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Idea Cellular - Building on the growth momentum

July 15, 2010
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The stiff competition and numerous tariff cuts in the telecom industry notwithstanding, Idea Cellular, India's sixth largest cellular operator, has managed to hold its own quite effectively. In the recently concluded 3G spectrum auctions, the company showed great ambition and played its bidding hand quite deftly. It focused mostly on those circles that would give it a competitive edge in the market.Though it did not receive licences for Delhi or Mumbai, it won 3G spectrum for 11 circles: Maharashtra, Gujarat, Andhra Pradesh, Kerala, Punjab, Haryana, Uttar Pradesh (East), Uttar Pradesh (West), Madhya Pradesh, Himachal Pradesh, and Jammu & Kashmir. The total outgo for this was Rs 57.69 billion -­ far less than what other operators had to pay for a similar 3G footprint. For Idea, this also meant securing its presence in circles that cover a very high proportion (81 per cent) of its total national revenues.

Winning cleverly was important for Idea as the 3G spectrum bids skyrocketed to nearly four times the estimated price.Without the 3G spectrum, it would have been in a vulnerable position as compared to rivals like Bharti Airtel, Vodafone Essar, Reliance Communications (RCOM) and Tata Teleservices Limited (TTSL), especially since the next level of competition is expected to be in the area of data and other value-added services (VAS).

Idea has announced that it will use 3G spectrum to ease network congestion and woo high-end subscribers with faster data plans and a slew of new services.

Currently the third largest pure-play GSM operator in the country, Idea had a slow start in the sector due to promoterrelated problems. It came into its own in 2006 when the Tatas sold their stake in the company to the Aditya Birla Group. Ever since, Idea's focus has been on pushing growth and increasing its footprint across the country. In 2008, after procuring licences and spectrum to operate in all telecom circles, the company put its rollout plans on the fast track. In June 2008, Idea acquired Spice Communications, which brought to the table Spice's considerable presence in the Punjab and Karnataka circles.

As of May 2010, Idea had a subscriber base of 66.7 million and trailed Bharti Airtel with 133 million subscribers, RCOM and Vodafone Essar with 106 million each, and Bharat Sanchar Nigam Limited and TTSL with 70 million each.Till August 2009, Idea was ahead of TTSL in the subscriber race. However, that changed with the aggressive launch of TATA DOCOMO's services.

Still, as Dr Mahesh Uppal, director, Comfirst, puts it, "At the moment, Idea stands very well against competition. It is a company with a great brand image and has considerable presence in some very important markets such as Gujarat, Maharashtra, Punjab and Karnataka, where it has lucrative customers."

Industry experts agree that one of Idea's strengths has been in creating a distinct brand identity. Its "What an Idea, Sirji" campaign has not just differentiated the brand from the rest, but has also brought in a social component to telecom advertising.

Idea's recent ad series, for example, gives a platform to environmental causes by building awareness on the preservation of trees. Punning on "paid/ped" -­ the Hindi homonym for a tree -­ the ad is a montage of clippings, with the tag line: "Use Mobile, Save Paper". The campaign may not have won Idea more subscribers, but it has certainly served its purpose by earning tremendous brand recall and in creating huge public interest.

R. Balakrishnan, chairperson and chief creative officer, Lowe Lintas, says,"When you're up against players with three times your money, you can't be saying the same thing as they are."

Building brand recall is, however, only one of the many tasks on Idea's to-do list.In order to keep up with the big players, the company spent the better part of 2009 in building a pan-Indian presence.

Market position
In 2009, Idea aggressively launched operations in the Orissa, Kolkata, West Bengal, Tamil Nadu (including Chennai), Jammu & Kashmir and Assam and the Northeast circles. "The previous regional tag was just a perception as we were not present in the big metros. The time for Idea has now come," says Sanjeev Aga, managing director, Idea Cellular.

"All the rollouts in 2009 were successful. We got an especially warm response in the east, where today, the business is stable. The company is now the third largest operator in India in terms of revenues. We have consistently grown our revenue market share despite the increasing competition," says Rajat Mukarji, chief corporate affairs officer, Idea Cellular. For financial year 2009-10, Idea has increased its overall revenue market share from 11.4 per cent to 12.7 per cent.

During the past year, Idea has been among the fastest growing telecom operators in the country. It has built up a competitive advantage in terms of having the right spectrum and scale of operations.The past two years have seen large investments in capacity creation. With its strong network and competitive pricing, Idea's subscriber additions are already beginning to match those of its rivals.

However, for Aga, the mobile game today is not just hinged on subscriber numbers; revenue and profitability have become even more crucial. "Nothing else matters. And by that yardstick, we are among the top three," he says.

Industry observers also consider the exit of Idea, Vodafone Essar and RCOM from the broadband wireless access (BWA) auctions to be a clever move. With Idea's balance sheet already stretched following the 3G payouts, it would make little sense for the company to pay a high price for BWA spectrum, particularly since there is no immediate demand for BWA services in India. Besides, the infrastructure and devices are not in place.

Financials
Idea's financial performance has far exceeded market expectations on the back of its increased mobile subscriber base, wider footprint and higher operating efficiency. The company posted an increase of 4.56 per cent in its consolidated net profit at Rs 2.66 billion for the quarter ended March 2010 compared to Rs 2.54 billion in the same quarter last year. Revenues too increased from Rs 29.42 billion in the quarter ended March 2009 to Rs 33.47 billion in the reported quarter. However, the company's EBITDA (earnings before interest, taxes, depreciation and amortisation) took a marginal hit of 0.12 per cent from Rs 8.12 billion in the quarter ended March 2009 to Rs 9.23 billion in the quarter ended March 2010.

For financial year ended March 2010, the company posted net profits of Rs 9.53 billion and revenues of Rs 124.47 billion.

Operationally, the going can only get better for Idea. Its peak capex period is over in all the existing circles. Given a constant price environment, these circles will only benefit from improved capacity utilisation. The company has already been witnessing a 13.5 per cent quarter-on-quarter growth in its overall minutes of usage.

However, according to analysts, it would be a bit of a stretch to assume that the company's double-digit revenue growth can be sustained going forward.
According to Anand Rathi estimates, Idea should continue to deliver better revenue and minutes growth; however, the growth in minutes of usage will eventually come down to a more realistic figure of 6-7 per cent quarter-on-quarter.

So far, the company has invested Rs 200 billion in telecom. Idea's total capex (network and non-network) for 2010-11 is approximately Rs 30 billion. This does not include any payouts on account of the 3G spectrum auction and 3G capex.

Company snapshot
Managing director: Sanjeev Aga
Market cap: Rs 214.02 billion (July 16, 2010; NSE)
Mobile subscriber base: 68.88 million (June 2010)
Presence: Pan-India
Shareholding: Aditya Birla Group 46.99 per cent, foreign holding 41.42 per cent, Indian institutions 7.52 per cent, others 4.07 per cent (March 2010)
Capex outlay for 2010-11: Approximately Rs 30 billion (excluding payouts on account of the 3G auction and 3G capex)

Recent initiatives
Post the 3G auction, Idea's primary focus was to pay up the spectrum fee of Rs 57.68 billion. It did so by mustering over 40 per cent (Rs 24 billion) from its internal accruals. This amount was largely paid from the leftover funds from the sale of its stake in Aditya Birla Telecom to private equity player Providence in 2009. It raised Rs 5 billion through the issue of commercial papers.The remaining amount was paid through a mix of longand short-term loans from a consortium of banks led by IDBI Bank.

For Idea, providing affordable and innovative talk plans for its users has been a key priority. In fact, the revenue from its voice business constituted 83 per cent (Rs 33.12 billion) of its total revenues for the quarter ended March 2010.

The operator has, in the past six months, introduced a number of talk plans in both its prepaid and post-paid segments to woo subscribers. For instance, in Andhra Pradesh, its prepaid subscribers can avail of a scheme known as "Reserve Talktime", which allows them to create a reserve account of talktime and use it when required. To avail of this service, subscribers need to use a recharge coupon worth Rs 33 and get talktime of Rs 25 credited to their reserve account.

Idea has been a keen player on the VAS front too. It recently tied up with Malayalam news channel Indiavision TV and technology provider IMImobile to provide its Kerala users live news services in Malayalam on their mobiles through an interactive voice response system. The service has been a big hit in the region.

According to company officials, there is a huge opportunity in the VAS segment, which will only increase with the introduction of 3G services. In the past few quarters, the share of VAS in Idea's overall revenues has increased significantly. In the quarter ended March 2010, the contribution of VAS increased by 12.4 per cent.

Idea is also focusing on the rural market in a big way. The company was the first to introduce small-denomination recharge vouchers, customised VAS and agri-related information for the farmer community, among other things. Mukarji says, "By late 2009, two out of every three of our users were from non-urban environments. This indicates how huge our rural penetration has been. If our penetration has been positive, it is because we have been able to develop and support innovative rural marketing plans." Idea's Kissan Suvidha Pack is a case in point. A voice-based utility portal, it offers information on commodity rates at major mandis, crop advisories for seasonal crops, weather updates, local news updates and Punjabi folk music.

Another initiative targeted at rural India is the "Fone Friend" service. This service, launched in association with the Self Employed Women's Association, offers telecom services in rural India by linking it with rural micro-entrepreneurs in the country's underserved areas. In other words, the service allows users to access mobile telephony and other VAS on a per-call basis. The project is based on the shared-access model, which enables the mobile phone to be used as a public phone operated by a micro-entrepreneur.

Analyst view

Aggressive brand building, a reasonable quality of service, and a place among the top six operators in the country are Idea Cellular's key strengths. Besides, being a part of the $29 billion Aditya Birla Group, which is ranked in the league of Fortune 500 companies, the operator has the backing of a strong promoter with financial muscle.

With a market cap of Rs 214.02 billion, an EBITDA of Rs 9.23 billion in the quarter ended March 2010, and 10.69 per cent market share, analysts are rather upbeat about the company. According to them, Idea has witnessed robust growth and has become more aggressive than ever before.

However, industry observers say that there are some key areas that the company may want to look into. For instance, Uppal says, "In about half a dozen markets, Idea has a dominant position.However, in other markets, it has entered very late. So, its competitors have a huge lead over it. This is something the company will have to deal with. Also, Idea has been a focused player without much interest in the internet or long distance.This could be a disadvantage, especially because telecom is a business where incumbency has an edge."

Moreover, analysts say that with new operators coming in, the competition is only going to get tougher. TTSL has already upstaged Idea on the user-base front. "With new entrants like Uninor, SSTL and Aircel all pitching for the same high-paying subscribers in the same circles, the competition is going to be intense. In that context, with no broadband network, no major enterprise presence and no global operations, Idea will be at a distinct disadvantage," notes Sridhar Pai, CEO, Tonse Telecom.

But the fact remains that Idea is yet to reach the 100-million subscriber mark, a milestone that many of its rivals crossed some time ago. The company, however, does not seem to be overly concerned about this. It is quite content to add 2 million users a month. Besides, subscriber numbers have never been that vital for the company. "User numbers are no longer a robust indicator. There was a time when the number of subscribers was the standard indicator for all calculations, including spectrum allocation. However, it has never been considered the dominant factor in financial terms. We will continue to focus on revenue market share, which grew last year," says Mukarji.

The road ahead
Going forward, the company has identified several key areas of focus. For any operator, the biggest challenge is to match the market leaders in the circles it operates in. And with new players in the fray, the competition will only get more intense. Keeping that in mind, Idea will continue to build on its growth momentum to increase its market share. Also, with falling tariffs and lower ARPUs, margins will be extraordinarily tight. In such a market, VAS will continue to be a key area of focus along with 3G.

Idea does not have any immediate global aspirations. It is, however, looking to offer national and international long distance services in the future.

Like other operators, the operator is betting big on 3G. The company reportedly plans to introduce 3G mobile services in the third quarter of the current fiscal year. It is currently in talks with global equipment vendors Nokia Siemens Networks and Ericsson, among others, to buy equipment for 3G services.

It is expected that with 3G services on the roll, there will be a surge in demand for basic data services such as text messaging, video calls, mobile banking and other 3G features. Idea is also considering the possibility of selling 3G-based services on $300 smartphones. The company expects the prices of handsets to drop within a year, which would give a fillip to the uptake of 3G services in the country, including in rural India.

To sum up, Idea is one of the stronger telecom players in the country. And though it trails the major operators in subscriber terms as of now, its fresh approach and innovative strategies should translate into big gains.





 
 
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