VALUATION APPROACHES

Valuations....drive the markets!!!

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2
Prologue

 In the financial services world, Valuations are used for various purposes
 For valuing the shares of a company
 In Mergers & Acquisitions
 In evaluation of new projects
 However, the the basic principle of Valuations remain the same
 What is the “Potential” of the business?
 The word “Potential” refers to the future and thus most of the valuation approaches are
about estimating the future and converting it into hard numbers
 So it is not just financial concepts but ability to project and estimate the future potential
 Discounted Cash Flow is the most robust methodology for valuations
 This Valuation is then benchmarked against various proxies
 Trading Comparables
 Transaction Comparables

3
Valuation Methodologies
Valuation Methodologies

Value
ValueRange
Range

Discounted
Discounted Comparable
Comparable Comparable
Comparable Sum
Sumof ofparts/
parts/
Cash
CashFlow
Flow Acquisitions
Acquisitions Companies
Companies Asset Valuation
Asset Valuation
Analysis
Analysis Analysis
Analysis Analysis
Analysis

 Inherent value of  Acquisition valuation  Trading valuation  Liquidation or break-up

analysis – assets
business presumed to be
representative of business
 Value based on  Value based on value
 Present value of multiples paid for market trading
projected free comparable multiples of  Value of component parts
companies in sale comparable – used when enterprise
cash flows comprises of several
transactions companies discrete businesses

5
Enterprise Value v/s Equity Value

Enterprise Value = Value of all the assets of a business

Equity Value = Value of the shareholders’ equity
Equity Value = Enterprise Value - Net Debt (1)

Net Debt
Enterprise
Value
Equity Value
 Unaffected by (or Market Value)
leverage
 Multiples of:
 A function of leverage
 Sales
 Multiples of:
 EBITDA
 EBIT  Net Income (Earnings)
 Size (such as  After Tax Cash Flow
capacity or
 Book Value
number of users)

(1) Net Debt equals Total Long-Term Debt + Preferred Stock + Capitalized Leases + Short-Term
Debt (other than working capital debt) - Cash and Cash Equivalents
6
A DCF valuation has three main components

 Credible forecasts for the explicit period

 Typically the horizon reflects the time in which steady state of business is achieved

 Revenue, cost and capex forecasts used to derive the unlevered free cash flows to the company

 These forecasts are validated through an understanding of industry, performance trends and
outlook
 Estimation of discount rate

 Discounting of future cash flows to make them equivalent to present value

 Discount rate is typically the cost of capital of target companies with profiles comparable to
the target – essentially it should reflect the Opportunity Cost of Capital
 Terminal value

 Terminal value comprises of value of the cash flows beyond the explicit forecast period
extending upto perpetuity
 Captures value of the business that grows at a steady state growth rate

7
Unlevered Free Cash Flow

 Unlevered free cash flow is the conceptual cash flow available for distribution to all capital
providers

 Tax shield effect of interest removed from cash flows to estimate unlevered free cash flows

 Unlevered Free Cash Flow = After tax EBITDA - Capital Expenditures - Increase In Non-Cash
Working Capital

 EBITDA = EBIT + Amortization + Depreciation = Earnings before Depreciation, Interest, Taxes

and Amortization

 Non-Cash Working Capital = Non-Cash Current Assets - Non-Debt Current Liabilities

8
Principles of computation of Discount Rate

 Weighted Average Cost of Capital or WACC used to discount free cash flows in order to
estimate the present value of an enterprise

 Defined as the weighted average sum of the cost of financing the enterprise, mainly through
equity and debt
 Cost of equity and cost of debt are weighted by the respective contributions of equity
and debt in the steady state of business operations - to remove the effect of different
financial structures in different companies
re x E
 WACC = + rd x D
D+E
D+E

Where: E = Market Value of equity

D = Market Value of debt
(typically approximate with book value but be careful)
re = return on equity derived from CAPM
rd = after tax return on debt
(assumed to be weighted average cost of debt)
 CAPM assumes consistent, long-term target capital structure (D/E ratio)
 Leveraged financing in maturing markets points to a Debt/Equity ratio of 30/70

9
Computation of WACC ingredients

Cost of Debt Cost of Equity

 Cost of Debt is the opportunity  Cost of equity represents the return
cost of lending, net of tax shield expectations of equity shareholders from
derived through leveraging investment of comparable risk

 Cost of debt assumed at the  Computed by adding a market risk premium

prevailing long term lending weighted by comparable asset risk over the risk
rates for similar companies free return on a long term security

 Cost of debt = rd = Y (I - T)  Cost of equity = re = rf + B *(rm - rf)

Where: rd = after tax-cost of long

Where: re= the required future market
term debt (after tax)
return on the equity of the
Y= gross redemption yield on debt
Company
T= effective marginal tax rate
rf = the risk free rate
rm= the return on the market
(factoring in the country risk
also)
B= the beta of the Company
10
Estimating the Terminal Value

 Two basic methods used for computation of terminal value

 Exit multiple basis (usually multiple of EBITDA – average of market related multiples )
 Perpetuity basis assumes that the free cash flows of the business would grow to perpetuity at a
marginal steady rate

FCF T+1
Terminal value =
(WACC T+1 - g)
 Both methods should produce similar results as EBITDA multiple should capture the perpetuity
growth in value
 May differ on account of trading liquidity/ speculative forces/ market risk/ differential information
availability
 Terminal value cash flow should also truly reflect a “steady state”
 The later years in the explicit forecasts should have reached a constant state of growth in cash flows
 capex/ROCE assumptions in the terminal year cash flows should be realistic
 Any non steady state assumptions used to derive the terminal year cash flow must be removed e.g.
the tax impact of any accumulated losses

11
Free Cash Flows : A Sample

(RSMILLION) FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016

EBITDA 12,180 15,632 19,692 23,425 27,973 31,982 35,653 39,508 43,199 46,725 50,035
Less:UnleveredTax (488) (709) (2,205) (4,775) (5,911) (6,823) (7,549) (8,287) (8,919) (9,434) (10,230)
Less:capex (8,366) (9,745) (11,198) (12,719) (13,805) (15,290) (17,791) (19,568) (21,333) (23,503) (24,976)
Less:WorkingCapIncrease (46) 627 700 821 825 944 1,093 1,186 1,260 1,348 1,400

FCF 3,280 5,805 6,988 6,752 9,082 10,814 11,406 12,839 14,207 15,137 16,230

(Rs Million)
18,000 55%
16,230
16,000 15,137
14,207
14,000 12,839
35%
12,000 11,406 35%
10,814
10,000 9,082
8,000 6,988
6,752
5,805 20% 13%
6,000 11% 15%
19% 7% 7%
4,000 3,280 5%
-3%
2,000
0 -5%
FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
FCF FCF Growth
Steady state CF
growth

12
Analysis of Publicly-Traded Comparable Companies
Selection Criteria for Comparable Companies

Primary Criteria Secondary Criteria

 Business  Margins / Operating Track Record

 Industry  Location / Geographic Focus

 Products  Ownership Profile / Liquidity

 Distribution Channels  Leverage / Capital Structure

 Dividend Yield / Payout

 Customers

 Seasonality

 Cyclicality

 End Markets

 Size

 Growth History and Growth Prospects

 Having determined a set of sample companies, multiples on parameters such as earnings, EBITDA
and book value are computed
 The average multiple for each parameter considered is applied to the respective results of the target
company to arrive at a range of valuation

14
Analysis of Comparable Acquisition Transactions
Objectives of Comparisons of Acquisition Transactions
 Measure “private” market value
 Often a result of a combination of factors
 Competitive bidding tension
 Strategic value available – specific to individual buyers
 Relative strength of target and buyer determined mainly by
– Market position
– Financial strength
 Transactions may be structured as full auction, limited auction or bilateral negotiation
 Privatisation transactions typically fall under full/ limited auctions
 Methodology determined by
 Need for transparency
 Need for confidentiality
 Universe of buyers
 Complexity of transaction structuring
 Enterprise Value may reflect not just the value of the target but also synergistic benefits available
to buyer through other transaction agreements such as brand rights, distribution sharing, non-
compete etc.

16
Computation of multiples from “Acquisition” Comparables

 Multiples to be computed based on financials available at the time of the transaction

 Shares Outstanding for acquisition comparables consists of the fully diluted shares:

 shares outstanding (as of the latest financials available); plus

 shares pursuant to convertible securities (if in-the-money)

 Offer Price Per Share = price per share offered by the acquiror. In the case of an offer that
includes stock, acquiror’s stock price one day prior to the announcement times the exchange
ratio should be used

 Offer Value = offer price per share x shares outstanding

 Enterprise Value = offer value + non-convertible debt + non-convertible preferred + minority

interest - cash & marketable securities

17
Sample Valuation Summary using the methods illustrated above

(US$ million)
1,000

900

800

700
625 630 650 655
600
500
500

400
465 460
300
355
200 335
260
100

EBITDA Perpetual EBITDA EBITDA Subscribers

Multiple Growth
Method Method

DCF Trading Trading Multiples with 30% Acquisition

Multiples Assumed Premium Multiples

The various methodologies yield an indicative valuation range between US$ 450 mn to US$ 550
mn

18
Case Study : Valuation of a Telecom Company
Template used for a Telecom DCF valuation and benchmarking

Revenue assumptions Cost assumptions

All India population Opex assumptions

Penetration of total population Capex assumptions

Market shares
DCF
Post paid and pre-paid
WACC of 13%
ARPU and MoUs
Perpetuity Growth

Projection Period of 11 years till FY 2016

Trading comparables Transaction comparables

 Pure play listed mobile comparables  Recently concluded transactions

not available in the Indian market provide a framework of reference
 Bharti closest benchmark  Transaction comparables can be
distorted by strategic considerations
 Control premia and bidding
environment need to be considered

20
Estimation of All India Population and Wireless Subscribers

Estimation of Based on

1 Population and growth Past trends and projections based on

estimates by Indian Census and
Top Down Approach

research reports

2 All India wireless penetration Published industry research reports

by Gartner, Morgan Stanley,
Citigroup, Merrill Lynch and Lazard
estimates

3 Gross additions & churn Lazard estimates of fair share of

gross adds in the respective circles

Past trends and projections based on

4 Pre-paid/post-paid split
Lazard estimates and Industry
research

Three separate cases have been considered for the purposes of valuation. In the “Base Case” all India
wireless penetration is assumed to reach 25% in FY 2016 with a CAGR of 17.8%

21
Key Assumption for ARPU and Key Costs

Key Assumptions For Estimating ARPU Key Assumptions For Estimating Operating Costs
 Activation Fee per Gross Add : is assumed to decline  Interconnect Pass Through Charges: is assumed
by 10% yoy at 20% of gross revenue
 Monthly Access/ Recharge Charge per Sub : is  Network Operating Costs : have been estimated at
assumed to decline by 5% yoy Rs 0.2 / min of usage
 Outgoing Airtime rate : is assumed to decline by 5%  License Fee : have been estimated at 10%, 8% &
in FY 2006. 6% of net revenues for Metro, Circle A & Circle B
 VAS : is assumed to stabilise at 20% of voice revenues respectively
in FY 2011; metro VAS assumed higher - stabilises at  Employee Costs: Cost per employee is assumed to
30% grow at 10% yoy
 Gross Outroaming : is projected to stabilise at 10% of  Customer Acquisition Costs: have been assumed
voice revenues by FY 2009 at the FY 2005 levels of Rs 790 / postpaid gross add
and Rs 187/ prepaid gross add
Key Assumptions For Estimating Capex
 Advertisement Costs: have been increased to 7.0%
 Incremental capex is estimated at $ 75 per
of net revenues in FY 2008 and thereafter remain
incremental subscriber during the projection period
constant during the projection period
 Maintenance capex is estimated at $ 5 per opening
subscriber during the projection period

22
Key Outputs – Subs and ARPU

Total All India Subscribers Total Company Subscribers

(Subs Millions) (Subs Millions) (All India Marketshare)
350 314 30% 40
38 13%
35 %* 12%
300 25%
11.2% e a 20.2 12.2%
%* R Id 12%
250 s 17.8 220 25.0% 30
CAG
eles 24
R Wir 20%
25
11%
200 CAG 10.2% 11%
142 18.3% 15% 20 9.8% 9.9% 10.7% 10%
150 14
15
71 10% 10%
100 52 12.3% 7
10 5 9%
33 5% 4
50 6.4% 5 9%
3.1% 4.8%
0 0% 0 8%
FY 2004 FY 2005 FY 2006 FY 2009 FY 2012 FY 2016 FY 2004 FY 2005 FY 2006 FY 2009 FY 2012 FY 2016
All India Subscribers Penetration Idea Subscribers All India Marketshare

(Rs/ Sub/ Month)

800 728 Company’s ARPU
700  ARPU is projected to decline in line
620 602
600 563 553 with industry trends
524
500 425
400
375 357  Proportion of Prepaid subscribers is
319 301
270 282
300 252 248 244 239 229 projected to increase to 86.4% in
200
the terminal year
100
0
FY 2004 FY 2005 FY 2006 FY 2009 FY 2012 FY 2016
Postpaid ARPU Prepaid ARPU Blended ARPU
23 * CAGR for the period FY 2005 – FY 2016
Benchmarking With Industry Estimates
All India Subscribers CAGR*  Key outputs from the model
( M illio n S u b s )
300 283
L az ard 28.8%
have been benchmarked
250
199 against research published
200 G artn er 55.6%
152 by leading houses such as
150 129 125 142
116 M o r g a n S t a n le y 42.8%
101100 117 Gartner, Morgan Stanley,
100 80 81 77 76 93
71 C it ig r o u p 38.0% Citigroup & Merrill Lynch
50
M e r r ill L y n ch 34.0%
0
FY 2006 FY 2007 FY 2008 FY 2009  The all India subscriber and
30%
All India Wireless Penetration penetration projections are
2 4 .8 %
25% lower than benchmarks
20% 1 7 .7 %

15% 1 3 .2 %
1 1 .6 % 1 0 .3 % 1 0 .9 % 1 2 .3 %
7 .3 % 1 0 .2 %
10% 7 .0 % 8 .3 % 8 .9 % 8 .8 %
7 .3 % 6 .8 %
6 .4 %
5%

0%
FY 2006 FY 2007 FY 2008 FY 2009
L azard G a rt n er M o r g a n S t a n le y C it ig r o u p M e r r ill L y n c h

24 * Lazard – 4 year CAGR, Gartner – 4 year CAGR, Morgan Stanley/Merrill Lynch – 3 year CAGR, Citigroup – 2 year CAGR
Benchmarking With Industry Estimates

(R s / M o n th )
All India ARPU  Overall ARPU in the “Base Case” is
500 473
451
much lower than the comparables in
450 435
409 418 the initial 2 years of the projection
390
400
366 period and thereafter follow the
357 348
350 340 331 327 316 market trend of steady de-growth
319
295
300  ARPU in the model is assumed to
250 reduce from Rs 375 / sub in FY 2005

200
to Rs 282 / sub in the terminal year
FY 2006 FY 2007 FY 2008 FY 2009 representing a CAGR of –2.6%
L az a rd G a rt n e r M o r g a n S t a n le y C it ig r o u p M e r r ill L y n ch
 ARPU decline is on account of
All India ARPU Growth  Decline in Activation & Access
0%
fees by 10% and 5% yoy
-2 %

-4 % - 4 .8 %
- 2 .6 %
-3 .6 %
 Decrease in call charges
- 4 .7 %
-6 % - 5 .6 % – Minutes of Usage(MoUs)
-7 .6 % - 7 .3 %
-8 %
-8 .0 %
are assumed to behave
- 9 .2 %
-1 0 % - 1 0 .5 % - 1 0 .6 % -9 .8 % inversely with the call
- 1 0 .6 %
- 1 0 .9 %
-1 2 % charges
- 1 2 .6 %
-1 4 %
FY 2006 FY 2007 FY 2008 FY 2009
L a z a rd G artn er M o r g a n S t a n le y C it ig r o u p M e r r ill L y n ch
25
ARPU & Key Components of ARPU
(Rs/ Sub/ Month)
800 ARPU
728
700
620 602
600 563 553
524
500
425
400 375 357
319 301
270 282
300 252 248 244 239 229
200

100

0
FY 2004 FY 2005 FY 2006 FY 2009 FY 2012 FY 2016
Postpaid ARPU Prepaid ARPU Blended ARPU
Breakup of ARPU

2
%5
% 4% 3
% 2
4
%% 1
% 1
4
%%1
8
%
7% 7
% 7
% 4
% 21
%
5
% 6
% 7
% 1
0
% 2
5
% 1
2
% 1
1
%
2
8
% 2
9
% 2
8
%

1
5
% 1
7
%
1
4
%
4
0
% 1
3
% 4
2
% 1
1
% 4
2
% 1
2
% 4
5
% 4
9
%
4
6
%

Activation Fee Recharge fees / Rental Incoming Interconnect Outgoing Airtime VAS Gross Outroaming Others

26
Costs

(% of Total Cost)
 Network operation costs form the
100%
14% 14% 14% 13% largest chunk of the costs
90% 18% 15%
2% 1% accounting for 37% of the total
5% 5% 3% 4% 3%
1%
80% 5% 6% 6%
5%
2%
2% costs in FY 2016
6% 2% 2% 12%
70% 3% 13% 13%
9% 11% 7%  Employee costs have been
9%
60% 10% 8% 5% assumed to grow to 20% of total
10% 9%
9% 7%
50% 10% costs from the 11% in FY 2005
15% 20%
14% 13% 14%
40% 11%  Advertisement and business
11% 9%
30% 10% promotions costs are projected to
20%
counteract increasing
36% 37%
29% 34% competition in all the operating
27% 28%
10%
circles
0%
FY 2004 FY 2005 FY 2006 FY 2009 FY 2012 FY 2016  Bad debts are projected to
Network Operat ion Costs Em ployee Costs decrease as a proportion of total
Custom er Acquisition Costs Custom er Servicing Costs
costs due to the increase in
Advertising and Business Prom otions Bad Debts
General and Adm inist rative Expenses Corporate Expenses quality of postpaid subscribers
License Fee

27
Capex Assumptions & Projections

(Rs Millions) (% of Gross Revenue)

30,000 30%
26% 24,976
25,000 25%
20%
20,000 17,791 20%

15,000 12,719 18% 15%

16%
10,000 8,366 10%

5,000 5%

0 0%
FY 2006 FY 2009 FY 2012 FY 2016
Total Capex Capex % of Gross Revenue

 Key Assumptions
 Capex for incremental growth as well as maintenance of service quality/ enhancements have been
estimated on comparable benchmarks
 Incremental capex is estimated at $ 75 per incremental subscriber in during the projection period
 Maintenance capex is estimated at $ 5 per opening subscriber during the projection period

28
Projected Profit & Loss Account

(RS MILLION) FY 2005

FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
(P)*
Revenue

Postpaid Revenue 7,950 9,146 12,529 14,948 17,883 20,132 22,834 25,483 28,007 30,702 33,450 36,267 39,089

Prepaid Revenue 14,093 12,834 17,310 23,838 31,264 39,243 47,909 56,745 66,157 76,222 86,525 97,136 107,798

Inroaming and Other s 1,654 2,108 2,015 2,217 2,439 2,683 2,951 3,246 3,570 3,928 4,320 4,752 5,228

Gross Revenue 23,697 24,088 31,855 41,003 51,586 62,057 73,694 85,474 97,735 110,851 124,295 138,156 152,115

Net Revenue 19,536 19,766 25,887 33,246 41,756 50,182 59,545 69,029 78,902 89,466 100,300 111,475 122,737

Revenue Growth 34.2% 38.7% 31.0% 28.4% 25.6% 20.2% 18.7% 15.9% 14.3% 13.4% 12.1% 11.1% 10.1%

Total Expenses (11,310) (11,022) (13,707) (17,614) (22,065) (26,757) (31,572) (37,046) (43,249) (49,958) (57,101) (64,750) (72,702)

EBITDA 8,226 8,744 12,180 15,632 19,692 23,425 27,973 31,982 35,653 39,508 43,199 46,725 50,035

EBITDA Growth 53.2% 62.9% 39.3% 28.3% 26.0% 19.0% 19.4% 14.3% 11.5% 10.8% 9.3% 8.2% 7.1%

EBITDA Margin 34.7% 36.3% 38.2% 38.1% 38.2% 37.7% 38.0% 37.4% 36.5% 35.6% 34.8% 33.8% 32.9%

Depreciation & Ammort (5,929) (4,961) (6,378) (7,207) (8,159) (9,240) (10,413) (11,713) (13,225) (14,888) (16,702) (18,699) (19,643)

EBIT 2,297 3,783 5,802 8,425 11,533 14,185 17,560 20,270 22,428 24,620 26,497 28,026 30,392

Finance Costs (4,147) (3,367) (3,560) (3,385) (3,001) (2,433) (1,779) (1,175) (809) (619) (428) (237) (105)

PBT (1,718) 416 2,242 5,040 8,532 11,752 15,781 19,094 21,618 24,001 26,069 27,789 30,287

Tax - - (189) (424) (718) (1,447) (5,312) (6,427) (7,277) (8,079) (8,775) (9,354) (10,195)

PAT (1,718) 416 2,053 4,616 7,814 10,305 10,469 12,667 14,342 15,922 17,294 18,435 20,092

29 * Projected P&L for FY 2005 in the original model. PBT includes other income of Rs 131 million
Balance Sheet

(RS M ILLIO N ) F Y 2005 F Y 2006 F Y 2007 F Y 2008 F Y 2009 F Y 2010 F Y 2011 F Y 2012 F Y 2013 F Y 2014 F Y 2015 F Y 2016
So urc es o f F unds
E quity Share Cap ital 22,595 24,294 25,289 26,260 27,017 27,782 27,782 27,782 27,782 27,782 27,782 27,782
Reserves 998 2,110 5,212 10,809 18,326 25,895 35,133 45,613 57,565 71,103 85,851 101,925
Accum ulated D eficit (19,209) (19,209) (19,209) (19,209) (19,209) (19,209) (19,209) (19,209) (19,209) (19,209) (19,209) (19,209)
P referen ce Sh ares 4,830 5,361 5,951 6,606 7,332 8,139 9,034 7,140 2,700 - - -
N e t Wo rth 9,214 12,556 17,244 24,465 33,466 42,607 52,740 61,326 68,838 79,677 94,425 110,499
T otal D eb t 36,920 35,612 32,835 27,953 21,611 15,037 9,657 7,616 5,576 3,536 1,495 717
T o tal Liabilitie s 46,134 48,168 50,079 52,418 55,076 57,643 62,397 68,943 74,414 83,212 95,920 111,216

Applic ation o f F unds

N et Blo ck 25,147 29,267 33,938 39,110 44,721 50,245 55,954 62,653 69,464 76,228 83,163 89,449
Licen se / E n try F ee 10,724 9,771 8,818 7,865 6,912 5,959 5,005 4,052 3,099 2,146 1,193 240
Cash & Bank - - - - - - 2,121 5,193 7,171 12,598 21,850 33,214
N et Curen t Assets (1,528) (1,482) (2,110) (2,810) (3,631) (4,456) (5,400) (6,493) (7,679) (8,939) (10,287) (11,687)
G o odwill 11,791 10,612 9,433 8,254 7,075 5,896 4,716 3,537 2,358 1,179 - -
T o tal As s ets 46,134 48,168 50,079 52,418 55,076 57,643 62,397 68,943 74,414 83,212 95,920 111,216

30
Cash Flow

(RS MILLION) FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016

PAT 2,053 4,616 7,814 10,305 10,469 12,667 14,342 15,922 17,294 18,435 20,092
Depreciation & Ammortisation 6,378 7,207 8,159 9,240 10,413 11,713 13,225 14,888 16,702 18,699 19,643
Gross Cash Accruals 8,432 11,823 15,972 19,545 20,882 24,380 27,567 30,810 33,996 37,134 39,736

Capex (8,366) (9,745) (11,198) (12,719) (13,805) (15,290) (17,791) (19,568) (21,333) (23,503) (24,976)
(Increase)/ Decrease in Working
Capital (46) 627 700 821 825 944 1,093 1,186 1,260 1,348 1,400
Debt Repayment (3,857) (4,269) (6,338) (7,478) (7,723) (5,380) (2,040) (2,040) (2,040) (2,040) (778)
Repayment of Pref Shares - - - - - - (2,887) (5,226) (2,997) - -
Dividend & Dividend Tax (411) (923) (1,563) (2,061) (2,094) (2,533) (2,868) (3,184) (3,459) (3,687) (4,018)
Gross Outflow (12,680) (14,310) (18,399) (21,437) (22,797) (22,259) (24,494) (28,833) (28,569) (27,882) (28,372)

Current Period Cash (4,248) (2,488) (2,426) (1,892) (1,914) 2,121 3,073 1,978 5,427 9,252 11,364
Cash Balance to Be Funded 4,248 2,488 2,426 1,892 1,914 - - - - - -
Cash at the End of the Year - - - - - - - - - 8,882 20,246

31
Free Cash Flows

(R S M IL L IO N ) F Y 2006 F Y 2007 F Y 2008 F Y 2009 F Y 2 0 10 F Y 2 0 11 F Y 2 0 12 F Y 2 0 13 F Y 2 0 14 F Y 2 0 15 F Y 2 0 16

E BIT D A 1 2 ,1 8 0 1 5 ,6 3 2 1 9 ,6 9 2 2 3 ,4 2 5 2 7 ,9 7 3 3 1 ,9 8 2 3 5 ,6 5 3 3 9 ,5 0 8 4 3 ,1 9 9 4 6 ,7 2 5 5 0 ,0 3 5
L e s s : U n le v e r e d T a x (4 8 8 ) (7 0 9 ) (2 ,2 0 5 ) (4 ,7 7 5 ) (5 ,9 1 1 ) (6 ,8 2 3 ) (7 ,5 4 9 ) (8 ,2 8 7 ) (8 ,9 1 9 ) (9 ,4 3 4 ) (1 0 ,2 3 0 )
L ess : cap ex (8 ,3 6 6 ) (9 ,7 4 5 ) (1 1 ,1 9 8 ) (1 2 ,7 1 9 ) (1 3 ,8 0 5 ) (1 5 ,2 9 0 ) (1 7 ,7 9 1 ) (1 9 ,5 6 8 ) (2 1 ,3 3 3 ) (2 3 ,5 0 3 ) (2 4 ,9 7 6 )
L e s s : W o r k in g C a p I n c r e a s e (4 6 ) 627 700 821 825 944 1 ,0 9 3 1 ,1 8 6 1 ,2 6 0 1 ,3 4 8 1 ,4 0 0

FCF 3 ,2 8 0 5 ,8 0 5 6 ,9 8 8 6 ,7 5 2 9 ,0 8 2 10 , 8 14 11, 4 0 6 12 , 8 3 9 14 , 2 0 7 15 , 13 7 16 , 2 3 0

(R s M illio n )
1 8 ,0 0 0 55%
1 6 ,2 3 0
1 6 ,0 0 0 1 5 ,1 3 7
1 4 ,2 0 7
1 4 ,0 0 0 1 2 ,8 3 9
35%
1 2 ,0 0 0 1 1 ,4 0 6 35%
1 0 ,8 1 4
1 0 ,0 0 0 9 ,0 8 2
8 ,0 0 0 6 ,9 8 8
6 ,7 5 2
5 ,8 0 5 20% 13%
6 ,0 0 0 11% 15%
19% 7% 7%
4 ,0 0 0 3 ,2 8 0 5%
-3 %
2 ,0 0 0
0 -5 %
FY 2006 FY 2007 FY 2008 F Y 2009 FY 2010 F Y 2011 F Y 2012 FY 2013 FY 2014 FY 2015 F Y 2016
FCF F C F G ro w t h
Steady state
CF growth

32
Intrinsic Business Valuation for “Base Case”

Indicative Valuation LazardModel Original

ValuationMultiples
Model
AllFiguresinUS$Millions “BaseCase”Lazard Original Model
M odel Terminal Value/ Terminal EBITDA 3.3x 4.5x

WACC 13% 14% EV/EBITDA(Historic) 10.7x 14.1x

PerpetuityGrowthRate 3% 4% EV/EBITDA(Forward) 7.7x 9.2x

EnterpriseValue(EV) 2,072 1,682 EV/Subscriber (Historic)US$/Sub 409 452

Net Debt (includingPref. Capital) 928 873 EV/Subscriber (Forward)US$/Sub 295 279
EquityValue 1,144 809
ExistingNoof Shares(Millions) 2,260 2,260
EquityValuePer Share Rs23 Rs16
Contributionof Terminal ValuetoEV 47% 51%

33
Valuation under Other Scenarios
 Valuation have been considered for two further scenarios - Pessimistic & Optimistic

 Pessimistic Scenario

– Terminal year all India wireless penetration 20% with a CAGR of wireless subscribers at 15.3% as
compared to a penetration of 25% in the Base scenario
– Perpetuity growth rate assumed at 2% as compared to 3% in the Base Scenario
– Resultant all India market share in FY 2016 is 11.5% as compared to 12.1% in the Base Scenario
 Optimistic Scenario

– Terminal year all India wireless penetration 30% with a CAGR of 19.8%
– Perpetuity growth rate assumed at 4%
– Resultant all India market share in FY 2016 is 12.8%

Enterprise Value EquityValue PerShare

WACC 12% 13% 14% WACC 12% 13% 14%

USDMillion (Rs)

Realistic 2,352 2,072 1,845 Realistic 28 23 18

Pessimistic 2,102 1,880 1,697 Pessimistic 23 19 15

Optimistic 2,738 2,362 2,066 Optimistic 36 29 23

34
Transaction and Trading comparable valuations
Benchmark Valuations in recent telecom transactions

SingTel’s stake enhancement in Bharti Da

te R
ecen
tTra
n sa
ction
s EV/Su
b(US
D )
A
cquisitionC
onside
ration(U
SDM
illion) 2
52 M ar-0
4A c
q uisitionofHexac
ombyB harti 593
Jan-04A c
q uisitionofEsc
otelbyIdea 323
Eq uityV alue(U SDM illion) 9,403 D ec-0
4A c
q uisitionofRPGC hennaibyA irc
el 412
Ne tD ebt(U S DM illion) 868 Avera ge 4
43
Ente rpriseV alue(U S DM illion) 1
0,270
S
hareofC ellula rB usine ss 7
0%
EV ofC ellula rB usine ss(U S DM illion) 7,189
Tota lS ubsc ribe rs(A pril2 00 5 )(M illions) 11
EV perS ubsc riber(U S D /S ubsc ribe r) 63 1
CellularE B IT D A (F Y 2 0 05 )(U S DM illions) 435
EV /F Y0 5E B ITD A 16.5

36
Wireless Trading Comparables
Trading Comparables
EN TERPRISE VALUE AS A MULTIPLE OF
COMPARABLE PRICE / EPS REVEN UES EBITDA EBIT 2005A MARGIN S
COMPAN Y Year End 2005A 2006E 2005A 2006E 2005A 2006E 2005A 2006E Gross EBITDA EBIT

Bharti March 33.7x 19.6x 5.9x 4.3x 16.5x 11.1x 27.1x 17.1x 16.0% 35.6% 21.7%
Advanced Info December 14.3x 13.4x 3.1x 3.0x 5.9x 5.6x 9.2x 8.7x 21.0% 53.0% 33.8%
China Mobile March 14.6x 13.2x 3.1x 2.6x 5.7x 4.9x 10.3x 8.7x 21.8% 54.1% 30.0%
China Unicom March 18.8x 18.4x 1.6x 1.5x 3.7x 4.5x 16.3x 15.2x 5.9% 44.4% 10.0%
DiGi.com Bhd March 12.4x 11.5x 1.7x 1.5x 3.8x 3.4x 7.6x 7.4x 14.2% 44.8% 22.8%
M1 December 13.9x 13.9x 2.9x 2.8x 7.5x 7.0x 11.5x 11.0x 20.5% 39.5% 25.7%
Maxis Comm December 15.1x 13.8x 3.8x 3.5x 8.1x 6.3x 12.1x 9.0x 27.0% 46.3% 31.1%
Telekom Malaysia December 13.3x 17.3x 2.7x 2.6x 5.8x 5.4x 14.0x 11.9x 19.5% 47.0% 19.6%
Hutchison Telecom December 0.0x 0.0x 3.3x 2.0x 15.7x 0.0x 519.2x 0.0x 0.0% 21.1% 0.6%
Total Access December 0.3x 0.3x 0.9x 0.8x 2.4x 2.2x 4.1x 3.6x 11.3% 38.4% 22.2%

MEDIAN 14.1x 13.8x 3.0x 2.6x 5.9x 5.1x 11.8x 8.9x 17.8% 44.6% 22.5%
MEAN 13.7x 14.8x 2.9x 2.5x 7.5x 5.1x 63.1x 9.3x 15.7% 42.4% 21.8%
HIGH 33.7x 19.6x 5.9x 4.3x 16.5x 11.1x 519.2x 17.1x 27.0% 54.1% 33.8%
LOW 0.0x 11.5x 0.9x 0.8x 2.4x 0.0x 4.1x 0.0x 0.0% 21.1% 0.6%

N OTES: Figures have been adjusted to exclude unusual and nonrecurring items.
Stock prices and historical financial statements reflect publicly available information as of 24 June 2005

SOURCES: estimates from I/ B/ E/ S.

37
Benchmarking with Trading and Transaction Comps

Enterprise EV/Sub EV/EBITDA Price Per

All Figures in Rs Million
Value (EV) (US$) (historic) Share* (Rs)

I Lazard Model  2072 409 10.7x 22.8

II. Value Based On        

Historical Transaction EV/Sub Multiples (Idea-Escotel

a. Jan'04, Bharti-Hexacom Mar'04, Aircel-RPG Dec'04) 2259 443 11.4x 26.5

Implied FY'05 EV/EBITDA Multiple for Increase in

b. Singtel's Stake In Bharti in May 2005 3164 620 15.9x 44.5

c. Bharti FY'05 EV/EBITDA Trading Multiples 3283 644 16.5x 46.9

38 * Prices based on existing capital base

In Summary ...
 Valuations are more about rigour in implementing the concepts than about concepts

 Every valuation is different

 Industry to industry

 Company to company

 Of a company at different times

 Though a thorough understanding of concepts is important to use them in different scenarios

 Different growth parameters – how to use them?

 Tax issues

 Carry forward losses and their treatment

 Split period approaches

 Terminal Value impact

 A thorough understanding of the industry, company, environment around it is very important

 And lastly, an excellent hold over spreadsheet is critical …

 Makes the difference between a good valuation and a not so good one …

Thank You
39