A Costly Recharge for Idea Cellular

Himanshu Kapania(MD,Idea Cellular)Man behind India’s 3rd largest Wireless Operator

•Idea has a market capitalization of over Rs.61000 Crores

•Kapania’s first stint lasted between 1997-2003 before he moved to Rcom as its CEO(Northern India)

•Rejoined Idea in 2006 as COO of Southern & Western India•In 2011,Kapania took over as MD of Idea Cellular

•Kapania has seen the Telecom landscape evolve over the years right from the introduction of the New Telecom policy(NTP)in 1999 to the low point of 2012when Telecom scam resulted in massive license cancellations that also saw Idea loose licenses for 7 circles

Himanshu Kapania(A brief Profile)

Why Idea is worrying?

900 Mhz is hugely critical since it has the advantage of penetrating signals “Indoors”. It s critical since it gives you geography & also makes moneyThe build-up for the above auction was clearly unnerving for incumbent players. It was like your own house, which you have painstakingly built & been living in 20 years was suddenly open for anybody & everybody to bid & ownA the end of the 4t

h

day of auction, the bids for 900 Mhz saw an increase of 85% against its reserve price of Rs.3980 Crores even as the other three bands(800/1800/2100 Mhz) saw a mere 2-6% jump-

Airwaves Auction by GOI

Amount spent by Telecom

Operators on Spectrum

Renewel/New Spectrum

Industry & Birth of Idea Cellular

It was in May 2002 that Ratan Tata announced a new name Idea Cellular for an equal three-way joint venture between the Tat Group, Aditya Birla Group & AT & T. Then Idea around 9 lakh subscribers

was new to the market. In 2006,Tatas & Birla’s were at loggerheads with the latter moving the Department of Telecom(DoT) to force the Tata’s to exit from Idea or reduce their stake to below

10%.The Birla’s complained that Tata’s were violating license conditions. A series of allegations & counter allegations ensued & the protracted 4 months battle saw the Tata’s slapping a notice on the Birla’s for breaching the shareholders agreement by revealing confidential information about the

then-unlisted Idea Cellular. Finally the battle ended on April 2006 with the Birla’s buying out Tata’s 48% stake for Rs.4406 Crores

-In 2007 Aditya Birla Group went public raising Rs.2200 Crores (@Rs.75 a share)

-Revenue2007-Rs.3000 Cr2015-Rs.31555 Cr

Market Capitalization-More than doubled from around Rs.30,000 Cr

-Idea jumped from 6th position to 3rd position in telecom business after Bharti Airtel & Vodafone but more

importantly overshadowing Reliance Communications which was at No.2 when Idea entered the market

Market appreciation for Idea Cellular’s quality of Growth

(a)Simple & Lean Organization Structure(allowing regional heads far more freedom)

(b)Direct connect with customers through branding(c) Dedicated business units

(d)Decentralized Decision Making(e)Flexible Pricing in different circles

When other Telecom Operators were focusing on & fighting for urban subscribers, Idea chose to go the other

way by building itself in “Rural Pockets” & then spreading to metros. Idea incurred huge Capex to build its network & doubled its reach from 11 circles in 2007

to 22

-Over the period of years, the market share of Idea Cellular grew from 8 % to 18% & its subscriber

base surged 21X from 7.37 million to 158 million currently with the highest chunk coming from

rural markets-Since FY 2006,sales of Idea Cellular have grown 30% & profits 35% every year setting the highest

benchmark in the industry

Idea Cellular Auction

Idea’s strategy to retain existing spectrum-Led by expensive bidding, Idea not only had

to shell out a hefty amount for its existing spectrum but also restricted its ability to buy new spectrum compared with its competitors

who were lapping-up more-9 Services Areas & 106 million subscribers

were dependent on the latest March auction & Idea simply could not afford to lose it

Idea shelling out hefty money-It was a tough choice for Idea which came at a huge price partly influenced by other bidders in the form of aggressive bidding when they knew

that Idea couldn’t afford to lose the circles-Against the market expectations of about

Rs.22,000 Crores to 23,000 Crores, Idea ended up paying Rs.30,300 Crores

For the first time, companies surrendered their spectrum(Ex. Rcom surrendered 5 out of 6 licenses that were up for renewal)Idea is very much happy that for the next 20 years, the bulk of its spectrum

does not run a renewal risk.

Idea’s Debt Circle-Though Idea Cellular emerged as the highest bidder,the irony is that only 12% of the money

spent on auction went towards acquiring additional spectrum compared with 40% in case

of Bharti -Idea spent the least on buying fresh

spectrum(Rs.6100 Crores compared with peers such as Bharti & Vodafone which extended

their 3G Spectrum footprint to 21 & 16 Circles-Bharti stole a march over both Vodafone &

Idea by picking up the maximum 900 spectrum.Bharti now has the capability to

deploy premium 3G in 6-7 Circles within the next 1 or 2 years compared with Vodafone &

Idea’s 2 Circles each

-Post recent auction, Bharti Airtel’s 98% of revenue will be covered under the 3G footprint compared with 80% in the case of Idea. This clearly shows that competitors are becoming stronger. Idea has to not only deal with the

increasing competition but also be ready for new entrants such as Reliance Jio(which is about to

enter the fray very soon)

Idea Cellular Auction

Amount to be paid to Govt by Idea Cellular

Upfront Amount-Rs.7,700 Crores

Balance-to be paid in 10 equal installments beginning April 2018

Net Debt of Idea Cellular

Analysts estimate that the Net Debt of Idea

will nearly double from the current Rs.16,800 Cr(FY15)to close to

over Rs.30,000 Cr by FY16 & balance of

approximately Rs.22,000 Cr Debt

coming on to the books

Idea’s Return on Equity(RoE)

RoE which is very important to understand how much a company is

making for every rupee of equity invested in the

business could drop from 16% in FY15 to as low as 10% by FY17.At this rate one would question if it were better to keep the

money in the bank instead of putting it in the business which is relatively riskier

Idea’s earnings to DebtIdea Cellular today makes earnings before interest &

tax of close to Rs.5500 Crores which is more than

enough to cover its interest cost(close to

Rs.583 Crore in FY15).However, with the interest cost ballooning to

around Rs.2500 Crores ,the interest

coverage ratio will fall to 2.1 times. This essentially means that a large part of

these earnings will be used for servicing the interest cost leaving very little

profit n the table

Mode of Payment by Idea

Initial payment-to be made through internal accruals & the recently

concluded QIP proceeds of Rs.3,750

Crores

Idea Cellular’s strong area

The only positive for Idea Cellular is that it generates Strong Cash Flows ensuring that it will not be caught in a liquidity trap

Year Particulars

FY 15 Idea generated operating cash flows of close to Rs.10,000 Crores(Marginal growth of 10-12% in operating profits Y-O-Y)

FY 17 Idea will approximately generate 12000-13000 Crores of cash flows

Even after leaving Rs.6000-7000 Crores for regular Capex, the company will be able to meet its Debt (equated installments towards the spectrum)& interest obligations which estimates suggest can be in the region of Rs.4000 Crores

Idea Cellular’s MD, Mr.Kapania says- “Considering our operating cash flows, we do not see any need to raise fresh Bank Debt & even the payment to the

Government can be managed through our internal accruals”

Idea Cellular’s strategy to service its Debt &

Interest In order to justify the investment(Rs.4000 Crores annually),Idea Cellular will need to generate an

additional operating profit of close to Rs.4000 Crores(i.e,Rs.30000 Crores divided by its current EV/Ebitda multiple of 8X).Now to generate that additional Rs.4,000 Crore, the company will have to raise tariffs by 7 paisa per minute to cover the investment cost. The number is arrived at by dividing the operating profit + other expenses such as license fees which typically amounts to 20% of total revenue divided by the total

number of minutes(68,000 Crores in FY14)

The above graph shows indicative figures(that only capture the pricing) which may be lower

if the company is able top raise volumes through its existing subscribers or bring in

new subscribers. Ex: If Idea increased subscribers by 5% every year, the additional

revenue required to be generated through ARPU will come down by Rs.1.From this, it is

clear that to justify investments & recover money to support adequate financials & cash flows, the focus will now be on generating

more money while leveraging existing assets

•With 22 circles, Idea has constantly grown its revenue market share from 14.4% in 2012 to 17.5% in 2015 & now aims o further leverage existing networks•One key concern for Idea Cellular is of “competitors” whose subscribers base are growing & with more muscle in the form of spectrum in the hands of Bharti & Vodafone the gap could actually shrink. The gap is marginally today as 48% of Bharti’s & 53% of Vodafone’s subscribers are based in rural markets. Ex:In March 2015,Bharti Airtel added close to 1.68 million rural subscribers(the highest in the country)

Price Hike by most Telecom Operators-The hope is that with the huge Capex & upfront payment made for the expensive spectrum, most

telecom operators are now looking for a price hike so that some of the costs can be recovered. ---On the flip side, even if prices are raised by 2-3%,that will have a huge impact on Idea Cellular given its highly sensitive earnings. The Street is expecting ARPU for voice(that account for close to 84% of the revenue)to go up from Rs.168 in

FY14 to around Rs.198-200 by the end of FY17 which is n annual growth of 5-6%

IDEA

Cellular

ARPU increase seems quite unlikely. The market is factoring in a price increase which is unlikely to happen. Idea has been trying to increase the tariffs but it has remained stable or declined. No doubt, there is a massive operating leverage when a price increase happens but in the context of new entrants who can cut prices & create distortion, increase in tariffs seems very optimistic

Agrees

Mr.Sar

al of

CRISI

L

The voice segment is expected to report a moderate growth over the medium term on the back of increasing subscriber base(CAGR of 6%) as well as selective scaling back of discounts offered on Voice Recharge VouchersThe last time Idea Cellular carried out a voice tariff hike including withdrawal of offers & freebies was in January 2013 in select circles.

Ag

rees Mr.Sar

al of CRISI

L

Voice revenue/minute has been falling for the past several years & with the drop in termination charges & roaming charges most players have reduced roaming charges in the range of 40-70%-there seems to be very less room for tariffs to go-up particularly with the possible price war expected with the entry of Reliance JioWith the entry of new large players, competition will increase & it will be challenging for telecom operators to raise tariffs

Voice Segment

Effect of auction on Jio’s operationsoAcquired Spectrum Jio’s decision to bid aggressively in 900 MHz saw the incumbents putting their might into retaining their turf that ensured that Jio still got the lower frequency spectrum of 800 MHz at a much cheaper rateJio got about 49MHz in the 800 MHz band & another 28MHz in the 1,800 MHz band for just over Rs.10,000 Crores increasing its spectrum footprint from 597.6 MHz to 751.1 MHz

o4G Services-The recent spectrum strengthens Jio’s position as the large spectrum holder & enables it to seamlessly offer 4G Services with the multi-band LTE Technology

Idea Cellular’s revenue Game

Idea’s

revenue

worry

In the just concluded March quarter of FY15,Idea saw a 7.1% year-on-year decline in revenue per minute to 33.9 paisa(the highest decline in the past 16 quarters)

In FY15,the average subscribers minute usage per month came to 388(13 minutes a day) which is close to 73,500 crore minutes annually based on its existing subscriber base of 158 million. On the same minutes of usage, if Idea reduces the tariff from 34 paisa to 32 paisa, it will impact revenue by close to Rs.1,500 crores (reduction of almost 6%)

Idea’s

revenue

worry

Voice tariff’s have very little scope & in fact will drag the revenue if rates fall further. Alternatively, the tariff fall can be offset through higher usage & an addition in subscribers. If as against 388 minutes a month, subscribers use 400 minutes (i.e,14 minutes a day),that addition will increase revenue by Rs.772 crores which is 3% higher

Can Idea Cellular raise minutes & subscribers to increase volumes which is again a function of economic growth & Income levels?

Analysts expect 6-10% growth in monthly minute usage along with growth of 6-8% in the subscriber base. Through this Idea will be able to partly compensate for

the possible pressure on tariffs

Idea Cellular revenue on Data

Role of Date revenue in Idea Cellular

Share of Data accounts for only 17%

of revenue & the impact on overall

basis is limited. Also in data, the growth is

largely driven by volumes because the pricing pressure is

high

The last hike in data tariff was in October

2013 & thereafter prices have only

fallen. In Q4 FY15,the company’s average

revenue per MB declined to 26 paisa.

Some analysts feel that if Jio gets

aggressive, it will erode the data revenue

of existing players similar to what

happened when the initial stages of the 3G

launch hurt 2G data revenues. Competition will certainly increase not only with the entry of new players such as Jio but also with cloud computing, machine-to-machine or device-to-device data transfer

having their own impact

Data realisations are down about 25% from

FY13 pointing to a continued pressure on data pricing. Though it had stabilized in the first three quarters on

FY15,Q4FY15 suggests that holding data prices at current

levels might be difficult. There is a continued risk of

moderation in data pricing in the name of

increasing data penetration

particularly due to Jio’s entry-says an

Telecom Analyst at JP Morgan. On the other hand, traffic has been

good growing at almost 100% year-on-year in each of the last

several quarters

Idea & its future

Idea’s penetration in IndiaSubscribers-16 MillionData revenues-Idea plans to upgrades about 70% of its GSM Networks to 3G in FY15 as the management expects data volumes to grow at 100% annually over the next couple of years

Future spends in networks-‘Data’ as a revenue model has just started & the subscribers propensity to consume is huge. In this case, Idea has to create infrastructure for data which is not a part of the Rs.30000 Crores that Idea will spend-Data unlike voice is not based on pricing but on ‘customer experience’. Operators can get away with poor voice quality but that will not work with data-Idea’s capex(2014-15)-Rs.4,000 Crores(2015-16)-Rs.5,000-5,500 Crores

Idea’s footprint in Rural Areas-Idea has a presence in over

3,50,000 Villages & it hopes to improve the ‘services & brand’ name further for which they have infrastructure ready in place

Anup George RebelloAsst.Manager

The Catholic Syrian Bank Ltd(anuprebello.6@gmail.com)

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