Valuation Techniques in Telecommunication Industry – An Alternative Approach based on Operating Cash Flow and Number of Subscribers

The Indian economy has witnessed tremendous growth after liberalization. The valuation of telecom companies has gained specific importance after 2010. The government has received revenue of more than Rs. 1.06 lac crores through 3G/BWA spectrum auction from telecom operators. The operators raised debt to finance acquisition of spectrum in the above auction. Due to this almost all the operators had to raise debt and now it is impacting their profits, cash flow and valuation. Apart from this the telecom operators are highly regulated. There are various issues due to which the valuation of the telecom companies prior to 2010 (i.e. before auction) and post 2010 shows a huge difference.

The valuation of telecom operators is very crucial and has invited special attention in the recent past. This article attempts to evaluate some special aspects of telecom valuation like valuation based on subscriber, per subscriber EV, PE ratios (EV ratios) etc. which may not be used while valuing other types of industries.

This paper evaluates existing valuation techniques, assesses limitations of these techniques in the light of 3G auction. The valuation of the telecom companies under the conventional techniques may not depict fair results, considering the fact that the telecom sector witnessed an increase in number of subscribers, increase in revenue however a reduction in profits & valuation and heavy cost of debt involved in acquiring spectrum and upgrading technology during 2009 to 2015. The paper attempts to find out an alternative basis to arrive at valuation based upon operating cash flows and the number of subscribers.