ATLAS Interactive – India

BUSINESS VALUATION

MAY 2005

By Philip Carse
Atlas India Broadband Valuation – May 2005
This note presents an estimated valuation of Atlas India’s Net TV broadband operation, as at May
2005, derived from discussions with Atlas management (primarily Amyn Chagan) and desk
research. We have not visited the Atlas India operation, nor undertaken financial or legal due
diligence, for example on Atlas India’s various contracts and vendor funding agreements.

Atlas India is in the process of rolling out innovative, new broadband services to Indian
subscribers, using the network of the incumbent fixed line operators, BSNL and MTNL:
• With BSNL, Atlas will install DSL equipment in local exchanges and offer broadcast and
on demand TV, gaming, broadband internet access and other services to BSNL
subscribers. Atlas has signed a contract, is installing equipment, and intends to launch
services from 10 BSNL exchanges in the Delhi National Capital Region in the second half
of 2005.
• With MTNL, Atlas has been selected to provide broadcast and on-demand services and
set top boxes to MTNL subscribers, with MTNL providing broadband connectivity. Atlas
has been selected for Mumbai, and is in discussions to either switch Mumbai for Delhi
(which is closer to its Network Operations Centre), or serve both cities. Trial services
could commence at a similar time to the BSNL launch.

Preparatory work is well advanced and includes signing commercial contracts with BSNL for
access to network and subscribers, with ZTE for vendor funding and full systems integration
services, and with other equipment vendors. Atlas is also undertaking negotiations with content
providers, commissioning market research, obtaining local offices and recruiting staff. To date,
Atlas has spent well over $1m on developing the concept, and has taken delivery of some $23m
of equipment to cover the first 50,000 subscribers. Atlas will be one of the first broadband
providers in India, providing significant first mover advantages.
Investment Positives
We believe that the Atlas India project holds several significant investment positives:
• Atlas’s contracts with BSNL and MTNL provides Atlas with fully unbundled local access
to 12m fixed line subscribers.
• Atlas has secured $230m of non-recourse vendor funding from ZTE of China, which
should meet a substantial proportion of network capex requirements. In addition, ZTE is
undertaking full systems integration activities
• The Indian market is potentially very attractive for innovative new TV and broadband
services, offering a fast growing, vibrant economy, a rapidly growing middle class, and
insatiable demand for new services, as proven by the explosion in mobile technology. In
addition, competing cable TV services are of poor quality.
• Atlas has sought to minimise risk through revenue sharing agreements with major
partners, for example BSNL and MTNL for DSL access and content providers for
broadcast and on-demand programming.
Investment Risks
As one would expect, the India broadband project is also subject to the usual commercial,
technical and regulatory risks associated with a start up operation for new services in a previously
untested market. We believe the major risks are: unproven demand for broadband services in
India, untested relationship with BSNL and MTNL, and reliance on BSNL/MTNL exchanges and
copper lines, increasing competition from other broadband providers, cable TV and satellite
operators, and mobile operators. On the other hand, the risk to the Atlas Group has been partly
mitigated through revenue sharing agreements, and obtaining non-recourse full vendor funding
from ZTE.
Valuation
The value of Atlas India’s broadband project could be substantial if Atlas achieves its business
plan. We have estimated a range of valuations at different time periods and using both
theoretical (DCF) and current market multiple methods. The estimates are summarised in the
following table and are described below, and highlight the potential for serious value creation
should the business be successful.

Exhibit 1. Atlas India Estimated Theoretical Valuations

Time Enterprise Equity

Method Main assumptions Horizon Value Value

DCF 15%/11.4% discount rate 10 years $700-1300m $400-1000m

Bharti EBITDA multiple 10x current year 2008-2009 $420-1200m $100-900m
Bharti subscriber value $1000 per subscriber 2007-2008 $510-1200m $340-950m

In reality, today’s value will be substantially lower than these valuations given that the business:
• is still a start up with no revenues and a long time horizon to profitability and positive
cashflows
• but nevertheless has assets in the form of the BSNL agreement, a preferred bidder
status with MTNL, $230m of vendor funding commitments from ZTE, and extensive work
already undertaken in preparation for network rollout and service delivery.

Given the reasonably well advanced status of the start up project, the huge potential saleability of
the Atlas broadband model in India, and the potential for a $1bn plus ultimate valuation, we
believe that the Atlas India project today has an option-like equity value of perhaps $50m.

DCF Valuation
We estimate an NPV of future cashflows of $700m, using DCF (discounted cash flow) analysis, a
WACC (weighted average cost of capital – or discount rate) of 15% and a perpetuity growth rate
of free cash flow of 4%. If we substituted a lower WACC, for example the 11.4% rate used by
Citigroup’s analysts for Bharti Televentures, the enterprise value would increase to $1.3 billion.

Current Year EBITDA Multiple

The following table shows comparable multiples for Indian telecoms companies and European
broadband players. The European broadband companies are trading on current year EBITDA
multiples of 12-16x, while Bharti Televentures, one of India’s growth telecoms stocks, is trading
on 10x current year EBITDA, the lower multiple probably reflecting higher country risk. Applying
the same 10x multiple to Atlas India in 2008, when it becomes EBITDA profitable, would give an
enterprise value of $420m, or an equity value of $100m given net debt of $320m at that date,
while applying the multiple for the following year would give enterprise value of $1.2bn and equity
value of $900m.

Per Subscriber Values

An alternative approach is to use per subscriber values. We estimate that the stock market
currently values each of Bharti Televentures’ 11.8m mobile and broadband subscribers at $875,
while European broadband subscribers are valued at $1,800 for Iliad (with 1m broadband and
telephony subscribers) to $7,500 for Fastweb (with 550,000 broadband subscribers). In
comparison to Atlas India broadband, Bharti has a lower ARPU ($11.6 v c$20), yet is profitable
with a proven business plan and close to cash flow breakeven. At $1,000 per subscriber, Atlas
India broadband would have an Enterprise Value of $140m at end of 2006 and $510m at the end
of 2007, translating into equity values of $75m and $300m.
Exhibit 2. Comparable Telecoms and Broadband Valuations
Net Debt Enterprise
Exchange Share Mkt Cap (Cash) Value Source of
DETAILS Main market Ticker Ccy rate Shares (m) Price (lc) (US$m) US$m (US$m) Estimates
BT BT.L UK£ 1.89 8,541 1.97 31,801 22,161 53,962 UBS
Indian telecoms:
Bharti Televentures India BRTI.BO Rs 43.32 1,853 217.10 9,288 1,030 10,319 UBS
MTNL India MTNL.BO Rs 43.32 630 116.3 1,691 (1,027) 664 UBS
VSNL India VSNL.BO Rs 43.32 285 204.2 1,343 (267) 1,076 UBS
Broadband:
Fastweb Italy FWB.MI Euro 1.29 56 36.3 2,635 1,050 3,685 UBS
Iliad France ILD.PA Euro 1.29 54 28.6 1,979 (51) 1,928 Reuters
Versatel Netherlands VERS.AS Euro 1.29 517.4 1.9 1,295 56 1,351 UBS

Sales (m) EBITDA (m) Net Income (m)

FORECASTS 2004 2005 2006 2007 2004 2005 2006 2007 2004 2005 2006 2007
BT £18,077 £19,313 £19,714 £5,562 £5,847 £5,972 £1,500 £1,535 £1,633
Indian telecoms (R bn):
Bharti Televentures 77,586 108,257 137,974 29,024 43,493 55,320 65,240 13,906 24,606 34,266 40,244
MTNL 53,760 59,132 59,738 13,602 17,241 16,592 9,141 10,700 10,267 0
VSNL 28,764 30,107 31,927 5,545 7,538 10,180 3,726 4,938 5,978
Broadband:
Fastweb € 694 € 1,004 € 1,285 € 1,595 € 165 € 242 € 364 € 529 € 385 -€ 80 -€ 51 €9
Iliad € 491 € 670 € 797 € 109 € 191 € 253 € 41 € 62 € 90
Versatel € 579 € 726 € 886 € 1,050 € 114 € 64 € 152 € 273 -€ 24 -€ 111 -€ 35 € 44

EV/Sales EV/EBITDA Price-Earnings Ratio

MULTIPLES 2004 2005 2006 2007 2004 2005 2006 2007 2004 2005 2006 2007
BT 1.6x 1.5x 1.4x 5.1x 4.9x 4.8x 11.6x 10.6x
Indian telecoms:
Bharti Televentures 5.8x 4.1x 3.2x 2.8x 15.4x 10.3x 8.1x 6.9x 28.9x 16.4x 11.7x 10.0x
MTNL 0.5x 0.5x 0.5x 2.1x 1.7x 1.7x 8.0x 6.8x 7.1x
VSNL 1.6x 1.5x 1.5x 8.4x 6.2x 4.6x 15.6x 11.8x 9.7x
Broadband:
Fastweb 4.1x 2.8x 2.2x 1.8x 17.3x 11.8x 7.9x 5.4x 5.3x (25.6x) (39.9x) 239.5x
Iliad 5.8x 4.3x 3.6x 26.3x 14.9x 11.3x 37.6x 24.6x 17.1x
Versatel 1.8x 1.4x 1.2x 1.0x 9.2x 16.3x 6.9x 3.8x (41.8x) (9.1x) (28.8x) 22.7x

Current Status of India Project

Background
Atlas has signed an agreement to provide broadband services to BSNL customers, using DSL.
BSNL is the incumbent fixed line operator for all of India with the exception of Mumbai and Delhi
(which is served by MTNL). Given currently low levels of broadband provision in India, BSNL has
sought commercial ventures with companies, such as Atlas, with the know-how to oversee the
rollout of DSL networks and develop broadband services.

Atlas’s non-exclusive 15-year agreement with BSNL provides Atlas with the right to install DSL
equipment in BSNL local exchanges, provide IP broadband services to BSNL customers using
BSNL access lines, offer a wide range of broadcast, on-demand, interactive, communications and
internet services (though not voice telephony), and set tariffs (subject to BSNL agreement). Atlas
will be responsible for operating services, sales and marketing, and customer service, while
BSNL will be responsible for collecting and passing on revenues to Atlas, providing necessary
collocation space, and upgrading access lines where necessary. Atlas will pay BSNL 29% of
revenues. Atlas is therefore effectively gaining unbundled local loop type access to BSNL’s
network, but in a controlled competitive environment, and with BSNL sharing the risk through
revenue sharing. We understand that Atlas is entitled to any receive any new, more favourable
commercial terms that BSNL may sign with other broadband providers.

Atlas has also been selected by MTNL to provide broadband services and set top boxes in
Mumbai, though in this case MTNL will provide the broadband connectivity. Atlas is currently
negotiating to either swap Mumbai for Delhi, which is closer to its new NOC, or be awarded both
cities. Assuming the successful completion of a trial, Atlas would then negotiate full commercial
terms with MTNL for a large scale rollout, including revenue sharing, pricing, and operational
responsibilities.

Atlas has secured funding of US$230m for 550,000 lines from ZTE of China.
Summer 2005 Launch
We understand that Atlas is on track to launch services from 10 exchanges in the Delhi National
Capital Region (NCR) in the second half of 2005 and will then, subject to initial commercial and
technical experience, expand network rollout to many of India’s major cities. The potential market
is huge – some 40m fixed lines, with a substantial proportion located in perhaps 40 major cities.

Exhibit 3. India, Delhi and NCR (Initial Rollout Area)

Source: Atlas

The main developments to date have been:

• Spending by the Atlas Group of well over $1m of its own resources on project
development.
• The signing of the formal agreement with BSNL in April 2004, and outline terms of
agreement in June 2004
• Selection by MTNL to offer trial broadband services in Mumbai
• The signing of the vendor funding contract with ZTE in August 2004 for an initial $23m,
with a new contract for $208m being signed in April 2005.
• Conclusion of negotiations with preferred equipment suppliers (see below), with the first
purchase orders being sent out on 7th December 2004 (to Bitband Technologies and
Tandberg).
• Delivery of $23m of network equipment, sufficient for the first 50,000 subscribers
• The necessary site surveys on the initial exchanges have been undertaken
• Atlas has obtained new office space and commenced local recruitment
• Construction of the network operations centre and broadcast design studio facilities has
commenced in partnership with Noida Software & Technology Park Ltd. (NSTPL)
• Commissioning of market research
• Content negotiations have commenced for broadcast and on-demand product.

Development of B2B Services

In addition to the B2C broadband service for BSNL customers, Atlas is well advanced in
developing a B2B broadband proposition, primarily for hotels. This market is large (90,000 hotel
rooms, with demand growing at 15-20% per annum1), and virtually untapped, and would leverage
the network facilities and content required for the Net TV consumer broadband offering.

Net TV Broadband Services

Net TV will be Atlas’s branded broadband offering in India. Although this will initially be provided
to BSNL and MTNL customers, Atlas also intends to use alternative broadband distribution
channels, thus leveraging potentially significant economies of scale and scope.

As the following figure shows, Net TV is planned to incorporate a wide range of broadcast, on
demand, interactive and communications services. Many of these services are not available in
India today (eg video on demand), while others such as free to air broadcast or pay TV channels
are available, but often of a poor signal quality due to the poor state of India’s cable TV networks
(see below).

Most of the services will be accessible through a conventional television set, using a set top box
(STB) to be provided by Atlas, while PC owners will be able to gain access to enhanced
broadband offerings.

Exhibit 4. netTV Service Offering

BROADCAST OFFERINGS
Home Channel Atlas India’s home channel, advertising services, forthcoming programmes etc
Free Broadcast TV 25 free to air channels provided by several broadcasters.
Channels
Pay TV Channels Premium broadcast TV channels, including sports and movies, provided by HBO,
Star, Zee TV & various other broadcasters.
Video-on-Demand Large library of content, including Hollywood & Bollywood movies, available for
viewing on demand
Pay Per View One-off events that have special appeal, particularly sports events
Free Radio Channels Rebroadcast of All India Radio (AIR) channels
Music on Demand For example film soundtracks
Games Single player and multi-player games
E-Commerce For example, Baazee.com (now taken over by e-Bay), home shopping channels
E-Learning Long distance training and education courses
Interactive TV For example tele-voting
Video Conferencing Via the TV set
Email/Web access Via the TV set
BROADBAND OFFERINGS
Messaging SMS, MMS, Instant Messaging
Video Conferencing Via a PC
Recording PVR functionality, enabling customers to record programmes
Web Access High speed internet access
File Download For example, access to software packages and upgrades
Source: Atlas

Free and Premium Broadcast Channels

We understand that Atlas is in advanced negotiations with suppliers of free and premium
broadcast channels, for inclusion in Net TV. Potential content providers include the state
broadcaster Doordarshan (the Indian equivalent of the BBC), which claims to be the largest
terrestrial broadcaster in the world, with a reach of 254m viewers in 82m households.
Doordarshan broadcasts 25 national and regional channels, covering a wide range of genres,
totalling 4000 hours per week. Doordarshan has also recently launched digital terrestrial services.

1
Hotels In India - Trends And Opportunity by Manav Thadani, Managing Director and Deepika Malkani, Editor - HVS International
New Delhi / November 2004 (http://www.hotel-online.com/News/PR2004_4th/Nov04_HVSIndia.html)
India also receives an estimated 247 free to air and 96 paid channels from 27 satellite systems,
some of which we understand will be available to NetTV. Potential multichannel partners for
Atlas in India include Zee TV, which is India’s largest vertically integrated media and
entertainment company and the largest producer of Hindi programming in the world, and Star TV,
owned by News International, which broadcast 40 channels in 7 languages to 173m viewers
across Asia.

Exhibit 5. Free and Paid Digital Satellite Programming Available in India

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On Demand Programming
Atlas plans top provide a wide array of on demand programming (video on demand and pay per
view), focussing on movies, given India’s heritage as the world’s largest producer of movies.
Radio
Atlas plans to rebroadcast many of the All India Radio (AIR) radio channels. AIR currently
broadcasts 21,000 hours of radio each week, in 24 languages and 146 dialects, from 229
broadcasting centres, to 1 billion people.
Interactive Services
Atlas plans to exploit its expertise in interactive TV programming, through its sister company
Celcast, to develop programming specifically suited for viewer interactivity, e.g. Pop Idol and Big
Brother voting formats.
Atlas India Strategy
Pricing
We understand that Atlas’s initial offering of internet access (minimum 128kbps), 40 broadcast
channels, and VOD will be priced at Rs799 ($18) per month. This compares with typical Indian
market ARPUs of $20 for fixed services and $12 for mobile services, and follows extensive
market research into the potential demand for broadband services.
Network and Technology
Atlas’s netTV business model is based on two essential technological elements:
• An IP-based (Internet Protocol) telecommunications network offering voice, data, Internet
and video simultaneously over the same connection both to residential and business
clients
• A very high connection speed gained by using DSL technology over existing telephone
copper connections.

Broadband IP is emerging as the state of the art technology to distribute television and high
speed internet content, conferring the following benefits:
• Supports the distribution of video in any format, i.e. broadcast (traditional television),
multicast (pay-TV and pay-per-view) and unicast (video-on-demand and interactive
television)
• Allows the integrated distribution of various types of services including voice, Internet and
video (triple play) using the same network. Not only does the use of IP technology allow
the development of a myriad of modular, value added services, but it is also much easier
and less costly to manage
• Two-way capability supports fast interactive services
• Does not suffer from the same bandwidth constraints encountered by cable, satellite and
terrestrial broadcast systems
• Enables the transmission of on-demand video and audio content to individual subscribers
• Has the lowest investment and operational costs of any full service network.

We believe that the use of TV over IP broadband represents the optimum strategy for Atlas in
India in terms of service functionality and cost. Although TV over IP is a relatively new
technology, it has already been proven in a mass market environment by companies such as
Fastweb (formerly e-Biscom) in Italy and Iliad in France (see profiles below), and is now receiving
support from incumbents worldwide, who are launching their own TV over broadband services.

Exhibit 6. Fastweb and Iliad Profile

Iliad (France) Fastweb (Italy)
Network 12,00km fibre network to 1000 Direct fibre (40%) and unbundled local loop
towns, plus unbundled local loop DSL (60%) to 4m homes
DSL in 300 exchanges
Services Internet services launched Internet services launched January 2000,
November 2002, TV over DSL followed by VoD in March 01 and TV in
(110 channels) in December 03 August 03
Subscribers 768,000 DSL subscribers 67,000 business and 390,000 residential
(1H04) broadband customers (3Q04)
ARPU €290 per year (1H04) €903 per year (September 04)
Revenue (1H04) €222m (+77%) €325m (+78%)
EBITDA (1H04) €46m (+106%) €105m (+165%)
Net Income €10.6m (+46%) (€65m)
Source: Company reports

Atlas’s network strategy for India is effectively an unbundled local loop solution, whereby Atlas
installs its DSL equipment in BSNL exchanges, with backhaul connectivity to central functions,
such as the head end. The main elements of the network are as follows:
 • The head end:
o Connectivity with the outside world in terms of content feeds (e.g. satellite and
terrestrial feeds) and internet connectivity
o Network management
o The head end function (i.e. broadcasting)
o VoD server
o Service software
• The transmission network – STM1 (or higher capacity) leased line connectivity between
the network centre and local exchanges
• Central Offices (telco local exchanges) – house DLSAMs, which convert local copper
exchange lines to DSL capability
• Customer Premises Equipment – a set top box for video content and a broadband
modem for broadband internet content, which are connected to the customer’s existing
telephone line

Exhibit 7. netTV Network Schematic

Equipment suppliers have been selected for the major network elements, with $23m of equipment
to cover the first 50,000 subscribers having now been delivered. ZTE is providing the core DSL
equipment (DSLAMs etc) as well as providing overall systems integration, and funding the
project. As the following table shows, Atlas has selected well known and respected suppliers for
other crucial network elements.

Exhibit 8. Equipment Suppliers

Supplier Scope of Activity
ZTE International XDSL Equipment Supplier and
End-to End Systems Integrator
SeaChange VoD servers
Tandberg Television Head End, De/re-code
ORCA Interactive Middleware
SunTec Billing Solutions
sunup Content management
WideVine Digital Rights Management
Hewlett Packard Billing/middleware servers
Source: Atlas
Operations
We understand that Atlas India has already commenced the necessary groundwork to begin
building an organisation capable of delivering netTV to the mass market. Atlas has now obtained
office space for the venture, appointed project managers, and begun recruiting for key positions.
This groundwork also extended to completing the process of market research and commissioning
of advertising agencies. Detailed operational issues have been defined with the incumbent.

Sales and Marketing

The primary responsibility for advertising and marketing the service will lie with Atlas, although
incumbent and other telcos will have an incentive to also promote the service. In the early days,
marketing needs to be highly focussed on the customers attached to DSL-enabled exchanges.
Atlas will work closely with telecom operators, for example ensuring that they include promotional
material in monthly bills sent to customers on those exchanges etc. Over time, Atlas will need to
increase overall awareness of netTV, for example through press and local TV campaigns,
advertising with major Indian ISPs etc.

Customer Operations
Atlas will use a mixture of outsourced and in-house operations, the decision to be based on
factors such as cost and quality of service.
Billing
Billing information will be provided through the subscriber management system within the
middleware supplier’s software. This will be sent directly to BSNL in a format yet to be agreed.
BSNL will be responsible for revenue collection, and under the expected contracts, will pay Atlas
100% of the full invoice value for that month within 15 working days.
Support
Customer service will encompass issues such as processing potential customer enquiries, order
processing, and ongoing support in terms of responding to customers’ technical queries,
complaints etc. Given the relatively new and relatively technical nature of the proposed netTV
services, a well-educated customer service operation will be essential. Atlas intends to outsource
this operation initially, and is currently talking to interested parties. Over time, Atlas will develop
web-based customer service solutions, e.g. technical help lines, in order to gain operating
efficiencies.
Customer Set-Up
We understand that the initial line testing for a potential customer, to ensure suitability for netTV
services, can be done remotely from the exchange. Atlas believes that it should be relatively
straightforward to have self-installation of the PC-only product, given the experience of other
markets, where self-install is now undertaken in a majority of cases.

An exception will be where the customer requires internal wiring, though over time Atlas intends
to offer wireless solutions for in-house transmission of the high-speed internet service. However,
a technician will be required to install the STB by BSNL/Atlas.
India Politics and Economics
Politics
India is the world’s 2nd largest country by population, with 1.05bn people. The current Congress
Party-led coalition government, which won a surprising victory in May 2004, is considered
unstable, with conflicting pressures from supporting economic liberalisers and Communist parties,
but is expected to remain in power through 2006. On October 13th 2004, it won a crucial test in
the Maharashtra state elections, which has strengthened its power considerably.
Economics
India continues to enjoy strong economic growth, though is unlikely to match 2003’s 8.2% in the
near term. Although the non-agricultural economy is enjoying an upturn, the late and subnormal
monsoons slowed GDP growth to 6.4% in 2004, with 6.7% forecast for 2005. The inflation outlook
is relatively benign, with consumer prices forecast to rise 4.7% in 2005 and 5.0% in 2006,
compared with 3.8% in 2004.

Per capita income levels are around $560 and annual population growth is 1.7 per cent (thus
reducing annual growth in per capita income to about 4 per cent). However, this figure disguises
the importance of the Indian middle classes, thought to number around 150 million today and a
key driver of growth. This influence is particular strong in the mobile phone market where the
subscriber base is increasing by over 1million handsets a month, accounting for almost a fifth of
global demand. This middle class market segment will be a key target for Atlas’s broadband
services.

Exhibit 9. Indian Economic Statistics

2003 (actual) 2004 (forecast) 2005 (forecast)
Real GDP Growth (annual % change) 7.2 6.4 6.7
GDP per Capita ($) 543 602
Inflation (annual % change) 3.8 4.7 5.0
Unemployment (% of working population) 9.1 9.5
foreign currency reserves (US$BN) 99.5 117.1 125.7
Government fiscal balance (% GDP) -5.3 -5.5 -5.4
Source: The IMF

The Indian Telecoms, TV and Internet Market

Telecoms Services

India offers a vibrant telecoms market, notable for being among the fastest growing mobile
markets in the world. According to latest figures for April 2005 from the Indian telecoms regulator
TRAI, India now has 53.65m mobile subscribers and 46.5m fixed line subscribers, growing at
17m and 7.2m a year respectively based on April 2005’s run rate. The combined 100m lines
represent a tele-density of 9.26%, which has almost doubled in the past 2 years but is still much
lower than comparable countries (eg China at 20%). Broadband services are now starting to
attract demand, with 44,000 lines added in April to take the total to 228,000.

The major players are summarised in the following table, and include the fixed line incumbents
MTNL and BSNL, and the leading mobile operators, Bharti and Reliance. Most of the major
players now compete in both fixed and mobile services, and intend to offer broadband services.
However, BSNL and MTNL retain virtually all fixed line access lines, though operators such as
Bharti and Reliance have been building local infrastructure. The Indian government has recently
stated a desire for a merger between BSNL and MTNL, not least to facilitate the rollout of
broadband services across India.
A clear signal of rapid growth in India bandwidth demand has been two recent purchases of
international submarine cable companies by Indian operators. In October 2004, VSNL agreed to
buy Tyco's 59,648-kilometer network spanning the Atlantic and the Pacific oceans for $130
million, while Reliance bought Flag Telecom for $211m in January 2004.

Exhibit 10. Key Indian Telecoms Players

Company Ownership Local NLD ILD GSM WLL ISP Revenue Coverage
acces s
s US$m
BSNL Government ● ● ● ● ● 6,739 Everywhere except
(100%) Delhi and Mumbai
MTNL Government ● ● ● ● 1,391 Delhi and Mumbai only
(56.25%)
Bharti Singapore ● ● ● 1,088 36 cities
Televentures Telecom
(28.5%),
Warburg Pincus
(15%)
VSNL Tata Group ● ● 733 International only
(45%)
Government
(26%)
Reliance Reliance ● ● ● ● ● 588 1,100 cities
Infocomm Industries and
the Ambani
Family
Hutchison Hutchison ● 587
Max Whampoa
Tata Tata Group ● ● ● NA 17 circles
Teleservices
Source: Gartner, COAI

The rapid growth in the mobile market is a combination of existing low penetration relative to GDP
levels, and fierce competition. Most administrative districts have up to 4 GSM operators, plus
CDMA operators (primarily Reliance) providing limited mobility services, with GSM accounting for
78% of all subscribers. According to TRAI, average mobile revenues of US$0.04 per minute are,
along with China, the lowest in the world, and compare with 7c in Hong Kong and 9c in the US,
which are also considered highly competitive markets, and 25-35c in most European markets.

The mobile market is projected to continue growing at a rapid rate, taking the number of
subscribers from 54m at April 2005 to just over 200m by the end of 2007 (source: COAI).

Television and Entertainment Services

The Indian cable TV market is currently very fragmented, with at least 30,000 operators.
However, a number of larger operators have entered the market recently, including Siticable
(backed by Zee TV), Hathaway Cable & Datacom, IndusInd Media, (InCable Net) and RPG. The
cable companies offer high speed internet, multi-channel television and VoD. However, the
quality of cable installation is mixed, with much of the required cabling running over ground and
through trees, giving both security and quality issues. Service quality is poor, with ‘high speed’
internet running at very low levels (in some cases 30 kbps), and television broadcast being
pixelated, patchy and suffering from ‘blocking’.

Despite the poor quality, cable TV has been popular in India with more than 38 million homes
receiving subscription based multi-channel services. Prices for the service are, however, very low
($1-2 per month for a 10-12 channel service and $4-6 per month for 30-60 channel service).
Doordarshan is the national free to air broadcaster, broadcasting 25 channels. The company has
recently commenced direct to home satellite services, offering 30 channels, including 16
Doordarshan channels. Doordarshan is in the process of rolling out Digital Free to Air services
(DTT) offering a wider choice of broadcast channels using digital signals. The user requires
additional equipment to receive these services and Doordarshan has been enabling rollout by
supplying the additional equipment for free. Atlas may need to ensure that DTT services can be
incorporated into its own set-top box to avoid the user needing multiple STBs.

In September 2001, the Government set up a task force to examine the possibility of introducing
Conditional Access Systems (CAS) in India. Taking into account the commendations of the Task
Force, the Ministry of Information & Broadcasting introduced the Cable Television Networks
(Amendment) Bill, 2002 and the bill has now become law. Note that Atlas’s netTV service will
NOT be covered by this Act. In a recent development, the government has put the requirement
for CAS on hold.

Public Broadband Policy

Broadband has become an important political issue for the Indian Government, leading to the
recent publication of a policy document.2 The document notes that India suffers low internet
penetration compared to many Asian countries, with penetration of broadband, internet and PCs
of 0.02%, 0.4% and 0.8% respectively at the end of 2003. The government estimates the rollout
of internet and broadband subscribers growing from 6m and 3m respectively at year end 2005 to
18m and 9m at year end 2007 and 40m and 20m at year end 2010, with broadband defined as an
always on, minimum 256kbps download service.

The government not surprisingly identifies DSL over copper as a priority for broadband given the
existing BSNL and MTNL networks. The government estimates that perhaps 7m out of the 40m
copper lines available today are technically suitable and economic for broadband services.

Despite the importance of DSL, the Indian Government has recently backed away from a
proposal from the regulator, TRAI, that BSNL and MTNL be required to open their networks to
third party broadband providers, for example by local loop unbundling as mandated in many other
countries. Instead, the government is happy for existing operators such as BSNL and MTNL to
negotiate franchise agreements, similar to the BSNL/Atlas agreement. This is undoubtedly good
news for Atlas, as it will reinforce Atlas’s early mover advantage in offering broadband to BSNL’s
subscribers.

A number of companies have launched broadband initiatives, as summarised in the following

figure.

Exhibit 11. Key Indian Broadband Players

Operator Broadband Plans
Atlas Launching TV over DSL from 10 BSNL exchanges in Summer 2005, ultimately reaching 38
cities. Targeting 1m subscribers within 2 years
BSNL 198 cities from December 2004, with a target of 1m subscribers by end 2005. This would
include services being offered via franchisees, such as Atlas.
MTNL Is spending $40m by the end of 2004 to rollout rollout broadband services in Mumbai and
Delhi, and is targeting 1m subscribers by the end of 2005. Services will be offered by
franchisees, including Atlas
Reliance Announced plans to build a national metro fibre network based on optical Ethernet, to be
Infocomm operational during 2004. The company is looking to provide fibre connections to around
200,000 residential and enterprise buildings, providing VoD, fast internet and business data
services. The company has been testing IP TV in Mumbai and Jamnagar, but has not yet
announced plans to install the access network required to rollout such services.

2
Govt of India, Broadband Policy 2004 (File No 813-07/03-LR)
VSNL Spending $110m rolling out services in 8 cities (New Delhi, Calcutta , Mumbai, Madras,
Bangalore, Hyderabad, Ahmedabad and Pune) and targeting 1m subscribers. Purchased
Dishnet DSL in March 2004, an ISP which has around 150,000 dial-up customers and 36,000
DSL users in 44 cities, mostly in the southern and western regions of the country
Bharti launched DSL services about a year ago in 5 states. About half its subscribers are in Delhi,
Telenet Faridabad and Gurgaon with monthly additions of around 2,000 users. Price for Bharti
Telenet’s 128 Kbps high-speed internet access service is currently $10 per month.
Korea Signed an MOU with BSNL to provide TV over IP, but no evidence of further progress.
Telecom
Times In collaboration with Alcatel, has been requested to demonstrate proof of concept by BSNL.
Internet
Hathway Offers broadband services over its cable networks in Mumbai, Delhi, Chennai, Bangalore,
Cable Hyderabad, Pune, Nashik and Ludhiana, charging R750 ($15) per month for a 256kbps
service.

The following figure summarises the strengths and weaknesses of the various technologies and
players. We believe that, on balance, using DSL over the BSNL network is the best broadband
solution for Atlas in India, offering a high installed base of lines and a well established technology.

Exhibit 12. Broadband Technology/Players Strengths and Weaknesses

Strengths Weaknesses
xDSL xDSL: Uneven quality of copper network
High installed base of fixed lines
Rapid time to market
Established technology
Atlas xDSL Entrepreneurial company Limited mass market experience
Content expertise in India
Best in class suppliers
Other Fixed Use own network Limited customer base
Line (e.g. Exploit low cost wireless solutions Emphasis on mobile
Bharti, Strong financial backing
Reliance) Strong branding from mobile success
Mobile (e.g. Large and fast growing customer base Relatively new technology
2.5G, 3G) Attractive for lifestyle reasons Limited bandwidth – won’t support
video or fast internet
Cable High installed base of lines Poor quality of network
Established technology Expense and time of rollout
Content expertise Highly fragmented industry

Financial Projections
We have adopted relatively cautious forecasts for Atlas India Broadband, given the inevitable
problems that will arise in rolling out new technology and services in a relatively untried market.
The major assumptions are set out below.

Rollout
We assume that Atlas commences rollout of services in 5 cities by the end of 2005 and a further
5 in 2006, including Mumbai, ultimately reaching 37 cities by 2014. This equates to 466,000
addressable lines by the end of 2005 and 4.8m by end of 06, as Atlas progressively installs
equipment in all exchanges in a city, ultimately reaching 17m lines by 2014. The pace of rollout is
likely to be constrained in the short term by the availability of staff and ease of access to BSNL
local exchanges, as well as the need for Atlas to develop and refine operational processes. The
longer term rollout will be influenced by the commercial and technical lessons from the initial
rollout, as well as competitive dynamics, but could turn out to be quicker and more widespread
than we have assumed.
Penetration
Forecasting subscriber demand for netTV connectivity in India is inevitably difficult given that
such services are largely unavailable in India today, and unlike other more developed countries
that have experienced rapid growth in broadband take-up, there is not a large pool of narrowband
dial up internet users who would appreciate the virtues of faster speeds. On the other hand, there
is a substantial base of cable TV subscribers, who currently receive poor quality services, and will
be attracted by the availability of better quality broadcast television, pay channels and on-demand
programming, as well as high speed internet. The rapid take up of mobile services in India also
demonstrates how new attractive services can rapidly become a mass market.

Data on global broadband take-up shows that the leading broadband countries are now achieving
broadband rates of 20-25 lines per 100 people in the case of South Korea and Hong Kong, which
compares with India’s total tele-density of 10 fixed and mobile lines per 100 people. A more
useful measure for India is to look at DSL penetration of existing fixed lines; these are typically
10-15 DSL lines per 100 fixed lines for the leaders, and 29 in the case of South Korea.

Exhibit 13. Global Broadband Leaders as at 31st December 2005 (DSL % of telephone lines)

Source: DSL Forum, Point Topic

Our forecasts are based on Atlas achieving broadband penetration of addressable fixed lines of
2% in 2005, rising to 10% in 2008.

Exhibit 14. (a) Atlas India Broadband rollout Exhibit 14. (b) Atlas India broadband penetration
and subscribers

40 18,000 3500 20%

35 16,000 3000
Addressible lines (000s)

14,000 2500 15%

30
12,000 2000
25
10,000 10%
Cities

20 1500
8,000
15 1000 5%
6,000
10 500
4,000
0 0%
5 2,000
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
0 -
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Total Subscribers (000s)
Cities covered Addressable lines (000s) NetTV penetration of addressable lines
Other major assumptions are as follows:
• The basic service will be charged at R699 per month ($18) for 40 broadcast channels,
video on demand and 64kbps internet access. Total ARPU reaches $24 in 2006,
including connection and modem rental fees
• BSNL initially receives a 29% revenue share while MTNL receives a higher 50% revenue
share as it is providing broadband connectivity, for the duration of the plan. Over time,
we assume that the model moves towards a conventional cost-based payment for
network access, set at $5 per line per month initially and declining to $3 by 2014.
• Content costs are assumed at 30% of gross revenues on all but the basic package
(which is free), with all content deals done on a revenue share basis
• Long run total cumulative capex (including DSL network equipment, set top boxes, VoD
servers) is $250 per connected subscriber, comprised of set top boxes, head end, VoD
servers, middleware, digital rights management, billing and, for BSNL subscribers,
DSLAMs.

Exhibit 15. (a) Atlas India Broadband ARPU Exhibit 15. (b) Atlas India broadband capex
($000s)
Customer ARPU ($/month) $200,000
$40
$35 $150,000
$30
$25
$100,000
$20
$50,000
$15
$10
$0
$5
$0
05

06

07

08

09

10

11

12

13

14
20

20

20

20

20

20

20

20

20

20
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Broadband access TV access Other Connection Total capex

The financial forecasts are summarised in the following tables.

Exhibit 16. Atlas India Balance Sheet (US$ in 000s)

Year to December 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Cash and equivalents $0 $2,296 $2,296 $2,296 $19,190 $95,217 $185,514 $227,346 $318,774 $455,887 $619,362
Receivables $0 $135 $2,109 $8,110 $20,708 $31,146 $40,532 $50,797 $61,438 $71,273 $75,386
Other current assets $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Total Current Assets $0 $2,431 $4,405 $10,406 $39,898 $126,364 $226,045 $278,142 $380,212 $527,159 $694,749

Property, plant & equipment $82 $14,301 $45,738 $133,934 $274,348 $301,909 $296,166 $279,194 $247,422 $225,657 $230,759
Total Fixed Assets $82 $14,301 $45,738 $133,934 $274,348 $301,909 $296,166 $279,194 $247,422 $225,657 $230,759
TOTAL ASSETS $82 $16,732 $50,143 $144,339 $314,246 $428,273 $522,212 $557,336 $627,634 $752,816 $925,508

Current Liabilities
Cost accounts payable $50 $528 $3,352 $10,273 $20,977 $25,838 $31,680 $37,496 $42,825 $47,323 $48,826
Total Current Liabilities $50 $528 $3,352 $10,273 $20,977 $25,838 $31,680 $37,496 $42,825 $47,323 $48,826

Non-capex funding $0 $6,979 $17,233 $30,314 $28,499 $24,019 $18,003 $13,081 $13,081 $13,081 $13,081
ZTE capex funding $0 $13,371 $45,997 $137,899 $292,551 $360,229 $384,137 $303,469 $197,537 $84,626 -$28,284
Other external loans $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Total long term debt $0 $20,350 $63,229 $168,213 $321,051 $384,248 $402,140 $316,550 $210,618 $97,708 -$15,203
TOTAL LIABILITIES $50 $20,878 $66,581 $178,486 $342,028 $410,087 $433,820 $354,046 $253,443 $145,030 $33,623

Shareholders Equity $538 $540 $540 $540 $540 $540 $540 $540 $540 $540 $540
Retained earnings -$506 -$4,686 -$16,979 -$34,687 -$28,322 $17,646 $87,851 $202,749 $373,651 $607,245 $891,344
TOTAL LIABILITIES & S/HOLDER EQU $32 -$4,145 -$16,439 -$34,146 -$27,782 $18,187 $88,391 $203,290 $374,192 $607,785 $891,885
Exhibit 17. Atlas India Profit & Loss (US$ in 000s)
Year to December 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Subscriber Summary
Addressible lines (000s) - 466 4,827 9,847 12,576 14,181 14,815 15,394 16,403 17,003 17,006
DSL Subscribers (000s) - 12 137 511 1,258 1,654 1,975 2,309 2,625 2,891 3,061
Customer ARPU ($ per month) $35 $24 $23 $23 $21 $22 $23 $25 $26 $26

PROFIT AND LOSS (US$, 000s) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2013
Exchange rate 43.74 43.55 43.55 43.55 43.55 43.55 43.55 43.55 43.55 43.55 43.55
Revenue
Connection and Install Fees $0 $723 $7,831 $24,213 $50,107 $33,959 $32,198 $35,395 $36,733 $36,017 $32,083
Broadband Access $0 $21 $1,451 $9,179 $32,920 $66,474 $106,862 $160,897 $225,894 $289,419 $320,102
Broadcast Access $0 $266 $10,071 $45,690 $129,153 $217,382 $278,328 $333,419 $383,946 $429,190 $463,167
VoD and PPV $0 $20 $1,066 $5,662 $18,447 $32,185 $41,482 $48,964 $56,384 $63,028 $68,018
Interactive gaming $0 $18 $843 $3,679 $10,052 $16,553 $20,632 $24,354 $28,045 $31,349 $33,831
Hotel Broadband $592 $4,395 $10,243 $11,267 $12,394 $13,633 $14,997 $16,496 $18,146 $19,961
Total revenues $0 $1,639 $25,656 $98,666 $251,946 $378,947 $493,136 $618,025 $747,498 $867,149 $917,201

Direct Costs
BSNL/MTNL Revenue Share $0 -$94 -$4,343 -$18,109 -$46,999 -$73,527 -$87,064 -$97,629 -$106,803 -$113,420 -$116,279
Hotels Revenue Share -$296 -$2,198 -$5,121 -$5,634 -$6,197 -$6,817 -$7,498 -$8,248 -$9,073 -$9,980
Content costs $0 -$38 -$1,936 -$10,579 -$33,868 -$61,502 -$84,643 -$105,944 -$125,416 -$144,011 -$157,388
Installation costs $0 -$127 -$1,455 -$4,756 -$10,405 -$7,504 -$7,543 -$8,765 -$9,621 -$9,986 -$17,855
Total direct costs -$100 -$556 -$9,932 -$38,565 -$96,905 -$148,730 -$186,067 -$219,836 -$250,089 -$276,490 -$301,502
Gross Margin -$100 $1,084 $15,725 $60,101 $155,041 $230,217 $307,069 $398,189 $497,409 $590,659 $615,699
Gross margin #DIV/0! 66% 61% 61% 62% 61% 62% 64% 67% 68% 67%

Indirect Costs
Bandwidth leases $0 -$301 -$7,083 -$9,548 -$8,042 -$6,040 -$4,610 -$4,012 -$3,441 -$2,837 -$2,061
Licences and miscellaneous $0 -$158 -$695 -$1,593 -$2,256 -$2,538 -$2,677 -$2,772 -$2,904 -$3,045 -$3,096
Sales and marketing $0 -$2,825 -$5,565 -$18,001 -$40,070 -$21,955 -$25,436 -$31,090 -$36,194 -$40,059 -$27,516
Head Office and Supervisory Staff $0 -$717 -$6,166 -$22,875 -$41,048 -$51,953 -$64,444 -$77,097 -$89,093 -$98,850 -$100,400
OWIndia Office Related Costs $0 -$244 -$1,850 -$6,863 -$12,314 -$15,586 -$19,333 -$23,129 -$26,728 -$29,655 -$30,120
General Costs -$131 -$1,039 -$3,919 -$7,564 -$9,776 -$12,156 -$14,636 -$17,054 -$19,130 -$19,928
Portal costs $0 -$344 -$1,188 -$1,367 -$1,572 -$1,807 -$2,078 -$2,390 -$2,749 -$3,161 -$3,635
Total Indirect Costs -$404 -$4,720 -$23,586 -$64,165 -$112,865 -$109,655 -$130,734 -$155,127 -$178,161 -$196,737 -$186,757

EBITDA -$504 -$3,636 -$7,862 -$4,065 $42,176 $120,563 $176,335 $243,062 $319,248 $393,922 $428,942
EBITDA margin -222% -31% -4% 17% 32% 36% 39% 43% 45% 47%
Depreciation $0 -$15 -$2,577 -$8,699 -$26,140 -$56,120 -$71,176 -$81,807 -$89,333 -$88,542 -$65,528
Operating Profit -$504 -$3,651 -$10,439 -$12,764 $16,035 $64,442 $105,159 $161,254 $229,915 $305,381 $363,415
Operating Profit Margin -223% -41% -13% 6% 17% 21% 26% 31% 35% 40%

Interest $0 -$526 -$1,855 -$4,944 -$9,670 -$12,651 -$11,787 -$8,439 -$2,615 $5,299 $14,437
Pre-tax Profit -$504 -$4,177 -$12,293 -$17,708 $6,365 $51,792 $93,372 $152,815 $227,300 $310,680 $377,852
Pre-tax Profit Margin -255% -48% -18% 3% 14% 19% 25% 30% 36% 41%
Tax $0 $0 $0 $0 $0 -$5,823 -$23,168 -$37,916 -$56,398 -$77,086 -$93,753
Net Profit Margin -$504 -$4,177 -$12,293 -$17,708 $6,365 $45,968 $70,205 $114,898 $170,902 $233,594 $284,099
Net Profit Margin -255% -48% -18% 3% 12% 14% 19% 23% 27% 31%
Dividends
Retained Earnings -$504 -$4,177 -$12,293 -$17,708 $6,365 $45,968 $70,205 $114,898 $170,902 $233,594 $284,099

Exhibit 18. Atlas India Cashflow (US$ in 000s)

Year to December 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Net income -$506 -$4,177 -$12,293 -$17,708 $6,365 $45,968 $70,205 $114,898 $170,902 $233,594 $284,099
Depreciation $0 $15 $2,577 $8,699 $26,140 $56,120 $71,176 $81,807 $89,333 $88,542 $65,528
Change in payables $50 $477 $2,824 $6,921 $10,704 $4,861 $5,842 $5,816 $5,329 $4,498 $1,503
Change in receivables $0 -$135 -$1,974 -$6,001 -$12,598 -$10,438 -$9,385 -$10,265 -$10,642 -$9,834 -$4,114
Operating Cashflow -$456 -$3,820 -$8,866 -$8,088 $30,611 $96,512 $137,837 $192,257 $254,922 $316,799 $347,016

Capex -$82 -$14,234 -$34,013 -$96,895 -$166,555 -$83,682 -$65,433 -$64,835 -$57,562 -$66,776 -$70,630
Intangible investments $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Investing Cashflow -$82 -$14,234 -$34,013 -$96,895 -$166,555 -$83,682 -$65,433 -$64,835 -$57,562 -$66,776 -$70,630

Levered Free Cashflow -$538 -$18,054 -$42,880 -$104,983 -$135,944 $12,830 $72,404 $127,422 $197,360 $250,023 $276,386

Funding from Atlas $538 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Non-capex funding $0 $6,979 $10,253 $13,081 -$1,815 -$4,480 -$6,016 -$4,922 $0 $0 $0
ZTE capex funding $0 $13,371 $32,626 $91,902 $154,652 $67,678 $23,908 -$80,669 -$105,932 -$112,910 -$112,910
Other External Funding $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Funding Cashflow $538 $20,350 $42,880 $104,983 $152,838 $63,198 $17,892 -$85,590 -$105,932 -$112,910 -$112,910

Starting cash $0 $0 $2,296 $2,296 $2,296 $19,190 $95,217 $185,514 $227,346 $318,774 $455,887
Change in cash $0 $2,296 $0 $0 $16,894 $76,027 $90,296 $41,832 $91,428 $137,113 $163,476
Ending cash $0 $2,296 $2,296 $2,296 $19,190 $95,217 $185,514 $227,346 $318,774 $455,887 $619,362
Net debt (cash) $0 $18,054 $60,933 $165,917 $301,861 $289,031 $216,627 $89,204 -$108,156 -$358,179 -$634,565
The Author
Philip Carse is an independent telecoms analyst, with 16 years experience in telecoms as a
consultant and analyst. Between 1989 and 1997, he worked as a consultant for NERA and PA
Consulting, specializing in telecoms business planning and finance. Between 1997 and 2003,
Philip worked as a telecoms equity analyst for UBS, Commerzbank and Schroder Salomon Smith
Barney (a division of Citigroup), covering a variety of European telecom services companies.

In his last year at Citigroup, Philip was responsible for the bank’s global telecoms equity research.

The UBS team was ranked number 1 for UK telecoms research, while the SSSB team was
regularly ranked in the top 5.

He now works as an independent telecoms equity analyst. Philip has BSc and MSc degrees in
Economics from the University of Southampton and University of London, Birkbeck College,
respectively.