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Group 3 Neeraj Tharwani (1112033) Shamik Bhattacharya (1112058) Vijey Kumar (1112069) IIM Bangalore

BSNL Ltd. - Services


Basic Telephony

Internet
ISDN, X.25

Cellular Mobile Services


GSM/GPRS Band 900 MHz Coverage Country wide Service Voice, SMS, voice mail, WAP, MMS.

Leased Lines
Cellular Mobile Service

WLL (M) Band 800 MHz Coverage remote areas

Service - Voice

BSNL Ltd. Market Share: GSM


Market Share: Metros
Kolkata Chennai Mumbai Delhi 0.0% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 17.6% 21.1% T.N. Karnatka A.P. Gujarat Maharashtra 19.5% 22.9%

Market Share: Circle A


29.0% 24.5% 30.2%

0.0%

0.0%

10.0%

20.0%

30.0%

40.0%

W.B. & A & N M.P. Rajasthan U.P.(E) U.P.(W) Haryana Punjab Kerala 0.0% 10.0% 20.0% 30.0% 11.3% 34.9% 40.0% 34.7% 35.0% 14.0%

48.9%

J&K N.E.

66.5% 78.6% 62.2% 63.9% 54.0% 33.8% 20.0% 40.0% 60.0% 80.0%

34.7%
43.9%

Assam Orissa Bihar H.P.

50.0%

0.0%

Market Share: Circle B

Market Share: Circle C

BSNL Ltd. Market Share: GSM/CDMA


3% 4% 6% 8% 19% 15% 16% 4% 1% 2% 0% 0%

1%
21%

Reliance Bharti BSNL Hutch Idea BPL Group Others Spice Escotel

Market Share: All India

Tata/Hughes

BSNL Ltd. Cellular Coverage


BSNL Circles: 21 Metro: 2 Circle A: 5 Circle B: 8 Circle C: 6 BHARTI Circles: 15 Metro: 4 Circle A: 5 Circle B: 5 Circle C: 1 HUTCH Circles: 11 Metro: 4 Circle A: 3 Circle B: 4 Circle C: 0 MTNL Circles: 2 Metro: 2 Circle A: 0 Circle B: 0 Circle C: 0 IDEA Circles: 5 Metro: 1 Circle A: 3 Circle B: 1 Circle C: 0 RELIANCE Circles: 7 Metro: 0 Circle A: 0 Circle B: 2 Circle C: 5

BPL Circles: 4 Metro: 1 Circle A: 2 Circle B: 1 Circle C: 0

AIRCEL Circles: 2 Metro: 1 Circle A: 1 Circle B: 0 Circle C: 0

SPICE Circles: 2 Metro: 0 Circle A: 1 Circle B: 1 Circle C: 0

ESCOTEL Circles: 3 Metro: 0 Circle A: 0 Circle B: 3 Circle C: 0

HEXACOM Circles: 1 Metro: 0 Circle A: 0 Circle B: 1 Circle C: 0

TDMA/ GSM Service Providers Migration Path


GSM/GPRS GSM GSM/ GPRS WCDMA

GSM/GPRS/EDGE

GSM(2G) Speed Spectrum? Upgrade Requireme nt 14.4 Kbps -

GPRS(2.5G) 160Kbps Same

EDGE(2.75G) 384 Kbps Same Software / Hardware upgrade. Triband Phone

UMTS(3G) New New Cell sites. Software/Hard ware upgrade.

CDMA/ NMT450 Service Providers Migration Path


cdmaOne Cdma2000 1x-RTT (cdma450)

cdma2000 1x EV-DO

NMT450

cdma2000 1x EV-DV

2G Speed Spectrum? Salient Features 14.4 Kbps Circuit Switched

cdma2000 1x-RTT (3G) 150Kbps Same Same cell sites. Increased voice.

cdma2000 1xEVDO(3G-Phase 2) 2.4Mbps Same Simultaneous data and voice calls.

CDMA vs GSM - Which path to take?


12 10 8 6 4 2 0 GSM

CDMA

BSNL: 3G CDMA Route Valuation


Case Data - CDMA Year Subscribers Revenues 2004 424652 52690000 2005 797569 98960000 2006 1497974 185860000 2007 2813455 349090000 2008 5284156 655650000 2009 9924560 1231430000

NPV Calculation DCF Calculation at WACC 0.15 Year Cash flow Discount factor Discounted cash flow NPV 0 -2400000000 1 -2400000000 -956770259.9 1 98960000 1.15 86052173.91 2 185860000 1.3225 140536862 3 349090000 1.520875 229532341.58 4 655650000 1.74900625 374870015.5 5 1231430000 2.011357188 612238347.1

Real Options Analysis An approach


Right, but not obligation to undertake certain business

initiatives. Differs from conventional options as it is not typically traded as securities do not usually involve decisions on an underlying asset that is traded as a financial security R&D managers can use Real Options Valuation to help them allocate their R&D budget among diverse projects

Types of Options available


Options relating to project size

Option to expand Option to contract Options relating to project life and timing Option to defer Option to abandon Sequencing options (parallel / sequentially) Options relating to project Operation Output mix options Input mix options Operating scale options

Option Valuation Process


Input parameters
Spot Price: the starting or current value of the project
Volatility: uncertainty as to the change in value over time Strike price: corresponds to the investment outlays,

typically the prospective costs of the project Option term: corresponds to the life of the option. Option Style: American style: Option can be exercised any time up to the due date. European style: Option can be exercised only on the due date.

Options Various Models


Black-Scholes Model
Binomial Lattices Specialized Monte Carlo Methods Finite difference methods for option pricing

BSNL: 3G CDMA Real Options Analysis


Real call options for this growth model using black Schloe's calculator Strike price(million dollars) Current price of asset(present value of future cash flows in million dollars) Price of call Option 2400000000 0 499160260

Calculated NPV
Therefore with Real Call option we get a positive NPV (million dollars)of:

-956770259.9
-457609999.9

Sensitivity Analysis based on CapEx


506 -448

504
502 500

498
496 494 492 490

-450 503.54 502.65 -452 501.77 500.89 -453.23 -454 500.01 -454.12 499.14 -455 498.26 -455.88 -456 497.39 -456.76 -457.63 496.52 -458 495.66 -458.51 494.79 -459.38 -460 -460.25 -461.11 -462 -461.98
-464

2375 2380 2385 2390 2395 2400 2405 2410 2415 2420 2425

BSNL: 3G GSM Route Valuation


A' Circle Average ARPU (Circle A) - Q4 2007 Oct-Dec Subscriber Subscriber 07 base base % Maharashtra 301.3 2735842 26% Gujarat 259.1 1766740 17% A.P. 314.9 2173710 21% Karnatka 246.2 1717436 16% T.N. 239.6 2182974 21% Average ARPU (Metro) - Q4 2007 Metro Kolkata Chennai Average prepaid ARPU 275.4 619 90% 10% Postpaid ARPU Blended ARPU Expected ARPU (BSNL) 2007 2008 309.7 247.78229 390.4 312.32309 20% Expected Subscriber (BSNL) 2007 2008 2009 10576702 19778433 36985669 1711642 3200770.5 5985441 87%

Oct-Dec 07
313.9 395.2

Subscriber base
841578 870064

Subscriber base %
49% 51%

Average prepaid ARPU Postpaid ARPU Blended ARPU FY ARPU (Circle A) ARPU (Metro) drop

355.2 707 390.4

90% 10%

309.7

2009 198.2258 249.8585

2010 158.5807 199.8868

2011 126.8645348 159.9094234

Subscriber Base Circle A Metro Increase

2010 69163201 11192775

2011 129335186.7 20930488.32

BSNL: 3G Economics (2007 2011)


400000000 350000000 300000000 250000000 200000000 150000000 100000000 50000000 0 1 Circle A 2 Metro 3 4 All India 5 450.0 400.0 350.0 300.0 250.0 200.0 150.0 100.0

50.0
0.0 1 ARPU (Circle A) 2 3 ARPU (Metro) 4 5 ARPU (All India)

Expected Subscriber Base (2007 2011)

Expected ARPU (2007 2011)

BSNL: Piloting in Metros


Capex Allocation Assumptions: Cost at which AT&T wireless rolled out 3G for 60 million customers(million) Adjusted Capex for Pilot 3G for BSNL (Metro) DCF Calculation at WACC: Year Cash Flow Discount Factor Discounted Cash Flow NPV(Metro) 4400 FY ARPU (Metro) Subscriber Base (Metro) Revenue in Million dollars Pilot capex Spectrum fee for Pilot Total Expenditure 2008 370.9 3200770.5 26.4 234.72 0.00 234.72 2009 352.3 5985440.9 46.9 2010 334.7 11192774.5 83.3 2011 318.0 20930488.3 147.9

234.72317

0.15 0 -234.72317 1 -234.72317 -37.044163

1 26.4 1.15 22.939165

2 46.9 1.3225 35.43602283

3 83.3 1.520875 54.74095178

4 147.9 1.74900625 84.5628703

using real call options by Black Schole's Method(million dollars) current price strike price price of call option 197.67901 234.72317 87.81

ARPU Sensitivity Analysis for Metros


100 50

0
5% -50 10% 20%

NPV(Metro)
price of call option Net NPV(million dollars)

-100

-150

5% NPV(Metro) price of call option Net NPV(million dollars) -37.0442 87.81 50.76584

10% -66.5257 66.8 0.274289

20% -115.062 35.7 -79.362

BSNL: Piloting in Circle A


Capex Allocation Assumptions: Cost at which AT&T wireless rolled out 3G for 60 million customers(million) Adjusted Capex for Pilot 3G for BSNL (Circle A) 4400 FY ARPU (Circle A) Subscriber Base (Circle A) Revenue in Million dollars Pilot capex Spectrum fee for Pilot Total Expenditure 0.15 0 -1450.42 1 -1450.42 -481.41 2008 294 19778433 129 1450.42 0 1450.42 2009 280 36985669 230 2010 266 69163201 408 2011 252 129335187 725

1450.4184

DCF Calculation at WACC: Year Cash Flow Discount Factor Discounted Cash Flow NPV(Circle A)

1 129.31 1.15 112.45

2 229.73 1.3225 173.71

3 408.11 1.520875 268.34

4 725.00 1.74900625 414.52

using real call options by Black Schole's Method(million dollars) current price strike price price of call option

969.01 1450.42 364.7

Net NPV(million dollars)

-116.71

ARPU Sensitivity Analysis for Circle A


600 400 200 0 5% -200 -400 -600 -800 -1000 10% 20%

NPV(Circle A)
price of call option Net NPV(million dollars)

NPV(Circle A) price of call option Net NPV(million dollars)

5% -481.406 364.7 -116.706

10% -625.923 271.4 -354.523

20% -863.846 139.1 -724.746

BSNL: Current Scenario


Currently BSNL has only 4.8 million CDMA customers compared to 93 million GSM / 3G customers. For private dual technology players like Reliance Communications (Rcom) and Tata Teleservices (TTL) are pushing GSM /3G instead of CDMA and both are intending to use CDMA network for data only in coming days. Aggressive EVDO coverage expansion with ZTE Though BSNL has quite good coverage in the metro and urban areas, on sub-urban areas especially tier II and III cities BSNL has less than 20% EVDO coverage. BSNL has entered into equipment supply agreement with ZTE, which is one of the worlds top CDMA supplier. BSNL should take care of EVDO expansion via ZTE. Investing on EVDO Rev B network Instead of investing EVDO rev A (3.1 Mbps downlink), BSNL must go for EVDO Rev B technology, preferably Rev B Phase II (supports upto 4.9Mbps per 1.25MHz channel). Starting trials of LTE on 800MHz band on 1.4MHz channels LTE can be deployed in channel widths as small as 1.4 megahertz, and in low spectrum bandwidth, for example, LTEs very high spectral efficiency and edge of cell performance means that even in a 1.4 MHz channel LTE provides close to the average sector throughput performance of an HSPA 5 MHz carrier. NTT Docomo has already started some trials on LTE over 1.4MHz channels. BSNL can either do their own trials or wait for global LTE roll out on this way.

APPENDIX

Black- Scholes Model

is the cumulative distribution function of the standard normal distribution is the time to maturity is the spot price of the underlying asset is the strike price is the risk free rate (annual rate, expressed in terms of continuous compounding) is the volatility of returns of the underlying asset

References
Migration to 3G Wireless Broadband Internet and Real Options: The Case of an Operator in India

http://www.trai.gov.in
http://www.coai.com/ http://voices.yahoo.com/comparison-between-real-option-valuationdiscounted-465727.html http://en.wikipedia.org/wiki/European_option

http://en.wikipedia.org/wiki/American_option
http://en.wikipedia.org/wiki/Real_options_valuation http://en.wikipedia.org/wiki/Black%E2%80%93Scholes http://www.auspi.in/