VALUATION APPROACHES

2

Valuations....drive the markets!!!

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BSE Sensex

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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

Valuation Methodologies

5

Valuation Methodologies

Trading valuation

Value based on market trading multiples of comparable companies

Acquisition valuation

Value based on multiples paid for comparable companies in sale transactions

Liquidation or break-up analysis – assets presumed to be representative of business value

Value of component parts – used when enterprise comprises of several discrete businesses

Sum of parts/ Asset Valuation

Sum of parts/ Asset Valuation

ComparableCompanies

Analysis

ComparableCompanies

Analysis

ComparableAcquisitions

Analysis

ComparableAcquisitions

Analysis

Value RangeValue Range

DiscountedCash FlowAnalysis

DiscountedCash FlowAnalysis

Inherent value of business

Present value of projected free cash flows

6

(1) Net Debt equals Total Long-Term Debt + Preferred Stock + Capitalized Leases + Short-Term Debt (other than working capital debt) - Cash and Cash Equivalents

Enterprise Value = Value of all the assets of a business

Equity Value = Value of the shareholders’ equity

Equity Value = Enterprise Value - Net Debt (1)

EnterpriseValue

Equity Value(or Market Value)

Net Debt

Enterprise Value v/s Equity Value

Unaffected by leverage

Multiples of: Sales EBITDA EBIT Size (such as

capacity or number of users)

A function of leverage

Multiples of:

Net Income (Earnings)

After Tax Cash Flow

Book Value

7

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

8

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

9

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

WACC =

Where: E = Market Value of equityD = Market Value of debt

(typically approximate with book value but be careful)re = return on equity derived from CAPMrd = 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

re x ED + E

rd x DD + E

+

10

Cost of EquityCost of Debt

Computation of WACC ingredients

Cost of Debt is the opportunity cost of lending, net of tax shield derived through leveraging

Cost of debt assumed at the prevailing long term lending rates for similar companies

Cost of debt = rd = Y (I - T)

Where: rd = after tax-cost of long term debt (after tax)Y= gross redemption yield on debtT= effective marginal tax rate

Cost of equity represents the return expectations of equity shareholders from investment of comparable risk

Computed by adding a market risk premium weighted by comparable asset risk over the risk free return on a long term security

Cost of equity = re = rf + B *(rm - rf)

Where: re= the required future market return on the equity of the Company

rf = the risk free rate rm= the return on the

market (factoring in the country risk also)

B= the beta of the Company

11

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

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

Estimating the Terminal Value

Terminal value =

FCF T+1

(WACC T+1 - g)

12

Free Cash Flows : A Sample

Steady state CF growth

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

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

Less : Unlevered Tax (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 : Working Cap Increase (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

3,280

5,805

10,814 11,40612,839

14,20715,137

16,230

9,0826,988

6,752

35%

7%7%11%13%

5%19%

20%

-3%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016

-5%

15%

35%

55%

FCF FCF Growth

(Rs Million)

Analysis of Publicly-Traded Comparable Companies

14

Selection Criteria for Comparable Companies

Business

Industry

Products

Distribution Channels

Customers

Seasonality

Cyclicality

End Markets

Size

Growth History and Growth

Prospects

Margins / Operating Track Record

Location / Geographic Focus

Ownership Profile / Liquidity

Leverage / Capital Structure

Dividend Yield / Payout

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

Primary Criteria

Secondary Criteria

Analysis of Comparable Acquisition Transactions

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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.

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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

18

Sample Valuation Summary using the methods illustrated above

100

200

300

400

500

600

700

800

900

1,000

625

465

630

460

500

260

650

335

655

355

EBITDA

Multiple

Method

PerpetualGrowthMethod

EBITDA

EBITDA

DCF TradingMultiples

AcquisitionMultiples

Trading Multiples with 30%

Assumed Premium

(US$ million)

Subscribers

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

Case Study : Valuation of a Telecom Company

20

Template used for a Telecom DCF valuation and benchmarking

All India population

Market shares

Post paid and pre-paid

ARPU and MoUs

Revenue assumptions Cost assumptions

Opex assumptions

Capex assumptions

Pure play listed mobile comparables not available in the Indian market

Bharti closest benchmark

Trading comparables Transaction comparables

Recently concluded transactions provide a framework of reference

Transaction comparables can be distorted by strategic considerations

Control premia and bidding environment need to be considered

DCF

WACC of 13%

Perpetuity Growth

Projection Period of 11 years till FY 2016

Penetration of total population

21

Past trends and projections based on estimates by Indian Census and research reports

Published industry research reports by Gartner, Morgan Stanley, Citigroup, Merrill Lynch and Lazard estimates

Lazard estimates of fair share of gross adds in the respective circles

Past trends and projections based on Lazard estimates and Industry research

Based on Estimation of

Estimation of All India Population and Wireless Subscribers

1 Population and growth

2 All India wireless penetration

3 Gross additions & churn

4 Pre-paid/post-paid split

Top

Dow

n A

pp

roach

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%

22

Key Assumption for ARPU and Key Costs

Activation Fee per Gross Add : is assumed

to decline by 10% yoy

Monthly Access/ Recharge Charge per Sub

: is assumed to decline by 5% yoy

Outgoing Airtime rate : is assumed to

decline by 5% in FY 2006.

VAS : is assumed to stabilise at 20% of voice

revenues in FY 2011; metro VAS assumed

higher - stabilises at 30%

Gross Outroaming : is projected to stabilise

at 10% of voice revenues by FY 2009

Key Assumptions For Estimating ARPU

Interconnect Pass Through Charges:

is assumed at 20% of gross revenue

Network Operating Costs : have been

estimated at Rs 0.2 / min of usage

License Fee : have been estimated at

10%, 8% & 6% of net revenues for

Metro, Circle A & Circle B respectively

Employee Costs: Cost per employee is

assumed to grow at 10% yoy

Customer Acquisition Costs: have

been assumed at the FY 2005 levels of

Rs 790 / postpaid gross add and Rs 187/

prepaid gross add

Advertisement Costs: have been

increased to 7.0% of net revenues in FY

2008 and thereafter remain constant

during the projection period

Key Assumptions For Estimating Operating Costs

Incremental capex is estimated at $ 75 per

incremental subscriber during the projection period

Maintenance capex is estimated at $ 5 per

opening subscriber during the projection period

Key Assumptions For Estimating Capex

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Key Outputs – Subs and ARPU

Total All India Subscribers Total Company Subscribers

Company’s ARPU ARPU is projected to decline

in line with industry trends

Proportion of Prepaid

subscribers is projected to

increase to 86.4% in the

terminal year

* CAGR for the period FY 2005 – FY 2016

3.1% 4.8%6.4%

12.3%

18.3%

25.0%

0

50

100

150

200

250

300

350

FY 2004 FY 2005 FY 2006 FY 2009 FY 2012 FY 2016

0%

5%

10%

15%

20%

25%

30%

All India Subscribers Penetration

(Subs Millions)

CAGR Wireless 17

.8%*

3352

71

142

220

314

3.1% 4.8%6.4%

12.3%

18.3%

25.0%

0

50

100

150

200

250

300

350

FY 2004 FY 2005 FY 2006 FY 2009 FY 2012 FY 2016

0%

5%

10%

15%

20%

25%

30%

All India Subscribers Penetration

(Subs Millions)

CAGR Wireless 17

.8%*

3352

71

142

220

314

12.2%

10.7%

10.2%9.9%9.8%

11.2%

0

5

10

15

20

25

30

35

40

FY 2004 FY 2005 FY 2006 FY 2009 FY 2012 FY 2016

8%

9%

9%

10%

10%

11%

11%

12%

12%

13%

Idea Subscribers All India Marketshare

(Subs Millions) (All India Marketshare)

CAGR Idea 20.2

%*

4 57

14

24

38

12.2%

10.7%

10.2%9.9%9.8%

11.2%

0

5

10

15

20

25

30

35

40

FY 2004 FY 2005 FY 2006 FY 2009 FY 2012 FY 2016

8%

9%

9%

10%

10%

11%

11%

12%

12%

13%

Idea Subscribers All India Marketshare

(Subs Millions) (All India Marketshare)

CAGR Idea 20.2

%*

4 57

14

24

38

270 252 248 244 239 229

425375 357

319 301 282

524553563602620

728

0

100

200

300

400

500

600

700

800

FY 2004 FY 2005 FY 2006 FY 2009 FY 2012 FY 2016Postpaid ARPU Prepaid ARPU Blended ARPU

(Rs/ Sub/ Month)

24

Benchmarking With Industry Estimates

All India Subscribers

All India Wireless Penetration

Key outputs from the

model have been

benchmarked against

research published by

leading houses such as

Gartner, Morgan

Stanley, Citigroup &

Merrill Lynch

The all India subscriber

and penetration

projections are lower

than benchmarks

28.8%

CAGR*

55.6%

42.8%

38.0%

34.0%

* Lazard – 4 year CAGR, Gartner – 4 year CAGR, Morgan Stanley/Merrill Lynch – 3 year CAGR, Citigroup – 2 year CAGR

8 0

1 2 9

1 9 9

2 8 3

8 1

1 1 6

1 5 2

7 71 0 1

1 2 5

7 61 0 0

7 19 3

1 1 71 4 2

0

5 0

1 0 0

1 5 0

2 0 0

2 5 0

3 0 0

F Y 2 0 0 6 F Y 2 0 0 7 F Y 2 0 0 8 F Y 2 0 0 9

L a z a rd

G a rt n e r

M o rg an S t a n le y

C it ig ro u p

M e rri l l L y n ch

( M i l l io n S u b s )

6 . 4 %8 . 3 %

1 0 . 2 %1 2 . 3 %1 1 . 6 %

7 . 3 %

2 4 . 8 %

1 7 . 7 %

1 0 . 3 %

7 . 3 %

1 3 . 2 %

8 . 9 %7 . 0 %1 0 . 9 %

8 . 8 %6 . 8 %

0 %

5 %

1 0 %

1 5 %

2 0 %

2 5 %

3 0 %

F Y 2 0 0 6 F Y 2 0 0 7 F Y 2 0 0 8 F Y 2 0 0 9

L a z a r d G a r t n e r M o r g a n S t a n l e y C i t i g r o u p M e r r i l l L y n c h

25

Benchmarking With Industry Estimates

All India ARPU

All India ARPU Growth

Overall ARPU in the “Base Case”

is much lower than the

comparables in the initial 2 years

of the projection period and

thereafter follow the market trend

of steady de-growth

ARPU in the model is assumed to

reduce from Rs 375 / sub in FY

2005 to Rs 282 / sub in the

terminal year representing a

CAGR of –2.6%

ARPU decline is on account of

Decline in Activation &

Access fees by 10% and 5%

yoy

Decrease in call charges

– Minutes of Usage(MoUs)

are assumed to behave

inversely with the call

charges

4 0 9

3 6 6

3 2 7

2 9 5

3 9 0

3 4 8

3 1 6

4 5 1

4 1 8

4 7 3

4 3 5

3 1 93 3 13 4 0

3 5 7

2 0 0

2 5 0

3 0 0

3 5 0

4 0 0

4 5 0

5 0 0

F Y 2 0 0 6 F Y 2 0 0 7 F Y 2 0 0 8 F Y 2 0 0 9L a z a rd G a rt n e r M o rg a n S t a n le y C i t ig ro u p M e rr i l l L y n ch

( R s / M o n t h )

- 1 0 .6 %- 9 .8 %

- 1 2 .6 %

- 9 .2 %

- 7 .3 %

- 5 .6 %

- 4 .8 %- 4 .7 %

- 2 .6 %- 3 .6 %

- 1 0 .5 % - 1 0 .6 %

- 1 0 .9 %

- 7 .6 %- 8 .0 %

- 1 4 %

- 1 2 %

- 1 0 %

- 8 %

- 6 %

- 4 %

- 2 %

0 %

F Y 2 0 0 6 F Y 2 0 0 7 F Y 2 0 0 8 F Y 2 0 0 9L a z a rd G a rt n e r M o rg a n S t a n le y C i t ig ro u p M e rr i l l L y n ch

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

ARPU & Key Components of ARPU

ARPU

Bre

aku

p o

f A

RP

U

2%5%

28%

13%

5%7%

40%

4%

29%

11%

6%7%

42%

3%

28%

12%

7%7%

42%

2%25%

14%

10%4%

45%

1%21%

15%

12%4%

46%

1%18%

17%

11%4%

49%

270 252 248 244 239 229

425375 357

319 301 282

524553563

602620

728

0

100

200

300

400

500

600

700

800

FY 2004 FY 2005 FY 2006 FY 2009 FY 2012 FY 2016Postpaid ARPU Prepaid ARPU Blended ARPU

(Rs/ Sub/ Month)

27

Costs

Network operation costs form the largest chunk of the costs accounting for 37% of the total costs in FY 2016

Employee costs have been assumed to grow to 20% of total costs from the 11% in FY 2005

Advertisement and business promotions costs are projected to counteract increasing competition in all the operating circles

Bad debts are projected to decrease as a proportion of total costs due to the increase in quality of postpaid subscribers

28% 29% 34% 36% 37%

10% 11% 9%11%

14%20%

14%15% 13%

10%7%

5%9%

10%10% 9%

8%7%9%

9% 11% 13% 13%12%6%

6% 6%5% 4% 3%

18% 14% 14% 15% 14% 13%

27%

1%2%2%

2%2%3%

1%2%3%5%5%5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY 2004 FY 2005 FY 2006 FY 2009 FY 2012 FY 2016

Network Operation Costs Employee CostsCustomer Acquisition Costs Customer Servicing CostsAdvertising and Business Promotions Bad DebtsGeneral and Administrative Expenses Corporate ExpensesLicense Fee

(% of Total Cost)

28

Capex Assumptions & Projections

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

8,366

12,719

17,791

24,976

16%18%

20%

26%

0

5,000

10,000

15,000

20,000

25,000

30,000

FY 2006 FY 2009 FY 2012 FY 2016

0%

5%

10%

15%

20%

25%

30%

Total Capex Capex % of Gross Revenue

(Rs Millions) (% of Gross Revenue)

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Projected Profit & Loss Account

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

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

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

30

Balance Sheet

(RS MILLION) FY 2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016

Sources of Funds

Equity Share Capital 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

Accumulated Deficit (19,209) (19,209) (19,209) (19,209) (19,209) (19,209) (19,209) (19,209) (19,209) (19,209) (19,209) (19,209)

Preference Shares 4,830 5,361 5,951 6,606 7,332 8,139 9,034 7,140 2,700 - - -

Net Worth 9,214 12,556 17,244 24,465 33,466 42,607 52,740 61,326 68,838 79,677 94,425 110,499

Total Debt 36,920 35,612 32,835 27,953 21,611 15,037 9,657 7,616 5,576 3,536 1,495 717

Total Liabilities 46,134 48,168 50,079 52,418 55,076 57,643 62,397 68,943 74,414 83,212 95,920 111,216

Application of Funds

Net Block 25,147 29,267 33,938 39,110 44,721 50,245 55,954 62,653 69,464 76,228 83,163 89,449

License / Entry Fee 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

Net Curent 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)

Goodwill 11,791 10,612 9,433 8,254 7,075 5,896 4,716 3,537 2,358 1,179 - -

Total Assets 46,134 48,168 50,079 52,418 55,076 57,643 62,397 68,943 74,414 83,212 95,920 111,216

31

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

32

Free Cash Flows

Steady state CF growth

3,280

5,805

10,814 11,40612,839

14,20715,137

16,230

9,0826,988

6,752

35%

7%7%11%13%

5%19%

20%

- 3%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

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

- 5%

15%

35%

55%

F C F F C F G ro w th

(R s M illio n )

3,280

5,805

10,814 11,40612,839

14,20715,137

16,230

9,0826,988

6,752

35%

7%7%11%13%

5%19%

20%

- 3%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

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

- 5%

15%

35%

55%

F C F F C F G ro w th

(R s M illio n )

(R S M I L L I O N ) 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

E B I T D A 12,180 15,632 19,692 23,425 27,973 31,982 35,653 39,508 43,199 46,725 50,035

L ess : U n lev ered T ax (488) (709) (2,205) (4,775) (5,911) (6,823) (7,549) (8,287) (8,919) (9,434) (10,230)

L ess : cap ex (8,366) (9,745) (11,198) (12,719) (13,805) (15,290) (17,791) (19,568) (21,333) (23,503) (24,976)

L ess : W o rk in g C ap I n crease (46) 627 700 821 825 944 1,093 1,186 1,260 1,348 1,400

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

33

Intrinsic Business Valuation for “Base Case”

Valuation Multiples Lazard Model Original Model

Terminal Value / Terminal EBITDA 3.3x 4.5x

EV/EBITDA (Historic) 10.7x 14.1x

EV/EBITDA (Forward) 7.7x 9.2x

EV/Subscriber (Historic) US$/Sub 409 452

EV/Subscriber (Forward) US$/Sub 295 279

Indicative Valuation

All Figures in US$ Millions “Base Case” Lazard Model

Original Model

WACC 13% 14%

Perpetuity Growth Rate 3% 4%

Enterprise Value (EV) 2,072 1,682

Net Debt (including Pref. Capital) 928 873

Equity Value 1,144 809

Existing No of Shares (Millions) 2,260 2,260

Equity Value Per Share Rs 23 Rs 16

Contribution of Terminal Value to EV 47% 51%

Valuation Multiples Lazard Model Original Model

Terminal Value / Terminal EBITDA 3.3x 4.5x

EV/EBITDA (Historic) 10.7x 14.1x

EV/EBITDA (Forward) 7.7x 9.2x

EV/Subscriber (Historic) US$/Sub 409 452

EV/Subscriber (Forward) US$/Sub 295 279

Indicative Valuation

All Figures in US$ Millions “Base Case” Lazard Model

Original Model

WACC 13% 14%

Perpetuity Growth Rate 3% 4%

Enterprise Value (EV) 2,072 1,682

Net Debt (including Pref. Capital) 928 873

Equity Value 1,144 809

Existing No of Shares (Millions) 2,260 2,260

Equity Value Per Share Rs 23 Rs 16

Contribution of Terminal Value to EV 47% 51%

34

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

WACC 12% 13% 14%

USD Million

Realistic 2,352 2,072 1,845

Pessimistic 2,102 1,880 1,697

Optimistic 2,738 2,362 2,066

Equity Value Per Share

WACC 12% 13% 14%

(Rs)

Realistic 28 23 18

Pessimistic 23 19 15

Optimistic 36 29 23

Transaction and Trading comparable valuations

36

Benchmark Valuations in recent telecom transactions

SingTel’s stake enhancement in Bharti Date Recent Transactions EV/Sub (USD)

Mar-04Acquisition of Hexacom by Bharti 593Jan-04Acquisition of Escotel by Idea 323Dec-04Acquisition of RPG Chennai by Aircel 412

Average 443

Acquisition Consideration (USD Million) 252

Equity Value (USD Million) 9,403 Net Debt (USD Million) 868 Enterprise Value (USD Million) 10,270 Share of Cellular Business 70%EV of Cellular Business (USD Million) 7,189 Total Subscribers (April 2005) (Millions) 11 EV per Subscriber (USD/Subscriber) 631Cellular EBITDA (FY 2005) (USD Millions) 435 EV/ FY05 EBITDA 16.5

37

Wireless Trading Comparables

ENTERPRISE VALUE AS A MULTIPLE OF

COMPARABLE PRICE / EPS REVENUES EBITDA EBIT 2005A MARGINS

COMPANY 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%

NOTES: 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.

Trading Comparables

38

Benchmarking with Trading and Transaction Comps

All Figures in Rs Million

Enterpris

e Value

(EV)

EV/Sub

(US$)

EV/

EBITDA

(historic)

Price Per

Share*

(Rs)

I Lazard Model  2072 409 10.7x 22.8

II. Value Based On        

a.

Historical Transaction EV/Sub Multiples

(Idea-Escotel Jan'04, Bharti-Hexacom

Mar'04, Aircel-RPG Dec'04) 2259 443 11.4x 26.5

b.

Implied FY'05 EV/EBITDA Multiple for

Increase in 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

* Prices based on existing capital base

39

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