IT ITeS Telecom Media Education 2013

Unnati Sector Report:

IT, ITeS, Telecom, Media & Education

Junior Security Analysts: Senior Security Analyst:

Shreyans Gangwal ([email protected]) Nirmal Bari ([email protected])

Omkar Tungare ([email protected])

IT/ITeS/Telecom/Media/Education Page 1

TABLE OF CONTENTS

TELECOM ......................................................................................................... 3

Overview .......................................................................................................... 3 Regulatory Framework ......................................................................................... 4 Government Policies & Impact ................................................................................ 5 Value Chain of Telecom ...................................................................................... 11

Description & Analysis .................................................................................. 11 Key Trends ................................................................................................ 13

Trends & Highlights of Voice & Data Services Industry ................................................. 15 Telecom Circles & Teledensity .............................................................................. 22 Airwaves & Bands .............................................................................................. 23 Growth Drivers ................................................................................................. 24 Player Profile ................................................................................................... 25 IT/ITES ........................................................................................................... 28 Overview ........................................................................................................ 28

Revenue Breakup: Verticals............................................................................ 29 Revenue Breakup: Geographies ....................................................................... 29

IT/ITeS Value Pyramid ........................................................................................ 30 Revenue Models ................................................................................................ 31 Current Market Scenario ..................................................................................... 31 Hedging Techniques & Impacts ............................................................................. 32 Growth Drivers ................................................................................................. 33 Mergers & Acquisitions ....................................................................................... 35 Challenges ...................................................................................................... 37 Industry Trends & Outlook ................................................................................... 38 Player Profile ................................................................................................... 39

MEDIA & ENTERTAINMENT .................................................................................. 43

Overview ........................................................................................................ 43 Television ....................................................................................................... 44

Value Chain ............................................................................................... 44 News & Trends ........................................................................................... 45 Key Players ................................................................................................ 46

Print ............................................................................................................. 46 Value Chain ............................................................................................... 47 News & Trends ........................................................................................... 47 Key Players ................................................................................................ 48

Films ............................................................................................................. 48 Value Chain ............................................................................................... 49 News & Trends ........................................................................................... 49 Key Players ................................................................................................ 50

Radio ............................................................................................................. 50 News & Trends ........................................................................................... 50 Key Players ................................................................................................ 51

Music ............................................................................................................. 51 News & Trends ........................................................................................... 51 Key Players ................................................................................................ 52

Player Profile .............................................................................................. 52


EDUCATION..................................................................................................... 54

Overview .................................................................................................. 54 Key Segments ............................................................................................. 55 Value Chain ............................................................................................... 56 Business Model in Non Profit Segments .............................................................. 56 Trends & Outlook ........................................................................................ 57 Player Profile ............................................................................................. 58


TELECOM OVERVIEW

Telecom sector contributes nearly 3% to Indias GDP and has seen a tremendous growth in the last few

years. It has emerged as the worlds second largest network and has the third largest number of

internet users in the world after China & the US. The teledensity in the rural parts has been on a

constant rise and the emergence of an affluent middle class is triggering demand for the mobile and

internet segments. With 70 per cent of the population, staying in rural areas, the rural market will be a

key growth driver in coming years.

The revenue from the sector currently stands at around Rs

1398 billion with 897 million subscribers as on April 2013.

Its revenue is divided into about 75% from mobile services

& the rest by fixed line, National Long Distances &

International Long Distances. Revenue growth has seen a

robust CAGR of close to 11% in the past 5 years.

The Mobile subscriber base in India is estimated to grow by

9% to 696 million this year, as per the technology

researcher Gartner. The mobile service penetration in the

country is currently at 51 % & is expected to grow to 72%

by 2016. Government has been very proactive in the sector

and has been constantly introducing & proposing new

policies all of which appear to be pro-consumer in the long

term. However the sector recently has witnessed volatility

on the policy framework point of view & has been abuzz since last year with the NTP-2012 launch,

cancelation of 122-2G licenses, low faring spectrum auctions, hefty fines for 3G roaming and a fairly

neutral impact of the Union Budget of 2013.

Also the telecom infrastructure in India is expected to grow at a CAGR of 20 per cent during 2008-15 to

reach 571,000 towers in 2015. Further, the production of electronic and related equipment is also

anticipated to reach US$ 52 billion by 2020, creating huge

opportunities for private players which is in line with the

predictions for the new FDI limits.

Market dynamics have been fiercely competitive and the

sector has traditionally been marred by a declining

ARPU(Average Revenue per user) and Minutes of usage; a

trend which has been improving lately. The major players

in the service providers sector are Bharti Airtel, Vodafone,

Reliance Communications & Idea Cellular.

The shift in focus from Voice to data is seen as the next big

source of revenue with Fitch predicting a boost in income

by 10% by 2015. Looking forward to newer technologies of

the likes of 4G are going to be a game changer for the revenue sources. As per a study by Cisco

Revenue Breakup (Source: TRAI)

Revenue Split Operator wise Source: TRAI


Internet traffic in India is expected to reach from 393 petabytes per month in 2012 to 2.5 exabytes per

month in 2017.The sector is going to witness a slew of events with auctions for the 4G licenses, the

proposal of the spectrum bill, spectral re-farming and re-auction of airwaves among a few which will

be monumental in shaping the future.

POLICY & REGULATORY FRAMEWORK

The key regulatory bodies of the telecom industry are the Department of telecom which is the licensor,

TRAI, which functions as the regulator and TDSAT which is the judiciary body.

1. Department of Telecom (DoT)

The DoT comes under the purview of Ministry of Communications and Information Technology. The

Department of Telecom formulates developmental policies for the accelerated growth of the

telecommunication services. The Department is responsible granting licenses for various telecom

services like Unified Access Service Internet and VSAT services, managing radio frequency in close

coordination with the international bodies and enforcing wireless regulatory measures by monitoring

wireless transmission of all users in the country.

DoT has got 5 major divisions to carry out these tasks which are Wireless Planning Coordination (WPC),

Telecom Engineering Center (TEC), Center for Development of Telematics (C-DoT), Public sector

undertakings like BSNL & TERM Cells (Vigilance Telecom Monitoring Cells)

2. Telecom Regulatory Authority of India (TRAI)

TRAI is the regulator of the business of telecommunications in the country. Its job is to provide an

Regulatory Trifecta

TDSAT Judiciary

DOT Licensor

TRAI Regulator


effective regulatory framework and adequate safeguards to ensure fair competition and protection of

consumer interests by the means of regulating a fair policy environment

Settlement of disputes between service providers, advising the government, assessing service quality

and traffic are some of its major functions.

3. Telecom Disputes settlement & Appellate Tribunal (TDSAT)

TDSAT is the judicial body & was established with the view to protect the interest of the consumers

and service providers of the telecommunication. The TDSAT can adjudicate any disputes that arise

between a group of consumers and service providers, a licensee and a licensor, and also between two

or more than the service providers. The power and function of Telecom Disputes Settlement &

Appellate Tribunal includes that it can hear the appeal and also dispose appeals that are against any

order, direction, or decision of the TRAI.

Non regulatory bodies

A. Cellular Operators Association of India (COAI)

The COAI was set up in 1995 as a registered non- governmental, and non-profit society. COAI is the

lobbying body of the GSM operators in India and it interacts on its behalf with the licensor, the telecom

industry associations, the management spectrum agency, and the policy makers. The core members are

Aircel, Airtel, Idea, Vodafone, Videocon, Loop and Spice. The tower telecom companies and telecom

equipment manufacturers are also part of this association.

B. Association of Unified Telecom Service Providers of India (AUSPI)

AUSPI is the representative industry body of Unified Access Service Licensees providing telecom

services in the country with CDMA and GSM technology, fixed line services and value added services.

The Association interacts on policy and regulatory issues with various Government bodies and other

apex industry organizations on behalf of its members. The members of AUSPI are Reliance

Communications, HFCL, Tata Tele and Sistema Shyam Telecom.

GOVERNMENT POLICIES & IMPACTS

There have been many policies & proposals impacting the telecom sector in India and some of them

have had a major impact such as:

1. Impact of 2G allocation & Re-allocation

2. National Telecom Policy 2012

3. Spectrum Re-farming

4. Proposal for Unified Licensing

5. The Union Budget 2013 Impacts

6. 100% FDI cap


1.2G spectrum allocation

Following the 2G spectrum scam, all the 122 2G licenses allotted on or after January 2008 were

cancelled by the Supreme Court in February 2012.

November 2012 auction

The auction process for the 800 MHz and 1800 MHz spectrum vacated by the Supreme Court order

began on 12 November 2012.

The key points related to the spectrum auction are summarized in the table below:

Source: CRISIL, TRAI, DoT

The pan-India reserve price per block was quite high not only with respect to the 2G spectrum auction

reserve price in 2008 but also the 3G spectrum auction reserve price in 2010.

Impact

The auction of spectrum vacated as a result of the Supreme Court's license cancellation order (in

February 2012) witnessed a much muted response due to the high reserve prices for spectrum. Other

reasons include slow revenue realization of 3G spectrum acquired at high prices and the resultant high

debt of players to get 3G and Broadband Wireless Access (BWA) along with the Capital Expenditure

spends for network rollouts.

March 2013 auction

Airwaves in Delhi, Mumbai, Karnataka and Rajasthan circles for the 1800 MHz band were to be

auctioned along with pan India circles for the 800 MHz band. Although the 900 MHz band was to be


auctioned in the Delhi, Mumbai and Kolkata circles, it was cancelled as current operators in the band

had moved the Delhi High Court to stop the auction of the band. The government reduced the reserve

price for 1800 MHz by 30% and for 800 MHz by 50% from the 2012 spectrum auction.

Impact

There were no bidders for the 1800 MHz band and only one bidder Sistema Shyam Teleservices

Limited for the 800 MHz band. Another round of auctions was scheduled to take place in later part of

2013.Inspite of the reduction in reserve prices, they were still high which resulted in such a small

response. Only 24 blocks out of the total of 61 put up for auction could be sold.

2. National Telecom Policy, 2012

Delinking spectrum in respect to future licenses, introduction of Unified Licensing and online real

time submission and processing

Unified licensing: Unified license for Voice, Data, Video, broadcast, IPTV, VAS etc. In a non-exclusive

and non-discriminatory manner. (Key implication- Voice can be sent via data channels)

Approved the proposal to re-farm spectrum, which involves redistribution of airwaves in the 900 MHz

band largely held by incumbents, and substituting it with frequencies in the 1800 MHz

Removal of roaming charges across the nation and provide free roaming to telecom users

Intra-circle mobile number portability facility on a nationwide basis

Minimum broadband speed definition changed to 2 Mbps from the existing broadband download speed

of 256 kbps (ISPs were forced to increase their speeds when the previous regime under Dayanidhi Maran

changed the definition of broadband to mean 256kbps and above)

Objective of increasing the rural teledensity from the existing level of 39% to 70% by 2017 and 100%

by 2020.

Facilitate resale of licenses at service level in both wholesale and retail.

Technology neutral unified services that allow telecom operators to deploy any kind of services on

any kind of technology platform.

Target to meet 80% Indian telecom sector equipment demand by 2020 and provide preferential

market access for domestically manufactured telecommunication products including mobile devices,

SIM cards.


Major Impacts of NTP:

Abolition of roaming charges: It can lead to reduction in revenues of telecom operators. As per rough estimates Airtel, Idea and Rcoms revenue will be reduced by almost 4.0% (to Rs.2800mn), 5.2% (to Rs. 728mn) and 4.2% (to Rs. 856mn) of total NLD revenue, respectively

Spectrum sharing Under new policy spectrum pooling, sharing and trading is allowed, which will lead to reduction in the operating cost of service providers, also unified licensing regime will make

things easier for TSPs as they will be able to give all the services (Voice, Data, MVAS)

Re-farming Scare- This is perceived as the probable loss of the more effective 900 MHz spectrum and lack of infrastructure in 1800 band to sustain the existing network if a migration is required.

3. Spectrum Re-farming

It is a proposal for re-farming of incumbent operators in the 900 MHz band to the 1800 MHz band when

the licenses come up for renewal in 2014-15. The idea was first presented by TRAI and has since then

been pursued by DoT. The present 1800 MHz band is being used by the armed forces and will be

vacated as soon as a dedicated optical fiber network is completed by DoT. However, incumbent telcos

can participate in the spectrum auctions to buy back their share of the 900 MHz band.

Impact

It will allow new players to get share of the 900 MHz band by the means of auctions

900 MHz band is cost efficient as lower capex is required for network rollout. The challenge of

shifting 900 MHz network to 1800 MHz network will involve huge costs for the incumbent

telecom companies. This involves possible scrapping of existing equipment as well as buying

new equipment.

Quality of the network will be affected. 900 MHz signals travel farther and penetrate better. So

to give a comparable network quality, telcos operating in the 1800 MHz will have to increase

tower density.

It will negatively affect telcos profitability because of the higher proposed spectrum re-

auction prices (two times of that for 1800 MHz band) for the 900 MHz band.

Telecom infrastructure investments by GSM telcos of over Rs 150,000 crore will become

redundant.

4. Unified Licensing

Unified Licensing will allow operators to offer telephone, internet and related communications services

under a single license. It is part of the government initiative to adopt One Nation One License policy.

Under unified licensing regime, the spectrum will be delinked from licenses.

A unified license will be valid for 20 years from the date of issue alongwith an option to renew

it for another 10 years.

Telcos will have to pay an entry fee of Rs. 15 crores for the license. In addition to this, an

annual license fee of 8% of adjusted gross revenue of the company will have to be paid.

A licensee cannot have a stake in the business of another licensee holding spectrum in the

same service area.

Roaming pacts between the various licensees have been allowed but a licensee cannot acquire

customers in the circles in which it does not operate.

DTH is not covered under the unified licensing regime.


Impact

Telcos who have a stake in other licensees will have to give up their stake. For example,

Vodafone will have to sell off its 4.4% stake in Bharti Airtel.

The limitations put on the telcos on the use of technology will be removed.

With the same media being used for different services, it would help build telcos economies of

scale. As a result, better services would be made available to the consumers at cheaper

price.

5. The Union Budget 2013

The Union Budget of 2013 did not have a much impact on the sector. Below are some of the positives &

negatives

Positives:

Zero duty for the import of plant machinery for the semiconductor industry. Telecom

equipment manufacturers to benefit from this proposal.

Low cost finance to be made available through the National Clean Energy Fund. This will help

telecom players in the introduction of clean energy and reduction in dependence on

conventional energy sources.

Negatives:

No special support doled out to the struggling telecom sector.

Service tax has been increased from 10% to 12%.

The excise duty on mobile phones costing more than Rs. 2000 has been increased from 1% to 6%.

Impact:

Overall, the impact is gauged to be neutral.

Domestic manufacturers would not be affected by the increase in the excise duty on mobile

phones as most of their models are priced below Rs. 2000. There will be a marginal impact on

the sales of smartphones. This in turn may impact the spreading of 3G, 4G, data services and

mobile value added services as smartphones are the main drivers of growth of these.

The thrust towards adoption of clean energy will help reduce the high costs(25% of opex costs)

of the telecom players due to the use of electricity or diesel.

Government expects revenues of more than Rs. 400 billion through spectrum auctions,

spectrum license fees, spectrum usage charges and one-time spectrum charges.

The tariffs on the various segments are as follows-


6. Increase in the FDI Cap

The government has allowed 100% foreign direct investment (FDI) in the telecom sector. Of this, upto

49% will be through the automatic route and the rest through the Foreign Investment Promotion Board

(FIPB) route. Earlier the FDI cap was 74%.

Impact

Unlikely to translate into newer players entering the telecom market. But we can expect

foreign players like Vodafone and Sistema to increase their stake in existing ventures. Foreign

players would also look out for market consolidation by the acquisition through M&A deals.

Smaller Indian players like Loop, Videocon Telecom, Uninor, Stel and HFCL may become

potential targets for takeovers.

The telecom players will be able to lower their financial burden by infusion of fresh capital.

The move will help reduce their debt burden as well, whose current combined value for all the

players stands at a whopping 40 billion dollars.

The high capital demands of the telecom sector for increased network roll-outs and offering of

new services (3G, 4G and BWA etc.) can be easily addressed.

Foreign partners can increase their ownership or take complete ownership of the business.

Source: CRISIL Research


VALUE CHAIN OF TELECOM

Telecom Infrastructure Providers

Tower Industry

India is the second largest mobile

market in the world. There are

currently about 400,000 telecom

towers (BTSs) in the country. The

enormous growth of the

telecommunications in the country

has unfortunately not been

accompanied by a corresponding

growth of the Telecom equipment

manufacturing industry. Resultantly,

while only about 12.5% of the

demand for telecom equipment is

being met by domestic production,

the Indian products account for a mere 3% of the demand

The towers are of two types:

GBT (Ground Based Towers) GBs are generally erected in rural

and semiurban areas. Each GBT can accommodate 5 to 6 tenants.

RBT (Roof based Towers) RBTs are installed in urban areas. Each

RBT can have 2 to 3 tenants

Telecom Infrastructure Providers Telecom Network Operators

Mobile & Other Services to Retail & Enterprise Customers

Mobile Value Added Services

Telecom Tower Owners( Passive Infrastructure)

Telecom Equipment Manufacturers

(Active Infrastructure)

Source: KPMG


Care Ratings estimates that Base Transceiver Station (BTS) deployment by service providers in India stands at 680,465 as on September 2011, grown over 20% from September 2010. Due to high CAPEX (Rs. 1.5 to 2 million/Tower) and tariff war industry felt the heat and started to discover its crucial weakness that is the low Tenancy Ratio of 1.6. In 2011, just 10000 towers were erected due to capital intensive nature of this industry plus viability problems in rural areas, low tariffs and hence the profitability and already burdened balanced sheets due to 3G-BWAspectrum auctions.

Growth Drivers:

Growing data requirement would need more BTSs

Congestion in urban areas due to 2G subscriber growth

Increased data usage as telephony in India moves from voice to data

Rural subscriber growth

Planned roll-outs of 3G and 4G services

Setbacks:

Low power availability hours

High diesel cost (consumption and pilferage- 15-20% of total diesel cost)

Low backhaul connectivity (India's 1,000,000 km Optical Fiber Cable (OFC) network is predominantly limited to urban areas and bigger villages is proving to be less due to high data requirement of 3G and 4g services)

Increasing rents and saturation in urban areas

Regulatory Issues:

Telecom Regulatory Authority of India (TRAI) has issued instructions, mandating 50%of all rural telecom base station towers and 33% of all urban towers to be migrated to hybrid power within the next 5-years (Hybrid solutions are a combination of renewable energy sources and grid electricity)



Deployment of telecom towers will not be permitted on and around 100 mtr of educational, religious and health infrastructures

Within 300 mtr radius of any monument, under Archaeological Survey of India and State Archaeology, permission to construction of towers will be denied

Also within 100 mtr of high security buildings and zones, where natural drainages located and local administration has imposed restriction, permission will not be given for tower installation

Propose changes in fee structure to bring tower firms under the unified licensing regime, which will force them to pay revenue to the government.

Key Major Trends

Shift towards better Tenancy Ratios

Shift from diesel powered to hybrid powered Towers- e.g. Bharti Infratel has been able to save 25.64 million liters of diesel after powering 12,000 tower sites with solar energy under Power P7 Project

Indus Towers Ltd. would be replacing diesel generators with batteries in 20,000 of its110,000 towers by next year

Active Infrastructure

Active infrastructure consists of electronics that power a wireless network such as radio antenna, BTS/cell sites and cables. Typically, a wireless telecommunications network in a circle consists of several mobile switching centers (MSCs). Each of these is connected to 8-10 base station controllers (BSCs), which are connected to 60-80 base transceiver stations (BTSs).

Backhaul

Backhaul refers to the backbone that connects the active infrastructure at the tower site with the BSC and MSC. In India, traditionally, wireless operators used microwave as backhaul. However, they are progressively moving to optic fiber-based links.



Challenges for tower companies

As passive infrastructure business has evolved into a separate industry around the world, many tower companies in the telecom industry face several challenges. These include:

High capital requirement: Tower deployment is a highly capital-intensive activity. The installation of each tower requires an investment of Rs 20-30 Lakhs. Thus, tower companies the world over end up being highly leveraged

Regulatory clearances: Apart from

dealing with telecom regulators, tower companies also have to deal with other governmental bodies such as municipalities, forestry departments and environmental departments

Operational cost optimization: Although operational costs such as power and fuel are generally passed on to the operators, these are usually subject to agreed maximum limits. Thus, tower

companies must work towards building controls to limit operational costs. Tower companies also face

the problem of finalizing the cost-sharing percentage and building a technology road map

Handling of local issues: Tower deployment and operation involves dealing with location-specific

issues, including dealing with the landlord and local authorities, and running operations across a

variety of geographies and terrains

Source: CRISIL


TRENDS & HIGHLIGTS OF VOICE & DATA INDUSTRY

This industry makes the most significant chunk of the telecom industry considering the total impact

and revenue. As per TRAI data, following are the major highlights:

The overall teledensity of the country stood at 73.16 as on 30 April 2013.

Mobile Number Portability requests increased from 89.70 million subscribers at the end of

March 2013 to 91.73 million at the end of April 2013. In the month of April 2013 alone, 2.03

million requests have been made for MNP.

Active wireless subscribers on the date of Peak VLR in April 2013 are 724.52 million, 83.56% of

the total subscribers.

Broadband subscription reached 15.09 million in April 2013.

To capture the net change in last financial year, comparative analysis has been done with the

subscription data as on March 31, 2013 and following trends have been observed:

Attribute As on March 2012 As on March 2013 Percentage growth

Wireless subscribers 919.17 867.80 -5.59%

Wireline subscribers 32.17 30.21 -6.09%

Urban subscribers 620.53 548.80 -11.56%

Rural subscribers 330.82 349.22 5.56%

Internet subscribers 19.51 21.61 10.77%

*all figures are in millions, Source: TRAI indicator report August 2013.


Trends in telephone subscribers and

teledensity in India (Source: TRAI)

Market share: Rural and Urban

Composition of telephone subscribers as

at March 31, 2013

Major trends

11.56% y-o-y fall in number of

urban subscribers affects the

overall teledensity of the country.

The reason for the fall is the

closing down of inactive

connections by the telecom players

in the urban market where the

phenomenon of multiple-sim usage

per user is highly prevalent.

The rural market shows a robust y-

o-y growth of 5.56%, representative

of its untapped potential but also of the beginning of its growth trajectory.

Source: TRAI


The wire line segment continues to

be a minor segment with respect to

the much larger wireless segment.

Internet subscriber growth of more

than 10% y-o-y due to increased

penetration of services like 3G and

BWA as well as the increased use of

smartphones.

Wireless Industry

According to TRAI data, total wireless (GSM+CDMA) subscriber base registered a growth of 0.36% over

the previous quarter and subscriber base increased from 864.72 million at the end of Dec-12 to 867.80

million at the end of Mar-13. The year-on-year (Y-O-Y) negative growth rate of Wireless subscribers for

Mar-13 is 5.59%. Wireless teledensity slightly increased from 70.82 at the end of Dec-12 to 70.85 at the

end of Mar-13.

Source: TRAI

Source: TRAI


The recent trends in

wireless subscriptions

can be shown in the

following chart

There is an increase in

the share of rural

customers as regards

wireless connections.

GSM services continue

to dominate the

wireless segment as

opposed to CDMA.

Source: TRAI

Source: TRAI

Source: TRAI


Trends in ARPU

As per COAI data, ARPU for GSM overall has declined 25% between March-2010 to March-2012 due to

declining minutes usage.QoQ, ARPU has continuously declined.

Source: COAI

However, recent quarter results show increasing ARPUs driven by increased use of data services and

the recent trend in hiking of tariffs by the telcos.

Quarter Apr-Jun 12 Jul-Sep 12 Oct-Dec 12 Jan-Mar 13

ARPU 114.71 111.92 114.08 119.60

Wire-line Industry

Wireline segment is continuing on the declining path. Broadband connections through showed a ray of

hope to this segment however popularity of USB dongles took over that opportunity also. Wireline

subscriber base declined from 32.17 million at the end of Mar-12 to 30.21 million at the end of Mar-13.

The overall wireline teledensity is showing a declining trend. At the end of April 2013, it was just 2.45.


Service provider market share as on 30 April 2013

Source: TRAI

The wire line subscriber base and teledensity is falling in both rural and urban markets.

Source: TRAI

Internet data services: Internet data access is through narrowband and broadband.

Although definition for broadband has been

changed from >256 Kbps to >2Mbps, it will take

some time to appear in TRAI statistics. Total

Broadband subscriber base has increased from

14.50 million at the end of June 2012 to 15.05

million at the end of March 2013. Yearly growth

in broadband subscribers is 8.98% during the

last one year. Number of Narrowband

subscribers decreased from 6.59 million at the

end of Dec-12 to 6.56 million at the end of Mar-

13, thereby showing a quarterly decrease of

0.5%. The total Internet leased line customers

stood at 41,041 at the end of Mar-13 as compared to 39,788 at the end of Dec-12, registering an

increase of about 3.15%.


Market Share of industry players in

Broadband ( 256 Kbps download)

Segment

There are 185 service providers providing internet service (excluding internet access by wireless phone) as at end of March 2013. Trends in internet subscription The past decadal profile of internet subscriptions is as follows

Source: TRAI


TELECOM CIRCLES & TELEDENSITY

Telecom Circles or Licensed Service Areas (LSAs) refer the region in which a service provider has the

license to offer its services. India is divided into 22 telecom circles & licensing in these is provided by

the Department Of Telecom (DoT).

Further these circles are classified into 4 categories, namely: Metros, A, B & C.

Circle Regions covered

Metro Delhi, Kolkata , Mumbai

A Gujarat, Daman Diu, Dadra and Nagar Haveli, Andhra Pradesh, Karnataka, Maharashtra(except Mumbai), Tamil Nadu, Pondicherry

B Haryana, Kerala, Lakshadweep, Minicoy, Madhya Pradesh, Chattisgarh, Punjab, Chandigarh, Rajasthan, UP-East, UP-West, West Bengal

C Assam, Bihar, Jharkhand, Arunachal Pradesh, Meghalaya, Mizoram, Nagaland, Manipur, Tripura, Orissa, Himachal Pradesh, Jammu and Kashmir

Source: Department Of Telecom

The importance of these circles is in understanding their revenue potential based on various factors

like teledensity, user income levels and average minutes of usage and availability of spectrum.

Teledensity

Teledensity refers to the number of telephone

subscribers per 100 people in a specified

geographic area. Teledensity is often used to

compare the level of access to voice and data

communications services between metropolitan

and rural areas, or between one country and

another.

Teledensity can be seen as an economic indicator

of the health of the sector and its rate of growth

directly translates in revenue generation. Below

is a snapshot of the total number of subscribers

as on 30th April 2013.

Source: COAI, TRAI


AIRWAVES & BANDS

The word airwaves or spectrum refers to a

collection of various types of electromagnetic

radiations of different wavelengths. Airwaves

are the radio frequencies on which all

communication signals travel.

In India, the telecom spectrum frequencies

and the services offered in each are listed

below:

The International Telecommunication

Union (ITU) at the World Radio Communication Conferences allocates spectrum frequencies for

the use of various countries. Since the mobile communication technologies provide

international roaming facilities, it is essential to allocate spectrum in the common bands which

are being used the world over. Secondly the mobile handsets which are manufactured are

aligned to the GSM 900/1800 bands. If radio frequencies are allotted in any other bands then

the handsets will not be compatible to those bands

Telecom operators in India who obtained licenses prior to 2001 were allotted spectrum in the

900 MHz band, while the later entrants obtained spectrum in the 1800 MHz band. In the case of

Source: TRAI quarter Report


operators offering services on the CDMA platform, spectrum has been allotted in the 800 MHz

band

The higher the frequency band, the lesser is the reach on that band. Hence, as the frequency

band goes up, operators need a higher capex to be able to provide services as compared to the

same services being offered on a lesser frequency band

Spectrums are sold by a market-auction process and are currently sold in blocks of 1.25 MHz

each. There are criticisms to this practice and many players have suggested to reduce the

block size to 200 KHz. Wireless Planning and Coordination (WPC) Wing is responsible for this

process

Presently, 100 MHz spectrum is ear marked for GSM services and 20 MHz is earmarked for CDMA.

Out of this 65 MHz of GSM band is still with Defence forces. The minimum amount of spectrum

required for launching GSM services is 4.4 MHz

Over the years the government has been taking steps to frame policies to ensure efficient

utilization of spectrum, which is a scarce resource. However efforts of DOT and TRAI have

resulted in controversies. Therefore the Government decided to go ahead with the auctioning

of 3G and BWA spectrum with an open and transparent format

GROWTH DRIVERS

Mobile Value Added Services The segment derives majority of its revenues from game based

applications and music downloads. The Indian MVAS industry is expected to cross $10 billion

mark by 2015.

The governments decision to allow 100% FDI in the telecom sector will help reduce the debt

load of current players as well as make available fresh capital for rollout of new networks as

well as services like 3G, 4G and BWA.

Data services will be major driver of growth of revenues of telcos. The lowering cost of

smartphones will increase demand for data services. According to a CRISIL study, high speed

internet services will have an increasing share in revenue generation and garner revenues of

approximately Rs. 137 billion in FY16.

Although the urban market is saturating, the rural market will drive future growth of the

industry. Y-o-y, the rural market is showing robust growth rates in terms of subscriber base as

well as revenue generation. MVAS targeted towards the rural population will further add to

revenue growth.

As the number of telecom players will reduce due to consolidation or exit of smaller players,

pricing power will return to the telcos which will drive up ARPU.


PLAYER PROFILE

Airtel

Bharti Airtel Limited is a leading global

telecommunications company with operations in

20 countries across Asia and

Africa .Headquartered in New Delhi, India, the

company ranks amongst the top 4 mobile service

providers globally in terms of subscribers. It is

the largest cellular service provider in India.

Airtel is the third largest in-country mobile

operator by subscriber base, behind China Mobile and China Unicom. In India, the company's

product offerings include 2G, 3G and 4G wireless services, mobile commerce, fixed line services,

high speed DSL broadband, IPTV, DTH, enterprise services including national & international long

distance services to carriers.It had 191.39 million subscribers as of July 2013 and net addition of

476,593 subscribers in the month of July 2013.The proportion of active subscribers is more than

95%, second highest among all telecom players.

It had 28.45% of market share as of July 2013 in the wireless segment and 11% market share in the

wire line segment, the highest among private telcos. Its customer base grew by 7.78% y-o-y from

FY12 to FY13. It has the highest ARPU among all the players. For Jan-Mar 13 quarter, its ARPU was

138.14.It had 27.58% market share of internet access by wireless phone subscribers as at March

2013.It covers 465,482 towns and villages in India.

Its area of operation includes Andhra Pradesh, Delhi, Gujarat, Haryana, Karnataka, Kerala, Kolkata,

Madhya Pradesh, Maharashtra, Mumbai, Punjab, Rajasthan, Tamil Nadu (incl. Chennai), UP(East)

and UP(West).

Business divisions

It has four business divisions

Mobile services This division provides the wireless mobile telephony services and contributes

for the majority of revenues and profits.

Telemedia Services This division provides broadband internet access using DSL, internet

leased lines, IPTV and fixed line telephone services.

Airtel business This division provides end-to-end telecom solutions to corporates. It also

manages the national fibre optic network of Airtel.

Digital TV services This division provides direct-to-home (DTH) TV servicesacroos India. As of

Dec-2012, it had about 7.9 million customers.


Financials

During the year ended March 31, 2013, the Company recorded consolidated revenues of 803,112 Mn, a

growth of 12.4% over the year ended March 31, 2012. Depreciation and Amortization (D&A) costs for

the year went higher by 21,283 Mn, up 16%, due to continued expansion of networks and investments in

new technologies and licenses. D&A costs grew by 13% in India and South Asia and by 23% in Africa. Due

to EBITDA margin drop and higher D&A costs in India, consolidated EBIT dropped by 9% to 93,740 Mn

and the EBIT margin for the full year dropped from 14.5% last year to at 11.7%. Full year EBIT margin of

India and South Asia stood at 13.7%. Consolidated EBITDA at 248,704 Mn grew by 5%, and the EBITDA

margin dropped from 33.2% for the previous year to 31.0% for the year under review. This decline was

mainly due to cost pressures and fall in voice realization rates across India and Africa. In India and

South Asia, the Mobile EBITDA margin dropped by 3.2%, from 33.9% to 30.7%.

The overall voice realization rate per minute has decreased by 3.6% from 36.64p to 35.31p.

(Source: Annual report 2012-13)

The following charts show a positive picture about financial health (Source: Annual Report)

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Key recent happenings

In March 2010, it bought Zains mobile operations in 15 African countries.

In August 2010, it acquired 100% stake in Telecom Seychelles.

On 5th April 2012, it launched Airtel Money an m-Commerce platform which will enable users

to pay bills, transfer money and conduct financial transactions through their mobile phones.

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IT/ITES OVERVIEW

The Indian IT industrys revenue for

2012-13 (estimates by NASSCOM) has

touched $108 billion contributing a

major part towards the GDP. The

sector has shown a robust growth rate

of 11.5%(CAGR) over the last 5 years

and NASSCOM has predicted the

revenue growth in FY14 to around 12-

14 %(y-o-y).

The industry is divided into 4

components namely IT Services, ITeS

BPO, Software Products & Hardware.

The sector is heavily export oriented

with exports accounting for over 70% of

the revenue and thus has a high

correlation with the international

economies. Geographical concentration of

the clients in the US/Europe, exchange rate fluctuations and the growing demand for employee

remuneration are some areas of key concerns. The below chart depicts the growth of IT exports

(Source: Crisil Research)

The revenue source of the exports is still

dominated by the BFSI sector and

thus is largely dependent on the

health of the BFSI sector as well.

However the trend is changing now,

sectors like retail, healthcare &

utilities are generating more and

more business.

North America (Largely United

States) has been the key market for

Indian IT services exports followed

by Europe. Indian IT exports are thus

highly sensitive to IT spends in these

countries. Also in a scenario the

currency devaluates with respect to

dollar, it favors the sector as most of

the revenue is dollar driven although domestic demand is also picking up. Various sources like the UIDAI,

passport generation are constantly adding to domestic demand and currently the domestic revenue

contributes about 29.8% to the $108 billion dollar industry. Revenues of the top 4 players (TCS, Infosys,

Source: NASSCOM

Source: CRISIL


Wipro and HCL) have grown by 20.8 per cent (y-o-y) in 2012-13 to touch Rs 1,714.1 billion which was

mainly a volume driven growth.

The Indian IT exports account for about 7.6% of the Global IT Industry and the revenue is best

understood as a spit from various verticals and geographies.

(Source: Crisil & NASSCOM)

Source: CRISIL

The US accounts for over 60 per cent of

the total IT services export revenues.

The slowdown in the US economy and

the subsequent decrease in IT spending

by the US Corporation took a heavy toll

on the Indian IT players. Consequently,

Indian companies began diversifying their

portfolio to include other geographies

such as Europe and Asia Pacific.

Europe has emerged as the second

largest IT/ITeS market after the US. In

2012-13, Europe (including UK)

accounted for 28 per cent of India's IT

services exports. Within Europe, UK is

the largest market for Indian exports

with a share of almost 60 per cent.

Source: Gartner


Indian IT companies have gained a significant market in the European region by garnering large

contracts and deals from the region.

On a global scale the revenue from IT as identified by Gartner is the most from Software Publishing

& Internet services followed by the Baking sector.

IT/ITES VALUE PYRAMID

The Indian IT services industry has

evolved from being a pure play IT

service provider to offering end-to-end

execution capabilities. Currently, its

clientele constitutes the top 2,000

corporations of the world. Indian

companies have expanded their service

mix to systems integration, network

management, packaged software

implementation and areas of products

and technological services. Over the

years, the Indian IT industry has moved

up the value chain and positioned itself

as a global player.

The Indian IT sector can be broadly classified into following segments:-

1. IT software: The companies which provide software application design, development, maintenance, integration and re-engineering services to various other industries like banking ,insurance, retail, telecom, manufacturing etc. Recently many players have started offering IT/ business consulting services along with basic software services. Examples include TCS, HCL Tech, Infosys etc.

2. ITES-BPO: These companies provide business and knowledge process outsourcing services like payroll management, voice based general and technical support services, legal processes etc. Many IT software services firms have developed their BPO arms and many pure play BPOs have entered the IT services segment. Companies like eClerx Services, First source etc. form a part of this segment.

3. IT Hardware: This segment has companies which provide hardware like desktop, laptop, system

accessories and components, printers etc. Examples include HCL info, Zenith etc.

4. IT Education: This segment consists of companies which provide professional certifications and training programs to corporate as well as individual customers. Some of them have collaborated with schools and colleges to conduct training programs. We have companies like Educomp

Solution, NIIT, Everonn Education etc.

Source: Gartner


REVENUE MODELS

The IT industry has been offering

customized revenue models according to

the needs of the customers.

Transaction based model Here the billing is done on per transaction basis. Outcome based model The billing depends on the end deliverables and not on duration or

cost of the service process.

Time and material billing model The billing is done according to how much resources in terms of time, personnel and materials are used for project execution.

Fixed cost billing model In this model, the customer pays the services provider a fixed amount irrespective of the amount of resources employed.

Product subscription and license based model The billing is done as per the usage of the product or application. Customer pays for the license to use a particular software application.

CURRENT MARKET SCENARIO

Although the bulk of revenue of the major IT players is generated from the BFSI vertical,

companies are focusing on other verticals such as manufacturing, engineering and healthcare.

Focus is also towards opportunities in emerging economies of Latin America, Africa and Middle

East.

The Indian IT industry continues its growth trajectory. Along with the traditional verticals,

others such as retail, energy & utilities and healthcare have also been key growth drivers.

The recent depreciation in the value of the rupee will have a positive impact as IT/ITeS

companies can hope for cheaper exports, higher margin and competitive pricing.

Indian IT players are moving up the value chain by offering remote infrastructure management

and enterprise application services.

With the ending of STPI tax break, IT companies experienced a rise in their tax outgo. Also with

MAT rate of 20% even on SEZs, the tax outgo remained high.

Along with Indian IT players, global IT players like IBM, Accenture, Cognizant and Capgemini

have also increased their headcount in India.


The companies are shifting to tier II/tier III cities to save on land and operating costs. Also it

helps them to reduce employee wage cost.

Companies are shifting focus onto building non-linear revenue business models based on

intellectual property/products, cloud based offerings like software as a service (SaaS) and

other platform based solutions.

Companies are also aligning themselves to a vertical-specific strategy and developing process IP,

specific to certain verticals.

The BPO segment is facing competition from other emerging economies like Phillippines, Sri

Lanka and Poland.

US being the major market for all the IT and BPO players, changes in current H1B visa rules and

local opposition in US to outsourcing of jobs is an area of concern.

HEDGING TECHNIQUES & IMPACTS

Hedging is a technique of making an investment to reduce the risk of adverse price movements in an

asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures

contract.

To reduce volatility in cash flows, Indian IT services companies take to hedging - locking the exchange

rate for their revenues. The companies earn 80 per cent of their revenues, in foreign currencies, from

exports of IT services to developed nations. About 60 per cent of the revenues are earned in US dollars.

But they incur most of their costs in Indian rupees. Movements in the value of the rupee relative to the

dollar accentuate the mismatch between costs and revenues, making the companies' earnings and cash

flows more volatile.

Hedging helps the companies offset gains or losses in their operating cash flows with gains or losses of

hedge instruments, and thus attain steady net cash flows.

Hedging Policy

Indian IT services companies follow strict guidelines on hedging as stipulated by their boards. On an

average, Indian IT services vendors hedge around 40-70 per cent of their net exposure for the

immediately following twelve months.

Hedging Instruments

Although, there are various derivative instruments available in the market, companies mostly use

forward contracts to hedge their future cash flows. Players typically enter into agreements with banks,

which offer forward contracts at a predetermined price (strike price) and duration, to convert their

foreign currency revenues into INR.

The second most commonly used derivative instrument is the currency option. Players use this

instrument to protect their cash flows in an appreciating rupee scenario, while simultaneously

retaining the option to discontinue the contract when the rupee starts to depreciate.


Swaps and futures are other hedge instruments that are used to minimize interest rate risk and third-

party risk in addition to minimizing currency risk. The following table shows the various types of hedge

instruments and their basic features.

Impact

Hedging helps the companies offset gains or losses in their operating cash flows with gains or losses of

hedge instruments, and thus attain steady net cash flows.

GROWTH DRIVERS OF IT-ITES INDUSTRY

Moving up the value chain: High end IT/Business consulting engagements with client provide a high margin growth opportunity to the players. The trend is visible in with Infosys getting 31% of its revenues from consulting and system integration in FY 12 as compared to 21% in FY 07

Ability to deliver high quality at lower cost: Indian IT companies have the ability to deliver quality, with most of them being CMM level 5 software firms, at a lower cost as compared to any other destination offering similar level of quality. This stamps the position of country as the preferred destination for high end IT services and other outsourcing activities. Even for lower end services India has traditionally been the favorite due to its low cost talent pool. Bundling of high and low end services makes a compelling proposition to the clients

Acquisition of strategic companies: Many Indian players have made a string of acquisitions to gain new markets and new clients in unexplored geographies. The acquisitions allow acquirer to build the missing competency in the company. It also helps to get employees who understand the local languages and customers better. Some of the deals could also bring in IP based products which can be employed worldwide by Indian IT companies

Focus on non-linear growth: The emphasis of the industry has shifted to Non-linear growth models which delink the revenue growth from the employee strength growth

Implementations which involve transaction based revenue models utilizing the IP based products and platforms developed by the company mark the beginning of a new chapter of high



margin growth. The number of employees with the top 4 firms has been consistently rising with for the last few years and projected to grow at a CAGR of 20 over a period of 5 years from 2010 to 2014.Thus nearly doubling the employee strength. Such huge workforce might become difficult to manage

Cloud based offerings: Cloud

based offerings allow software,

platform and infrastructure as

a service and allow pay as you

use model. It is a compelling

offer for new investment for

SMB category. According to a

Forrester research public

cloud is expected to record a

CAGR of 27% by the year 2020.

It is one business model which

can deliver non-linear returns

BIG data: With digitization every

industry produces loads of data recording transactions at each and every step. Even the data

which is available online in forms of blogs,facebook posts, tweets etc. have their own story to

tell. The new age big data solutions effectively combine data internal to organization and

publicly available external data to provide a way to gain insight into consumer, supplier and

market as whole thus granting clients an edge over competitors. According to Nasscom-CRISIL

report Indian Big Data industry is projected to grow at CAGR of 83%. The IT services segment is

expected to acquire the majority market share with current market share of 82.9% in the big

data services market.

Source: Forester Research


Mobility: The world is going mobile with devices like smart phones and tablets becoming

commonplace. It is new platform to provide solutions ranging from news and training modules

for IT industry. The app world has already gained a sizeable market. The number of smart

phones has already outnumbered the active PCs, which provides an opportunity to migrate all

the solutions earlier developed for PCs to the mobile platforms like tablets and smart phones

MERGERS & ACQUISITIONS

Faced with increasing competition from international players, wage inflation and volatile currency, it is

imperative for Indian IT service players to explore new opportunities. Mergers & Acquisitions help in

growing inorganically in high-end service-lines and under-penetrated markets for cash rich Indian IT

service providers and can lead to considerable benefits such as:

Efficiencies in operations and delivery services and cost synergies

Economies of scale from consolidation of shared services, and

Opportunity to play in larger deals and more verticals and to cross-sell key solutions to a

broader client base

Indian IT service players have undertaken acquisitions in the past to gain entry into markets, in terms of geographies, service lines and clients. Acquisitions, involving Indian companies, grew by close to 33

per cent over 1999-2008. The pros & cons of growing inorganically have been highlighted in the following table (Source: Crisil Research)


Diversifying Portfolio

Indian IT service players have limited exposure to high value service lines like consulting and network integration. They, instead, earn a bulk of their revenues from application development, maintenance, infrastructure management and support. MNCs hold the edge in this regard and continue to control a

lions share of high-end IT services globally.

Untapped Market Potential

Traditionally, the US has constituted the largest share of revenues of Indian IT service vendors more than 61 per cent. However, over the last couple of years, revenue contribution has increased from Europe and emerging markets in the Middle East and Asia Pacific. Companies in the UK, France and Germany have increased the proportion of off shoring, predominantly in the retail, utilities and

insurance space

Opportunity for Larger Deals

Both TCS and Infosys acquired BPOs to expand their presence in the insurance vertical. The typical modus operandi of Indian IT companies has been to penetrate the market with low-end service lines

and subsequently, permeate to provide a range of services to their existing clientele.

M&A Activity in the past

Acquirer Target Target country Acquisition date Deal amount ($US million)

Geometric Software Solutions

3Cap Technologies

Germany Jan 2013 14.5

eClerx Services Agilyst US Apr 2012 16

TCS Alti France Apr 2013 98

L&T Infotech Citigroup Fund Services Canada

Canada Feb 2011 40

Tech Mahindra Comviva Technologies

India Sep 2012 48

Mphasis Digital Risk US Nov 2012 202

Genpact Headstrong US Apr 2011 550

iGate Global Solutions

Patni Computer Systems

India Jan 2011 1222

Infosys Portland Group Australia Dec 2011 37

Wipro Technologies

Promax Applications Group

Australia May 2012 36

KPIT Cummins Infosystems

Systime Global Solutions

India May 2011 23


CHALLENGES FOR THE IT INDUSTRY

Protectionism sentiments: With elections approaching in the US the cry against outsourcing is

getting louder. The recent attempt to pass an anti-outsourcing bill which was rightly defeated

in the US senate underlines the seriousness of any such attempts in future. Even in the euro

zone with the current austerity drive the situation is even worse. The unemployment rate has

made a new high of 24.6 percent in Spain. Protectionist sentiments might arise even there. The

economic environment as a whole is uncertain leading to companies to cutting back on

discretionary IT spending

Impact of US Visa Norms: Another area of concern is the proposed H1B and L1 visa restrictions

in the new US immigration bill. If implemented, it will increase the visa expenses for the IT

companies as well as mandate them to employ more local employees. Hiring of more local

employees will result in higher wage expenses. The new proposed legislation will reduce the

margins and affect the competitiveness of the IT players significantly. Under the new laws,

offshore vendors who have more than half of their US-based workforce on H1B visas will have

to pay a $10,000 fee per every additional H1B worker. North America accounts for about 60% of

the total revenues for the Indian IT sector and, according to The Wall Street Journal, these

reforms can wipe out a quarter of the global revenues for this $100 billion industry.

Commoditization: There is a danger that of companies might not be able to differentiate

among the offerings in the basic application development business leading to commoditization

of the service reducing the overall margins of the segment which forms a major portion of the

industry revenue

Employee cost: The increasing wages of employee threaten to derail the profitability of the

companies. However the hikes are difficult to avoid as the high demand for skilled people

might lead to an increase in attrition which is cooling currently. Also the industry has to

continuously invest in training its employees in rapidly changing technological environment

Talent acquisition and retention: The employees are currently the biggest assets for a

company in this sector. It is a huge challenge to not only acquire the highly skilled people but

also to retain them as there is always a threat of them being poached by the rivals leading to

project delays

Threat from rivals: Countries like Philippines which have cheap availability of English speaking

labour are threatening to take carve out a market share for themselves in lower end voice

based services. China is also developing its talent pool of English speaking individuals to take

on the IT industry. In 2011, the market value of China's software and information services was

valued at around $60 billion registering a growth of 40 percent year-on-year, according to an

annual report issued by the electronic technology information research institute under the

Ministry of Industry and Information Technology. However the Chinese demand formed more

than 87 percent of the market share

Infrastructure: Any service industry needs the underlying infrastructure like power and digital

networks to offer uninterrupted service. The latest episodes of blackout and current network

facilities paint an image of infrastructure which is lagging behind its competitors like China


INDUSTRY OUTLOOK

According to CRISIL estimates, the IT services exports are expected to grow at 14% CAGR over

the next five year period. Currently, only 5.6% of the global IT services requirements are

serviced by Indian IT firms. Hence, there is a lot of opportunity for growth.

New areas of growth will be cloud services, data analytics and big data. Non-linear business

models will drive growth. Higher value services like infrastructure management services (IMS),

integration services (system and network integration) and IT consulting are expected to drive

up billing rates.

Depreciation in the value of the rupee will help marginally. But for greater profits, strong

business fundamentals and continuous innovation in offerings will be required.

Apart from better service offerings, efforts are also being done in the direction to offer

software products to move up the value chain. iSPIRT(Indian Software Product Industry Round

Table), a body of software product companies, has been formed within NASSCOM. Software

product development will help the players to develop and leverage IPR as well develop

platforms which can be customized according to the needs of the individual clients.

Increased government spending on computerization and e-governance initiatives will help

garner revenues from domestic sources.

As most of the big players have a huge amount of cash in their balance sheet, they are

expected to grow inorganically wherever they can create synergy between their operations and

those of the company acquired.

A further shift to tier II/III cities where cheaper labour is available would place Indian

companies in a better position to compete with rivals from other emerging economies for low

end work.

Expansions in North America and European subsidiaries of big players will help them get closer

to clients and hire more local talent which will also pacify any protectionist sentiments and

overcome visa issues.

Some of the significant challenges the industry may face are increasing competition from global

majors, a potential resource crunch, uncertain macro-economic conditions and steadily rising

employee costs. Another significant threat is due to the trend of captive data centres of large

multinational corporations. The presence of such data centres reduces the amount of IT work

that is being outsourced by the corporations.

Indian ITeS firms are expected to expand into key business activities like knowledge process

outsourcing (KPO), legal process outsourcing (LPO) and engineering services outsourcing (ESO)

apart from their usual offering of business process outsourcing(BPO).

National Electronic Policy 2012 by DoIT entails setting up of semiconductor wafer fabrication

facilities, preferential treatment for domestic manufacturers etc., to curb imports in a

segment which is expected to be worth $450 billion by 2020. This policy is expected to give a

fillip to indigenous electronic hardware manufacturing.


PLAYER PROFILE

Tata Consultancy Services

TCS is the largest IT player in India with revenues of US$ 11.57 billion in FY 2012-13. Founded in 1968,

it is headquartered in Mumbai and has presence in 44 countries with 199 branches worldwide. revenues

have grown over 22% CAGR over the last 4 years. It had won Business Standards Company of the Year

in 2012.

Service lines

The company service lines along with the contribution of each service line in the revenues in FY 2012-

13 is as follows

Source: TCS annual report

Clients

Some of its key Clients are ABB, Aviva, British Airways, Cisco, ING, Microsoft, Chrysler etc.

The company follows a customer-centric model which has helped it to acquire new clients as well as

retain old ones. It has been successful in increasing its customer base y-o-y.

A snap-shot of the number of customers according to revenue buckets is as follows

Revenue bucket

Number of customers

FY13 FY12 FY11

$ 1 mn + 556 522 458

$ 5 mn + 277 245 208

$ 10 mn + 196 170 143

$ 20 mn + 115 99 81

$ 50 mn + 48 43 27

$ 100 mn + 16 14 8


Revenue generation

By verticals

The growth of the company has been contributed to by the growth in all the verticals. CAGR in retail & CPG (40%), BFSI (30%), telecom (23%) and other verticals (24%) were significant.

The following chart shows the impressive growth in the companys verticals from FY05 to FY13

In FY13, BFSI vertical was the dominant

revenue generating vertical followed by Retail

and CPG, Telecom, Manufacturing and others.

The contribution of verticals in FY13 is as

follows:

By geographies

Over the last nine years, CAGR in Americas and Europe has been more than 25%. CAGR in emerging

markets such as Asia-Pacific and Middle East & Africa has been more than 35%. The presence of the

company in established as well as emerging markets has been an important factor for the growth of the

company as well as for maintaining growth momentum.

Source: Annual Report


The following chart shows the growth of the

company in various geographies

In FY13, North America, the UK and Europe were the main revenue generators for the company.

(79.3%) In addition to these, the company has strong focus and growth in Latin America, Middle-East

and Asia-Pacific.

The contributions of various geographies in FY13 are as follows


Financials

The overview of

companys financial results

is shown on the next page.

The revenue growth of the

company has been

impressive from FY05 to

FY13.

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The revenue of the Company aggregated 62,989.48 crores in fiscal 2013 (48,893.83 crores in fiscal

2012), registering a growth of 28.83%. Revenue in USD in fiscal 2013 was 11.57 billion (USD 10.17 billion

in fiscal 2012). The net profit after tax (PAT) for fiscal 2013 was rupees 13917.31 crores. It was rupees

10413.49 crores in fiscal 2012. There was a growth of 33.65% y-o-y.

Key recent acquisitions

In October 2010, acquired Supervalu Services India.

In August 2012, acquired Computational Research Laboratories from Tata Sons to acquire

expertise in high performance computing (HPC) and cloud offerings.

In April 2013, acquired Alti SA of France to increase its foot-print in Europe.


MEDIA & ENTERTAINMENT OVERVIEW

The Media & Entertainment Industry comprises of various verticals such as television, print, film, radio

&music.The Indian M&E industry grew from Rs 728 billion in 2011 to Rs 820 billion in 2012; marking a

growth of 12.6 per cent. The industry as per Crisil Research is expected to grow steadily at a 13 per

cent CAGR to cross Rs 1.3 trillion by 2017. Backed by strong consumption in Tier 2 and 3 cities,

continued growth of regional media and fast increasing new media businesses, the industry is estimated

to touch INR 926 billion in 2014. Some factors expected to contribute to growth are high penetration of

media translating into high advertising spends & higher consumption of media products, widespread

availability of digital media distribution platforms & expanding international market for Indian content.

Advertising is the major source of revenue across the industry verticals. Television & print are the

biggest sources of revenue from advertisements. Advertising spends have been increasing but at a

slower pace since the last 2 years. 2013 & 2014 are expected to be better due to increased government

spending on account of forthcoming elections. With the rise in the consumption of digital data, digital

advertising is expected to overtake print & television in advertising revenues.

Media & Entertainment

Television

Print

FilmRadio

Music


51%

24%

16%

Revenue

Television

Newspaper

Films

Radio

Music

Others

Subscription to the above mentioned verticals

makes the other contributor to revenue which is

non-advertising. Subscription is also expected to

increase at a CAGR of 10% over the course of 6

years.Overall contribution to the revenue by the

various sources in 2012 is depicted in the graph.

Data Source: Crisil Research

TELEVISION

Television is the largest medium for media delivery in India in terms of revenue, representing around

51% of the total media industry. Television penetration in India is still at approximately 60 percent of

total households. Television industry has evolved and come a long way since the launch of Star TV in

1992 and now has over 150 million TV households and over 800 registered channels. The total Indian

television industry revenues stood at around Rs 386 billion in 2012 witnessing a rise over the previous

year owing to increased advertising revenues and a steady growth in subscription revenues too.

There has been a significant increase in demand for satellite bandwidth, with the introduction of HD

channels, DTH expansion, and new channel launches. This increases the options to the consumer, who

may be amenable to paying more for content in the medium to long term

Value Chain of the Television Industry

Distributors

Content

Providers

Broadcast-

ers

Multi system

Cable

Operators

Local Cable

Operators

Cable &

Satellite

Subscibers


The television distribution value chain comprises three players MCO (Multi System Cable Operator),

LCO (Local Cable Operators) and broadcasters. LCOs enjoy a virtual monopoly in most regions leading

to under reporting of subscriptions. Other problems associated with Analog Television services are poor

broadcast quality and capacity constraints in terms of number of channels that can be transmitted.

However, this scenario is set to change with the advent of digitalization of analogue cable networks

and continuous expansion in DTH

Television broadcasters draw their revenues from two main sources, viz., advertising revenue

(revenues earned through the sale of time slots during programmes) and subscription revenue

(proceeds collected from subscriber households that distributors pass on to the broadcasters).

The television content business, especially general entertainment programming, is characterised by the

presence of large number of content houses and low entry barriers. Competition and entry barriers are

relatively higher in case of niche content, where exclusivity and intellectual property rights (IPRs) are

involved (e.g., cricket matches).

Advertising & Subscription

In 2011, Advertising rates faced pressure from the global and domestic economic slowdown, resulting in

a lower than expected increase in advertising revenues which did improve in 2012 as mentioned

previously.

Most Important parameter for advertiser is Television Rating (TVR) which measures the popularity of a

program or advert by comparing the number of target audience viewers who watched against the total

available as a whole. One TVR is equivalent to 1% of a target audience. E.g. In 2011 Top TVR of 4.1%

was enjoyed in General entertainment Channel (GEC) program category was by Sathiya Sath Nibhana

on Star Plus.

Subscription industrys key metric is ARPU, which is about 165 for analog cable and 170 for DTH and CAS

due to fierce competition. With digitization it is expected to rise in coming future.

Key Trends

Reduction In Television Ad- Time: TRAI has suggested on putting a cap on the television ad time from

20 mins/hr to 12 mins/hr which is going to not only impact the revenues but may deter players from

looking forward to television as their primary advertisement channel. Advertising revenues in television

grew 10% y-o-y in 2012 and with this regulation TV could lose its appeal. Usually FMCG companies are

the largest advertisers in TV ads which are now increasingly targeting online channels like youtube.

Ambuiguity of FDI Limits: TRAI recommended the FDI limits in the news channels to be increased to

49% from the current 26% which was put on hold by the government. This limit is largely speculated to

not bring much tangible benefits to the sector as the players have hardly been able to use the current

levels, although increasing the limits with a wide scope including print also would tremendously benefit

the news industry.

Niche Genres- Marketers have started taking niche genres seriously as these channels have become

most cost effective medium for the brands


HD Package takers are increasing amongst DTH subscribers, which will be instrumental in increasing

ARPU Subscription driven, advertisement free channels: Such channels require a non-capped tariff

regime, which is still being discussed by TRAI with the industry stake-holders channels in the four

southern markets

Multiscreen Consumption- With growing no. of tablets, smartphones in tandem withinternet

penetration and fast internet technologies multiscreen consumption is increasing.

Regulator-Broadcaster-Distributor Regulatory Issues: A no. of regulatory issues involve between these 3

players.

According to TRAI when a platform or a multi-system operator approaches channel for its

content, then there is no question of carriage. On the other hand, when the channel

approaches the platform to be carried then the concept of carriage applies. Distributors have

quoted viability problem as providing 500 channels create a lot of infrastructure investment

and there is no ad revenue share model between broadcaster and MSO.

Another issue involves TRAI regulations regarding Duration of advertisements in television

channels to all broadcasters, after several complaints from subscribers on the increasing

duration and distracting formats of TV ads which had affected the TV viewing experience. Here,

broadcasters are questioning TRAIs jurisdiction over these matters.

Key Players

Content producers:

Balaji telefilms, BAG films ltd, Dish TV, IBN 18 ltd, New Delhi telefilms ltd, UTV software

communications ltd, Sahara One media and entertainment ltd, Sun TV network ltd, television eighteen

India ltd, TV today network ltd, wire and wireless India ltd, Zee entertainment enterprises ltd and ZEE

news ltd.

PRINT

Print industry consists mainly of newspapers and magazines. India, along with China, is one of the

largest newspaper markets in the world. The Indian newspaper industry is characterized by extreme

fragmentation and regional diversity. With over 2,000 daily newspapers in the country, no single

newspaper dominates national circulation. Out of the total daily newspapers published, around 90 per

cent are Hindi and other vernacular language newspapers, while the rest are in English.

While around 68 million copies were circulated on a daily basis in 2012, the readership increased by 4

per cent y-o-y to about 260 million. The newspaper industry size was estimated to be around Rs 180

billion in 2012 and as per Crisil Research it is expected to grow by about 8 to 10 per cent in 2013.


Value Chain

Print Media contributed to about 24% to the total revenues of the M&E industry and shares about 56% of

the total revenues from advertisements. Revenue from Non English papers in FY13 was about Rs 39

billion and the major costs. Here the production costs account for roughly 40-50% of the total operating

costs and the industry operating margins are of the order of 20-22%.

Revenue Sources:

Advertisements

Subscripton

Key Metrics of industry is Average Issue Readership. Top 10 publications as per IRS are as below.

Source: IRS

Key Trends

Rise of digital media: More and more users move to online as internet penetration is increasing along

with no. and credibility online newspaper websites and blogs for information and knowledge. Also the

Publisher Distributor Vendor Customer


convergence of various sources and absence of each time access charges, online platform is

substituting print media slowly and steadily

Content is the king: large content aggregators are taking away advertising revenue from the publishers.

In fact success lies in quick response and content superiority in terms of language and analysis today.

Hybrid pay model where commoditized content is free of cost or nominal fees and analyzed matures

and insight driven content is major driver behind subscription revenue is evolving from this trend only

Expansion to alternate media: Dainik Bhaskar operates a radio station by the name 94.3 MYFM.

National dailies such as Times Group have established a diversified portfolio of media properties; Radio

Mirchi, Times Outdoors, Mirchi Movies, ET Now, SimplyMarry.com, TimesJobs.com etc.

Evolution as Brand Activation Medium: The industry is providing activation solutions to brands for

promotions, brand/product launches, brand awareness campaigns, consumer fairs, exhibitions and

other mega social events

Wage Bill Implications: Wage Board has proposed recommendation that might affect the profitability

of this industry. As proposed recommendation divides the newspaper companies into certain classes as

per their gross revenue and-- has introduced a variable pay component which including many

allowances for the employees. As a result of the variable pay, there would be around 35 percent and 20

percent increase in the wages of employees working in the newspaper companies which can increase

wage cost from 15-20% to 25-30% of total revenues

Key Publisher and distributor

Bennett Coleman and Company Ltd (BCCL), Deccan Chronicle Holdings Ltd,Mid- Day Multimedia Ltd, HT

Media Ltd

FILMS

The Indian film industry is the second largest in the world in film production and theatrical admissions.

The size of the Indian films industry was estimated to be around Rs 121 billion for the year ended 2012.

Domestic theatrical revenues contributed to about 75 per cent

Documents

IT ITeS Telecom Media Education 2013