Idea Cellular

Currently world's second largest telecommunication market, India has the third highest number of internet users in the world. India's telephone subscriber base has been expanding at a CAGR of 19.22 per cent to 1002 million over FY07–15. The Indian mobile economy growing rapidly is expected to contribute substantially to the country’s gross domestic product (GDP), according to a report compiled by the GSM Association and Boston Consulting Group. The government has fast-tracked reforms in the telecom sector and continues to remain proactive in providing room for growth for telecom companies with its flagship Digital India campaign. Of many policy initiatives, the government approved the rules for spectrum trading that will allow telecom companies to buy and sell rights to unused spectrum among themselves. Idea Cellular perfectly fits the bill as it has recently acquired spectrums and would be a major beneficiary of the consolidation that would take place in the Indian telecom Industry in near future.

About Idea

Idea Cellular (Idea) is the third largest wireless operator in India with a Revenue Market Share (RMS) of 18.7 per cent (Q1FY16). Idea's total subscriber base stands at 166 million at the end of Q2FY16 with urban regions accounting for 55.76 per cent of the total and rest are rural. Idea provides pan India GSM mobile services in all the 22 service areas of India. The company offers voice, data, wireless fidelity (Wi-Fi) services and other value added services (VAS). It provides GSM-based second generation (2G) in around 22 service areas, third generation (3G) mobile telecommunications services in 21 service areas and upcoming 4G services would be covered in 12 service areas in India. Idea Cellular is part of the Aditya Birla Group, which is one of the largest business groups in India with operations in more than 30 countries.

Spectrum Acquisition

In first of transaction taking place between the telcos, Idea Celluar acquired spectrum in two of its leadership circles, Gujarat and Uttar Pradesh (West) from Videocon in a deal worth Rs 3310 crore. Idea intends to use this acquired spectrum for launch of 4G LTE (long term evolution) mobile broadband services. Acquisition of spectrum goes well with the company’s business plan and also render Idea with a huge opportunity to harness the lucrative high subscriber base in the two leadership circles.

UP West has a total subscriber base of 53.19 million and Gujarat has 60 million subscribers according to Telecom Regulatory Authority of India (TRAI) data. With the purchase of spectrum, Idea will have now 4G footprints in 12 circles, which together account for 75 per cent of its revenues and therefore, ensuring that they remain a combative pan India player and thereby prepared to take on competition in the sector. Idea would have full a range of mobility services across 2G (GSM), 3G (HSPA) and 4G (LTE) technologies in all of its eight leadership markets. Idea's push to buy spectrum has also been influenced by the imminent arrival of Reliance Jio. Hence, in order to avoid losing out in terms of market shares and revenues in the all-important circles it appears to be a right decision given the longer terms implications.

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3G & 4G Push

Mobile data has been a great revenue driver for all the telecom companies in past two years. This very fact has been revelatory by Idea's aggressive buying of spectrums in the last two auctions. Idea had won airwaves to operate 3G services in 21 circles and 4G services in the 10 circles plus two circles in recently acquired spectrum.

The net mobile data customer base (2G+3G) has seen an ascending trend, as it has increased by 4.2 million to 41.3 million in the past year, with 24.8 per cent of overall Idea subscriber base using Idea 2G or 3G platforms to access internet. Over the last year, the 3G data subscriber base for the company has grown by 86 per cent with addition of 9.1 million new 3G data customers, which is likely to see further growth given the recent launch of 3G in important circles like Delhi and Kolkata. The faster 3G adoption has led to robust volume growth of overall mobile data traffic.

Idea is also on track to launch its 4G (LTE) services in a phased manner covering 750 towns across existing as many as 10 4G circles by the first half of 2016 and subsequently plans to introduce, 4G services in Gujarat and Uttar Pradesh (West) telecom circles as well. Idea also plans to offer whole host of other services to its existing internet customer base and new additions. Given the large mobile data opportunities, Idea with increasing consumer affinity, steady cash flows, deep rural 2G presence, expanding 3G network footprint & planned 4G LTE network launch the company remains to further strengthen its market competitiveness and emerge stronger.

Hyper-Competition

With more than 1 billion wireless users, India's mobile market trails only behind China. With more than 13 market players in the Indian telecom markets, making competition fierce amongst all of them in almost all the operating circles as all fight for a pie of 1 billion plus subscriber base, making the telecom sector more like a bat field. India's already overcrowded telecoms sector is bracing itself for the arrival of the 14th player in Reliance Jio. Hyper competition amongst the companies has led to increasing price competition and aggressive customer acquisitions by the telecom operators. Competition among top telcos like Bharti Airtel, Vodafone India and Idea has intensified and tariffs have hit rock bottom in recent times.

Broadband services user-base in India is expected to grow to 250 million connections by 2017. Driven by strong adoption of data consumption on handheld devices, the total mobile services market revenue in India is expected to touch USD 37 billion in 2017, according to research firm IDC. Rivalry is further going to heat up as data services revenue would be a massive contributor more than the voice.

This would also lead to a rise in the data traffic aided by the spread of cheaper smartphones, lower data tariffs and improving digital content. Heightened competition will also restrict any meaningful pricing improvement for the telecom sector in near to medium term. Besides entry of Reliance Jio into the telecom market will force the top operators to reduce data tariffs in face of fierce competition as it would seek to persuade away lucrative data customers from existing companies with its 4G services. All this competition would be reflective on company's operating performance as margins would reduce due to pricing pressure. Idea could face headwinds as increased competition in data may impact data pricing power which will translate into lower data revenue growth.

Amidst all the rivalry between the telcos, Idea remains in a sweet spot owing to its stronger market share gains that it has been making over several years. Idea has been successful in reducing the gap over arch rival Vodafone as it continues to strongly gain market share and now stands much closer to its competitor. This has been primarily led by growth in rural subscriber base as Idea continued to remain, the service provider with highest proportion of rural subscribers (57.21 per cent), followed by Vodafone (53.52 per cent) to their total subscriber. Idea has maintained leadership position on overall Mobile Number Portability too. On a consistent basis Idea has been able to outpace the industry growth in new subscriber additions too, which gives it ammunition to outlast the competition.

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Financially Idea has been performing well with revenue CAGR of 15.30 per cent over the last five year led by a robust voice and data volume growth. The company has outperformed the industry in revenue growth. During the same period company's EBITDA CAGR rose by 23.32 per cent. CAGR of PAT showed an improvement of 28.86 per cent in the last five years. On a consolidated basis, the company's total revenues for FY15 increased by 19 per cent to Rs 31571 crore from Rs 26519 crore in the previous fiscal again outpacing the industry growth. The EBITDA also increased to Rs 10812 crore from Rs 8334 crore, representing growth of 30 per cent over the preceding year. The company was successful in augmenting its margins by 282 basis points despite witnessing intense pricing pressure. PAT stood at Rs 3193 crore up by 62 per cent in comparison to the previous year.

For the quarter ending Q2FY16 the subscriber base was 16.6 crore. The company saw its Average Revenue Per User (ARPU) decline by 3.8 per cent sequentially in Q2FY16 due aggravated pricing pressure. Minutes of usage decreased sequentially by 3.2 per cent QoQ. Data ARPU (2G+3G) declined marginally by 2 per cent due to high pricing pressure and reduction in data charges, whereas total data volume increased by a healthy 14.9 per cent sequentially.

The company has registered near triple digital mobile data revenue growth in the past year. It attained the highest ever absolute voice growth, with 96 billion minutes of usage in Q2FY16. Competitors like Bharti Airtel too saw headwinds due to pricing pressure in voice ARPU as it decreased by 11 per cent YOY and 6 per cent QoQ, whereas data ARPU showed strong growth.

The company's net debt stood at Rs 22251 crore as of Q2FY16 from Rs 16811 at the end of Q4FY15 an increase of 32 per cent on half yearly basis mainly on account of capex undertaken and spectrum payment fees. It was reflective in its interest expense also as it augmented by 35 per cent on a half-yearly basis. The company’s debt equity ratio was at 1.17 in FY15 in comparison to 1.25