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Idea Cellular: Speeding towards 4G

December 29, 2015
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In November 2015, Idea Cellular purchased Videocon Telecom’s spectrum in two circles, making this India’s first ever spectrum trading deal. At a broader level, this move can be seen as one that will strengthen the ongoing trend of sector consolidation. It also hints at the impending 4G war in the industry. Idea’s intention is to use Videocon’s spectrum for launching 4G services in 2016.

For a company that did not have a concrete 4G plan till mid-2015, this is a major move. In fact, Idea was keener on its 3G services gaining traction and had initially planned a selective 4G roll-out. But the increasing interest of its peers in the 4G segment has compelled the operator to gear up for the 4G battle in 2016. For financial year 2015-16, the company has revised its capex guidance from Rs 45 billion-Rs 50 billion (as decided in early 2015) to Rs 60 billion-Rs 65 billion, in light of its plans to launch 4G services in January 2016. The newly acquired spectrum from Videocon Telecom will help Idea realise its 4G potential and enable it to hold its own against bigger rivals like Bharti Airtel and Reliance Jio Infocomm Limited (RJIL).

Idea, India’s third-largest operator, has always been known for its astute business strategies for driving operational growth and profitability, and has rarely shown any desperation while crafting its business moves. It decided to cater to semi-urban and rural areas at a time when its peers were busy minting money from premium urban users. The strategy paid off over time with the company holding a major share among rural telecom users. Similarly, the operator had initially gone slow in its 3G service offerings, waiting for the segment to come into its own in the urban and rural markets.

Now, however, Idea seems to be lacking its usual patience, as is evident in its aggressive push to launch 4G services in early 2016. This can be seen in the strategies of other incumbents as well. Rather than a proactive approach, industry analysts believe that the recent incumbent moves in the 4G space are a response to the anticipated challenge from RJIL’s upcoming market entry and the market disrupting strategies it is likely to employ. Given the robust ground work RJIL has done in terms of infrastructure, content creation, etc. in the past two to three years, it is only natural to expect it to take the industry by storm. This is putting more pressure on the incumbents to make their networks 4G-ready so that they can offer stiff competition to the newcomer. Bharti Airtel’s 4G services have already reached 300 cities while Vodafone recently launched these services in Kochi, and  plans to cover other cities soon.

However, in a recent interview, Idea’s chief executive officer Himanshu Kapania stated that competition is not the only reason for the change in the company’s plans. The operator is now confident about the country’s evolving 4G ecosystem in terms of network and devices to push its service uptake. In addition, a strong 4G growth signal from other Southeast Asian markets, particularly China, from where India sources the majority of its 4G equipment and handsets, is a positive sign.

With other operational and financial metrics under control, Idea is well-placed to put all its energies and the majority of its resources into making 4G a reality for its customers.

A look at the Idea Cellular’s performance, key focus areas, challenges and the way forward…

Strong operational and financial wicket

Idea has come a long way from being a fringe regional player to a pan-Indian telecom major. It achieved this by making significant inroads into then-untapped semi-urban and rural areas, and later strengthened its position in more lucrative urban markets. As per data from the Cellular Operators Association of India, Idea’s subscriber base stood at 167.29 million as of October 2015, the third-highest in the industry after Bharti Airtel (237.98 million) and Vodafone India (189.48 million).

This exemplary growth has been possible on the back of a robust and ever-expanding telecom network, spectrum acquisition from time to time, success in tapping emerging business opportunities, and significant branding exercises. Even prior to its spectrum trading deal with Videocon, the company had been enhancing its spectrum holding by actively participating in auctions over the past few years. It has taken part in five auctions, committing Rs 480 billion for 20-year spectrum licences. Idea’s strength lies in a good quality and quantum of spectrum in Tier II regions, a solid distribution network and strong brand presence.

During the first two quarters of 2015-16, the operator spent Rs 31 billion on network expansion and installed 16,485 sites (2G and 3G). During the same period, it added 7,000 km of optical fibre cable to reach 100,400 km of fibre across the country. Most of its sites are now being integrated on single radio access network technology, where two technologies can run on the same radio. For instance, in the 1800 MHz band, Idea can provide GSM as well as 4G services to its customers.

To tap opportunities in the digital money segment, it has joined hands with Aditya Birla Nuvo to bid for a payments bank licence. The financial venture will profit from the operator’s large rural subscriber base and retail presence as Idea’s services are present in 375,000 villages across India. These services are expected to be launched by December 2016. Idea already has a prepaid payment instrument licence and 150,000 subscribers for its digital wallet.

Financially, the company has grown tremendously. Its revenues doubled from Rs 154.38 billion during 2010-11 to Rs 315.27 billion in 2014-15, while its profits jumped from Rs 8.9 billion to Rs 31.9 billion during the same period. In its recently announced results for the quarter ended September 30, 2015, Idea posted a year-on-year increase of 7.15 per cent in its net profits, from Rs 7.55 billion during the quarter ended September 2014 to Rs 8.09 billion during the quarter ended September 30, 2015. Its revenues grew from Rs 75.69 billion to Rs 86.89 billion during the same period. During the first half of financial year 2015-16, the company generated close to Rs 50 billion in cash, which was partly used to fund the Videocon spectrum buy-out.

Gearing up for 4G

Idea will launch 4G services from January 2016, with the aim of serving 750 towns across 10 circles by the first half of the year. These include markets like Maharashtra and Goa, Andhra Pradesh, Madhya Pradesh and Chhattisgarh, Kerala, Punjab, Haryana, Karnataka, Odisha, Tamil Nadu and the Northeast. The company has leadership positions in six of these circles in terms of revenue market share. The Gujarat and Uttar Pradesh (West) circles are also leadership markets for Idea, but the operator did not pick up 1800 MHz spectrum in these circles during the March 2015 auction. However, it seems to have made up this lost ground through its recent purchase of Videocon’s spectrum in these two circles for Rs 33.1 billion. As a result, Idea will be able to launch 4G services in a total of 12 circles, which together account for 60 per cent of its revenues and comprise about 170 million customers. In the Haryana circle, it is the only operator with spectrum in the 1800 MHz band while in Gujarat, RJIL will be its only competition. Thus, Idea can enjoy some level of exclusivity in both these circles.

On the investment side, the company has revised its capex for 2015-16 by about Rs 15 billion to Rs 20 billion. This addition is likely to support the expansion of 3G/4G sites and related services. For 2015-16, Idea Cellular has set a target of adding 30,000-35,000 3G/4G incremental sites, which will encourage mobile broadband coverage.

The operator is also planning to introduce self-branded digital service applications like Idea Music, Idea Games, Idea Movies, Idea API and Idea Digital Wallets, in addition to creating regional and vernacular content/applications through planned investments in platforms and partnerships. On the pricing front, it is likely to move away from separate value packs for voice and data and instead offer combo-packs across voice, mobile data and specialised content.

3G to complement 4G

Idea is certain that its 3G growth will not be jeopardised as it pursues its 4G plans. It has announced plans of expanding its 3G coverage significantly, and is also upgrading up to 80 per cent of its 2G sites so that they can handle 3G as well. Recently, it began offering 3G services through its homegrown network in the Delhi circle on the 900 MHz band, which is considered more efficient than the 2100 MHz band on which they were earlier being offered.

At present, the company has 42 million subscribers who have 3G smartphones, but only about 16 million of them are using 3G services. Idea now expects that better coverage will encourage existing customers with smartphones to upgrade to 3G/4G services. This is likely to translate into a healthier data ARPU. Its ARPU currently stands at around Rs 144 for a data user and goes up to Rs 202 for a 3G user.

Idea is looking at the co-existence of both these technologies in the medium to long term. For urban markets characterised by high data usage, it will pursue a hotspot strategy and improve its mobile broadband capacity through 4G, while in the rural market, it will continue to expand its 3G service base.

The way forward

It will be interesting to see how 2016 pans out for Idea Cellular. In terms of its 4G spectrum holdings, the company has already covered all its leadership circles and most of its EBITDA (earnings before interest, tax, depreciation and amortisation) generating circles, and no major spectrum trading/sharing deals are expected from it in this space. However, Idea will need to leverage this spectrum to the best of its ability to ward off competition and drive business growth.

Consolidating its position in the broader wireless market will not be easy either. Reliance Communications’ recent acquisition of Sistema Shyam TeleServices Limited has given the former greater spectrum play. Other consolidation moves are also on the anvil, which could seriously alter the industry’s market structure. Thus, defending its position will be crucial for Idea in the years to come. Meanwhile, the pressure on profitability will continue as the operator, like its peers, will have no option but to participate in the auction slated for 2016. Enhancing spectrum assets has become a necessity for maintaining/ improving service quality, especially with call drop rates reaching an alarming level.

Idea’s journey from the position of a regional player to the country’s third-largest operator has not been without challenges. The company missed India’s telecom growth phase during 2000-07, but its persistence, connect with the masses, and rapid adaptation to changing business scenarios have helped it emerge stronger than ever in recent years. This can be seen in the operator’s stellar financial performances quarter after quarter vis-à-vis its competitors. As the industry braces itself for a massive shift from voice to data, Idea, with its strong commitment to 3G and 4G, seems all set to ride this wave

 

 

 
 
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