This presentation is on Idea Cellular-one of the growth oriented Telecom Operator.This presentation explains Idea Cellulars spends at this years auction conducted by Govt. on spectrum to retain its existing licenses .Idea's growth over the years,cash flows etc

1. A Costly Recharge for
Idea Cellular

2. 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)

3. Why Idea is worrying?
-The Fifth round of spectrum license auction
between 04.03.2015-24.03.2015 turned out to be the
fiercest telecom battle India has ever witnessed since
1991
-The current auction was so aggressive because in
December 2015,the 20 year validity 29 licenses
across 18 service areas will expire.The top telecom
players had a lot to fight with Idea Cellular having to
retain 9 circles(Vodafone & Rcom 7 each & Airtel 6
each)
-Against the reserve price of Rs.49000 Crores &
much before the auction began, the govt had already
received commitments of Rs.60,000 Crores
-A total of 8 Operators paid Rs.20435 Crores as
earnest money deposit for participating in the
auction(Reliance Jio paying highest deposit of
Rs.4500 Crores)
-Jio already has Pan-India spectrum in the 2,300
Mhz band & it won spectrum in 1,800 Mhz in 14
telecom circles in the previous auction
-In non-metro circles where fewer towers were
available it made sense for Jio to bid for 900 Mhz
given that it is the most efficient spectrum with
propagation characteristics similar to spectrums in
higher bands
900 Mhz is hugely critical since it has the advantage
of penetrating signals “Indoors”. It s critical since it
gives you geography & also makes money
The 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 & own
A the end of the 4th 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
-
On the last 4 days of the auction, the lull again turned into a
storm as aggressive bidding was once again seen in the 900
Mhz band. Kapania says, he was surprised by the Bank
Guarantees given by the companies with deep pockets. It
was the most emotional time for Idea because there was a
huge danger of services being discontinued for 108 million
subscribers of Idea Cellular. It was a case of an existential
crisis
The fiercely fought auction ended after 115 rounds of
bidding yielding the Govt an all-time high of Rs.1.09 Lakh
Crores surpassing the Rs.62,162 Crores of the previous
auction in Feb 2014
Airwaves Auction
by GOI

4. Amount spent by
Telecom
Operators on
Spectrum
Renewel/New
Spectrum

5. 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)
-Revenue
2007-Rs.3000 Cr
2015-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

7. 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)

8. 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 Debt
Idea 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

9. 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”

10. 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

11. •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%

12. IDEACellular
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
AgreesMr.SaralofCRISIL
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
Vouchers
The last time Idea
Cellular carried out a
voice tariff hike
including withdrawal of
offers & freebies was in
January 2013 in select
circles.
AgreesMr.SaralofCRISIL
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 Jio
With the entry of new
large players,
competition will increase
& it will be challenging
for telecom operators to
raise tariffs
Voice Segment

13. Effect of auction on Jio’s operations
oAcquired 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 rate
Jio 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

14. Idea Cellular’s revenue Game
Idea’srevenueworry
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’srevenueworry
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

15. Idea Cellular
revenue on Data

16. 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

17. Idea & its
future
Idea’s penetration in India
Subscribers-16 Million
Data 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

18. Anup George Rebello
Asst.Manager
The Catholic Syrian Bank Ltd
(anuprebello.6@gmail.com)
http://www.slideshare.net/anuppresentations