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Idea Cellular: Striking the right chord

February 28, 2013
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Idea Cellular has always been astute in its branding and advertising initiatives.  The “What an Idea, Sirji!”, “An Idea can change your life” and “Get an Idea” campaigns, and the more recent “Honey Bunny” jingle, which is part of the “Idea Rings All India” campaign, have struck the right chord in establishing a high-impact brand recall.

Over the years, Idea’s aggressive marketing efforts have ensured brand stickiness. It has also helped in adding users.

Through 2012, the operator was the biggest beneficiary of mobile number portability, with 5.75 million net addition to its network, as of January 18, 2013.

Today, Idea Cellular is the country’s fourth largest telecom operator with a user base of over 113.94 million. As of December 2012, it trailed Bharti Airtel (181.9 million users), Vodafone India (147.47 million) and Reliance Communications (RCOM) (118.52 million). The company also had the highest share of active subscribers at 98.22 per cent. It was followed by Bharti Airtel with 95 per cent.

Branding is, of course, only a part of Idea’s strategy. A robust infrastructure backbone, a strong go-to-market strategy and a focus on profitability are the operator’s other key strengths.

The year 2012 saw Idea Cellular gain ground despite a testing start. In February, the Supreme Court cancelled 122 2G licences awarded in 2008, of which seven belonged to Idea. The company decided to participate in the second round of 2G spectrum auction in November despite the high reserve price. It won back the spectrum it had lost in seven circles and acquired a licence to operate in the Bihar circle. The operator’s total outgo for the new 20-year 2G licences was Rs 20.31 billion.

Experience so far

The initial phase of the company’s operations involved several challenges including promoter-related issues. The company came into its own as late as 2006 when the Tata Group sold its stake in the joint venture, thereby leaving the Aditya Birla Group as the sole promoter.

Idea launched an initial public offering in 2006, which marked the beginning of an upward trajectory for the company. Its revenues grew from Rs 30 billion in 2006-07 to Rs 196 billion in 2011-12. During this period, During this period, the company added about 7,200 2G and 3G cell sites to establish a network of over 100,000 such sites across the country. Its revenue market share (RMS) grew from 6 per cent to 14.6 per cent.

In the past six years, the operator has been trying to drive growth and increase its footprint. Unlike its peers, it has primarily focused on non-urban and rural markets. Company officials say that Idea has not pursued subscriber addition at the cost of profitability. Greater attention has been paid to RMS both at the national and circle levels. Therefore, as other operators have invested in new areas, Idea has strengthened its presence in established markets like Gujarat, Andhra Pradesh, Maharashtra and Kerala, before entering new circles.

“At that time, we were the only company to offer services from outside in, which means from the hinterland to the metros. Even in the metros, we have offered products and services for users belonging to all income groups and age categories. We have always looked at long-term investments,” says Himanshu Kapania, managing director, Idea Cellular.

Current position

As of December 2012, Idea’s mobile business was spread across 13 established service areas (which have evolved over time in terms of profitability) and nine new circles (where it launched services in financial years 2009 and 2010).

As of December 2012, Idea’s RMS in the 13 established circles was 18.6 per cent while its overall RMS (all circles) was 14.3 per cent. At 24 per cent, the company’s RMS was the highest in the Kerala, Madhya Pradesh, Maharashtra, Uttar Pradesh (West), Haryana, Punjab, Andhra Pradesh and Gujarat circles, which accounted for 68 per cent of overall revenues. The Uttar Pradesh (East), Rajasthan, Delhi, Bihar, Karnataka, Himachal Pradesh and Mumbai service areas accounted for 27 per cent of Idea’s revenues.

In terms of infrastructure, the company has an optic fibre cable network of over 71,600 km. Idea intends to use this infrastructure to tap the wireless broadband potential. The operator also plans to increase its points of presence (PoPs). It currently has over 1,906 PoPs in 128 cities and linked highways.

Financially, Idea has been on steady ground despite the regulatory interventions that have impacted the telecom industry. The operator has been reporting profit growth on a year-on-year basis. Its net profit grew by 14 per cent from Rs 2.01 billion for the quarter ended December 2011 to Rs 2.29 billion for the corresponding quarter in 2012. Revenues grew by 10.9 per cent from Rs 50.31 billion to Rs 55.78 billion during this period.

However, the earnings before interest, taxes, depreciation and amortisation (EBITDA) margins dropped from 26.7 per cent to 26.4 per cent. During the quarter ended December 2012, Idea maintained the trend of free cash flow (after capex but excluding spectrum payout) and registered a cash profit of Rs 11.09 billion. The Rs 6.54 billion capex (excluding forex fluctuations and spectrum payout) for the reported quarter was entirely sourced from cash profits. For 2013-14, the company’s capex guidance stands at Rs 30 billion, excluding payments towards spectrum.

On the operational front, Idea’s total minutes of usage (MoUs) grew by 16 per cent from 113.96 billion for the quarter ended December 2011 to 132.18 billion for the corresponding quarter in 2012. The ARPU witnessed a marginal decline from Rs 159 to Rs 158. Interestingly, the contribution of non-voice services to total service revenues increased from 13.7 per cent to 14.6 per cent during this period. As of December 2012, the company’s net debt stood at Rs 116 billion.

Going forward, Idea intends to build on its strong brand equity, strengthening its presence in Tier II and Tier III cities, and increasing the uptake of 3G services. The recent acquisition of telecom licences will help the company in consolidating its market position.

Key focus areas

3G services

Starting March 2011, Idea rolled out 3G services in 10 circles (it has 3G licences in 11 circles) amidst a high-profile rebranding exercise. Today, it offers 3G services in 20 circles (excluding Odisha and Punjab) through its own licences and roaming arrangements.

However, in early 2012, intercircle roaming (ICR) agreements were declared illegal by the Department of Telecommunications (DoT). In December 2012, DoT issued a show-cause notice to Idea Cellular and Vodafone India, asking them to pay Rs 500 million per circle where they were offering 3G services through such arrangements. Idea was looking at a possible penalty of Rs 5.5 billion or losing its 3G licences. In January 2013, the operator challenged the move in the Delhi High Court. The case is yet to come up for hearing. This has been a major impediment to the company’s 3G plans.

To encourage the adoption of these services, the operator has started taking corrective measures. It, for instance, reduced 3G tariffs by 70-80 per cent in mid-2012. Currently, Idea’s prepaid and post-paid users pay Re 0.30 for 10 kb of data. The company has also introduced new prices in sachet packs, regular packs and unlimited packs. The Rs 10 sachet pack offers 30 minutes of high speed internet surfing. For regular home internet users, Idea offers 1 GB of data download for Rs 250 while for professionals and corporate users, there is an unlimited plan priced at Rs 950. According to company officials, the lower tariff plans are aimed at taking internet services to rural areas and small towns.

Following the tariff reduction initiative, Idea’s 3G subscriber base grew to 4.1 million in December 2012 from 3.1 million in June 2012.

Going forward, the operator believes that data uptake in India will be a function of lower device prices and reasonable data tariffs. According to company officials, devices play an important role in enhancing the service experience for users and, therefore, will be key to Idea’s 3G growth strategy. Considering this, the operator has introduced competitively priced 3G handsets in the market. It recently launched Ivory, its fifth 3G handset, and first Android 4.0 Ice Cream Sandwich-based smartphone. The device costs Rs 7,390. Further, to improve customer relations and promote 3G services, the operator has launched the Idea Mall application store.

To accommodate data traffic, the company is focusing on building backhaul networks and is strengthening its packet core networks.

Rural operations

Rural India is a key focus area for the company. As on December 31, 2012, the operator had a presence in 293,139 villages and 4,633 towns. The company claims to have the highest share of rural users in total subscribers amongst GSM players. These subscribers account for two-thirds of its total revenues. In fact, two out of the company’s three new subscribers belong to rural/semi-urban areas.

To strengthen its presence in this market, the operator has launched innovative value-added services (VAS) and products. For example, it has introduced a special weekend recharge offer in Tamil Nadu. Priced at Rs 4, the recharge coupon allows users to make local calls at Re 0.10 per minute within Idea’s network and at Re 0.30 per minute to other networks.

The operator also has a partnership with Axis Bank for the Idea MyCash m-banking facility. Besides offering basic banking services like cash deposits and withdrawal, and balance enquiry, the mobile-based financial inclusion initiative enables money transfer by the migrant population in urban areas to beneficiaries in rural areas.

Industry view

Analysts believe that Idea is a strong brand with sound financials, and high MoUs and network resource utilisation. The company is in good stead with profitable operations, a respectable market cap of Rs 364.07 billion (as of February 8, 2013) and the financial backing of the Aditya Birla Group, a Fortune 500 company.

According to a report by Motilal Oswal, Idea’s financial performance in the third quarter of 2012-13 was below expectations, but the results indicate positive trends with regard to revenue per minute (RPM), traffic growth and subscriber churn.

“Most operators, including Idea Cellular, have been rationalising 2G prepaid tariffs as RPM improvement has become a key priority. We believe that the price hike will offset input cost inflation,” the report states. Going forward, Motilal Oswal expects Idea’s EBITDA margins to increase by 18 per cent between 2013 and 2015.

Moreover, the company has a strong go-to-market strategy. According to an analyst from KPMG, Idea is very strong in terms of delivery and focus, which has driven subscriber and revenue growth, especially user addition.

“Idea is extremely market driven. It has been working steadily to build and retain its place in the Indian telecom space. While most companies would have been significantly impacted by the issue of ICR agreements, Idea has challenged DoT’s decision to term this arrangement illegal – a difficult move given the possible financial implications,” says Dr Mahesh Uppal, director, ComFirst.

However, unlike Bharti Airtel or RCOM, Idea is a pure-play GSM operator. This could be a limiting factor in the long run. Vodafone India is also a pure-play GSM operator, but has expressed interest in entering the fixed broadband space for additional revenues. Industry experts believe that Idea should begin exploring new business avenues.

According to research firm Angel Broking, the operator is still facing regulatory uncertainties such as the one-time spectrum fee and spectrum refarming.

Before the November 2012 auction, the empowered group of ministers, led by Finance Minister P. Chidambaram, approved a one-time fee for excess spectrum held by existing telecom operators. This one-time spectrum fee was proposed to be made effective from January 1, 2013. Subsequently, DoT gave mobile carriers the option to pay one-third of the amount upfront and the remaining in equal instalments based on the validity of their licences. All operators opposed the proposal. In January 2013, DoT issued showcause notices to all operators, including Idea Cellular, which was asked to pay Rs 21 billion, including Rs 3.7 billion as retrospective charges. Idea filed a petition against the move with the Bombay High Court, which has directed DoT to not take any coercive action until the next hearing on March 1, 2013.

Payments for excess spectrum would adversely impact the company in terms of performance and valuation. This also holds true for other operators. A partial resolution is expected on these issues with the 2G auction coming up in March 2013.

Industry experts also say that the company should concentrate on delivering attractive data services to increase 3G uptake.

Future thrust areas

Idea Cellular plans to focus on voice services, VAS and 3G applications over the next year. The VAS segment could be beneficial for the company as the government is looking to promote an ecosystem that supports the VAS industry under the National Telecom Policy, 2012.

In a major development, Idea launched a service delivery platform as part of its VAS transformation project in late 2012. This is aimed at providing users with an easy method to subscribe/unsubscribe to any VAS offering. In the long run, the company plans to leverage this platform to increase its VAS user base by offering services in the areas of information, education, entertainment, commerce, health, etc.

Idea believes that another 250-350 million users can be added in the voice segment over the next two to three years, especially in rural areas. To capitalise on the business opportunities this growth would entail, expanding the rural reach is a key priority.

The company entered the internet service business in 2011, which has witnessed steady growth so far. Going forward, Idea is looking to meet the internet bandwidth requirements of media and large enterprises. It is also preparing to enter the MPLS and Wi-Fi markets.

In the 3G space, the operator is looking to build long-term mobile broadband infrastructure, apart from expanding its footprint. The company is also focusing on the development of a 3G device ecosystem. To this end, it has introduced the Aurus and Ivory 3G devices.

Going forward, the operator expects the average price of a smartphone to drop to below Rs 5,000 and a shift in the purchasing pattern for handset replacements towards 3G devices.

Despite facing strong headwinds, Idea Cellular is a serious long-term player in the Indian telecom sector, focusing on expanding its brand presence and strengthening its position in terms of incremental revenues, the visitor location register, MoUs and market share.

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