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Has Idea's time come?

July 08, 2008 12:04 IST

Having acquired Spice, Kumar Mangalam Birla believes his mobile phone service provider can be among the top three. It will first have to hold its own against the new challengers.

A choppy beginning followed by flashes of good work. Strong pedigree, yet lagging behind peers. That could be actor Abhishek Bachchan or the mobile phone service he endorses, Idea Cellular.

The analogy goes further. Just like Amitabh decided to step in and shore up his son's career, Idea's parent, AV Birla Group, has taken the cellular services provider by the scruff in a bid to make it one of the top three in the business.

Idea is number five now. Jumping two places will be an enormous task since the top three are far ahead of it. Even the fourth, state-owned Bharat Sanchar Nigam Ltd, has nearly 37 million subscribers to Idea's 30.6 million.

Despite being an early entrant, the Rs 6,720 crore (Rs 67.2 billion) company remains somewhere in the middle of the heap.

That is in part because Idea's first few years saw a string of flops. At first, there was Birla-AT&T-Tata, which went by the somewhat ungainly acronym of Batata. Its nomenclature threatened to get worse when BPL nearly joined the venture, but the agreement fell through.

After AT&T moved out, two of India's most-admired business houses, the Tatas and the Birlas, squabbled in public until Tata, which had decided to focus on the CDMA platform instead of Idea's GSM, sold its holding to Birla in April 2006.

In 2002, the company had renamed itself as Idea. At a press conference in New Delhi, its top executives said the name was inspired by French writer Victor Marie Hugo's oft-repeated quote, "Nothing is ever so strong as an idea whose time has come."

Idea's time hasn't yet. Present in only 11 out of 22 circles -- 13 now, with Spice adding two -- the company is still some distance from being a pan-India player.

Kumar Mangalam Birla, chairman of AV Birla Group, believes that is about to change. Having acquired a controlling stake in Spice Communications from joint venture Czar B K Modi, Idea's share of the market has gone up from 9 per cent to 11 per cent and given it a foothold in the lucrative circles of Punjab and Karnataka.

"We will grow faster than the market and that's how we plan to add market share," says Birla, expressing the hope that Idea will be among the top three in a few years.

Tough call

Easier said than done! Even in the last couple of years, Idea has grown faster than the market as it has rolled out networks. But the growth has been on a small base. Its rivals, sitting on much bigger bases, have not exactly been slowcoaches.

If Idea grew its subscriber base by 71 per cent on a base of 14 million in the year to March 2008, Vodafone grew by 69 per cent on a base that was nearly twice as high at 26 million. If Idea added 100 basis points to its market share, taking it to 9 per cent, Bharti Airtel added twice as much to hit 24 per cent on a base that was nearly three times as big.

Between April 2007 and January 2008, Idea's coverage nearly doubled. However, after rolling out in Uttar Pradesh East, Rajasthan and Himachal in September-November 2006, it has not spread further. Its rivals have. Bharti Airtel is present in 5,000 census towns, compared with 2,735 for Idea.

Many believe Idea should have made a pitch for Hutchison-Essar (now controlled by Vodafone), if not on its own then by teaming up with a foreign partner. But Birla has no regrets. "At that point we didn't think of bidding for it," he says, adding that by and large Idea plans to grow organically.

That is at variance with last month's event, when it acquired Spice. As managing director Sanjeev Aga points out, Spice is a good strategic fit, giving Idea running operations in two prosperous states and reducing the time to market.

However, the combined market share of just over 11 per cent may not be enough to take on Reliance Communications' GSM network, which is in the works, and serious new players like Sistema, which has a target of 35 million subscribers by 2010.

Videocon, the conglomerate, and real estate company Unitech, too, are knocking on the door.

No wonder, Idea is in a hurry to build scale. Over the next six months, it will roll out networks in Tamil Nadu, Orissa, Bihar and Mumbai. The last two were to be launched in early 2008.

Aga says Mumbai will happen in two months and the rest within six. Even after this, it will be some time before Idea can claim that its network follows wherever you go.

Romal Shetty, the executive-director and head of the telecom practice at KPMG, points out that a national footprint is imperative.

"When tariffs are cut, which happens frequently, it hurts less if the volumes are high. It's easier to pass on the benefits to consumers if they are roaming on the same network. If an operator is relying on others to provide roaming facilities, the cost will go up."

Mumbai matinee

Bharti Airtel has already fanned out into 300,000 villages. Idea has reached 120,000. Alpesh Shah, partner and director, The Boston Consulting group, reckons that in the next five years the share of Tier II towns will go up to 45 per cent of the market from 25 per cent now.

"That is where operators need a presence." He says Idea could ensure a quicker rollout by sharing infrastructure. "For some time the operating margins will be lower, given the rentals, but it will have a 6-12 month lead over the newer players."

To its credit, Idea has penetrated deep into Maharashtra, Kerala and Madhya Pradesh, where it is the market leader. It is already among the top three in Haryana, Gujarat and Andhra Pradesh and has a blended market share of 19 per cent.

However, breaking into markets like Mumbai, Tamil Nadu and Orissa as the seventh player will not be easy. Concedes Birla, "Yes, the Mumbai market will be a challenge, but Idea is a strong brand, so we are ready to take on that challenge."

The hope lies in the high churn (subscribers changing operators). In Mumbai, the churn is pegged at 5 per cent a month -- that's 700,000 subscribers. The city also adds 250,000 subscribers a month. That means nearly a million subscribers are up for grabs every month.

However, the fourth, fifth and sixth entrants in a circle typically post an average revenue per user (ARPU) that is 25 per cent lower than that of the top three.

According to Birla, Idea will have an edge over the newer players in terms of capital expenditure and, more importantly, because it is a well-entrenched brand. According to Aga, with Telekom Malaysia as a partner, Idea can offer international roaming across 10 Asian countries.

Not for profit

Twenty months after Idea rolled out operations in UP East, Rajasthan and Himachal, the circles are still not making money. The management believes the break-even point will come in the third quarter of this financial year.

However, the numbers in recent times have been far from ebullient. Idea's ARPU fell sharply in the quarter ended September 2007 and revenues in the December 2007 quarter were less than forecast.

At Rs 287, Idea's ARPU is far below Bharti Rs 347, mainly because it doesn't operate in the most prosperous circles. While revenues bounced back in the quarter ended March this year, the profitability has been under pressure partly because of the cost of new network launches.

Idea's operating margin, in the region of 34 per cent, is not too far behind Bharti's over 40 per cent, given that Bharti is the runaway leader.

However, Spice's margins are much narrower. Birla, however, is confident that the larger scale will bring profitability.

"We see ourselves as aggressive players and hope to be India's most profitable telecom company," he says. Adds Aga, "Our operating margins should be in line with the national average in about two years."

Birla's confidence perhaps stems from having Telekom Malaysia as a partner. The Rs 7,200 crore that Telekom Malaysia brings in will make Idea debt-free and allow it to compete at the auctions for the third generation mobile services licences.

KPMG's Shetty says Idea should also focus on value-added services. BCG's Shah says it will need to invest more in the brand because the jury is still out on whether a mobile telephony is a push or a pull service.

"We will distinguish ourselves with the quality of the service and network like we have done quite successfully in the past," says Birla. Will that make the next superstar?

All Things Nice

  • The addition of Spice gives Idea a strong foothold in Karnataka and Punjab
  • Idea's post-merger market share will stand at 11 per cent (9 per cent earlier) and the subscriber base at 30.6 million (26 million)
  • Idea pays Rs 77.30 a share for 40.8 per cent stake in Spice, which is a 50 per cent premium to the market price
  • The total cash outflow, including the non-compete fee and the open offer expenditure, is pegged at Rs 3,250 crore (Rs 32.5 billion)
  • Merger to dilute Idea's consolidated earnings per share by about 10 per cent for the next three years
  • Telekom Malaysia to infuse Rs 7,300 crore (Rs 73 billion) into Idea for a 19 per cent stake -- a hefty premium to the market price
  • The net cash inflow into Idea is pegged at Rs 4,050 crore (Rs 40.5 billion); this will free it of debt
  • The rise in market share and cash infusion will help Idea fortify itself against entrants

 

Shobhana Subramanian
Source: