termination charges for international incoming
calls stood increased from INR 0.30 per minute to INR 0.40 per minute.
Opportunities, Risks, Concerns and Threats:
Indian telecom industry has continued to demonstrate strong growth even in
a period of global economic recession. This establishes that mobile
communication, which not too long ago was seen as a luxury affordable to a
limited few, has become a necessity even with consumers from the lower
income groups. This creates an opportunity for further growth with
increasing penetration. It also shows that the industry is not as
susceptible to economic cycles as some other consumer segments.
The increasing level of competition is resulting in higher churn which
continues to be a threat as well as an opportunity. The churn rates may
increase in the short term following the implementation of Mobile Number
Portability (MNP), but in the long term it is not expected to have any
significant impact on market shares. The increasing competition is also
likely to have an adverse impact on margins. However, as your Company is
expected to merge with Idea, the overall strengths of the merged entity
will strengthen it to withstand competitive pressures.
The telecom industry has seen rapid progresses in technology and hence
competition from alternative technologies is an inherent threat in such a
business. The government proposes to auction 2100 Mhz spectrum to be used
for rolling out 3G technology. The final structure of the auction and the
number of spectrum slots will also have a bearing on the competitive
landscape.
The Company requires certain approvals, licenses, registrations and
permissions for operating its business. In addition, regulators may impose
conditions in relation to the grant of licenses and approvals and any such
requirements could have a material adverse effect on the Companys
business. The Company, however, is confident that the regulatory changes
will ensure a level playing field for all service providers.
The Companys business is dependent on a limited number of vendors to
supply critical network equipment and services. Besides this, its ability
to provide quality mobile network and expanding its area of operations and
the subscriber base is also dependent on the spectrum allocation by
government. The Company believes in partnering with vendors who are of
international repute, and with whom it builds long term relationships.
Outlook:
We believe that the telecom sector will continue to demonstrate continued
growth. In the short term the competition is likely to intensify which may
place pressure on margins. However, in the medium to long term we believe
that some consolidation in the industry is inevitable. Your Company,
subject to necessary approvals, will be merging with Idea Cellular. This
merged entity is expected to be a strong industry player with advantages of
spectrum and scale.