Competitiveness in Indian Telecom Industry: The case of IDEA Cellular Hyper-Competition in Telecom

International Journal of Management and Social Sciences Research (IJMSSR) ISSN: 2319-4421 Volume 1, No. 3, December 2012

i-Xplore International Research Journal Consortium www.irjcjournals.org

9

Competitiveness in Indian Telecom Industry: The case of

IDEA Cellular Arunkumar L , Student of SJMSOM, IIT Bombay

Nirmal Kumar D, Student of SJMSOM, IIT Bombay

Abstract Indian Telecom Industry is the third largest in terms of

user base and is the fastest growing telecom market in the

world. The Industry has grown almost 23x in subscriber

base in a short span of 10 years from 37 million in 2001 to

over 846 million in 2011.

Despite the downfalls, the industry is all set to grow at

20% CAGR over the next five years and high speed data

networks like 3G and 4G are expected to boost revenues of

the telecos. A brainchild of the prolific Aditya Birla

Group, IDEA Cellular is an interesting company with a

strong rural subscriber base. We have tried to analyze

competitiveness of IDEA cellular on various fronts.

Research methodology used is secondary research

followed by in-depth interviews with key industry persons.

We have answered many key relevant questions for IDEA

like their strategy for 2G spectrum auction and

benchmarking them in key parameters and providing

recommendations for them

Keywords: TRAI, Regulations, Spectrum, 2G

Hyper-Competition in Telecom

A recent report by PriceWaterCooper House compares the

number of players in telecom across countries and India

leads the list by a huge margin. (See Exhibit 1) When

developed nations like US have only 4 players, India has

10+ players in each circle and 14 players on a national

scale. Also, with TRAI being a tough taskmaster, the

market is highly regulated and leaves very little scope for

differentiation amongst players. The result is almost

identical pricing plans, dwindling margins and marketing

being the only differentiation. With the advent of the

recent 2G scams, the industry has also attracted media

spotlight on itself.

An Average IDEA

We were curious to know what factors drive consumer

decisions while deciding on a telecom service provider.

Amongst the options provided, Network coverage and

Plans & Pricing took the top 2 spots respectively. (See

Exhibit 2) But interestingly, Customer service took no.3

while Brand Value and Marketing landed no.4 and no.5

respectively. With IT systems and pricing being almost

similar, it was quite an insight that intangible values like

Customer service and perceived Brand value account for

30% weightage while deciding on a service provider.

The second component of the survey asked the

participants to rate the top 5 players namely Bharti,

Vodafone, IDEA, Reliance and Tata DoCoMo on the 5

factors. (See Exhibit 3) IDEA Cellular was rated „average‟

in ALL the 5 factors. Bharti, Vodafone and IDEA share

network infrastructure through the INDUS tower company

but IDEA‟s perceived rating on network coverage was

only average whereas Bharti and Vodafone were rated

Excellent and Best respectively. Also, despite their hugely

acclaimed marketing campaigns of „What an Idea Sirji‟,

the perception rating was average hugely because the ads

were trendy and youthful but did not communicate

effectively to the consumer.

Benchmarking on ARPU, ACPU & AOPPU

We decided to benchmark the companies based on

Average Revenue per User (ARPU), which is an industry

standard to compare telecom firms. Due to lack of publicly

available data, Vodafone and Tata-DoCoMo do not figure

in this list. The benchmarking was performed on Bharti,

Reliance and IDEA Cellular. (See Exhibit 4) Bharti leads

the pack by a huge margin while IDEA has been able to

hold its fort against Reliance. We also benchmarked the

three firms on Average Cost per User (ACPU) which

interestingly shows a very small difference between Bharti

and IDEA. (See Exhibit 5) In terms of Average

Operating Profit per User, Bharti was again miles ahead

whereas Reliance‟s figures are going downside. (See

Exhibit 6) IDEA has managed an almost flat curve with

respect to ARPU, ACPU and AOPPU, which is a good

sign considering the fact that other players‟ figures have

been declining over the years.

Financial Competitiveness

The Operating margin of IDEA is better than the industry

average (See Exhibit A) and second of Bharti (Vodafone

India figures unavailable). Reliance Communications has

their own backbone networks and towers and probably

they should have had the best EBITDA / Operating margin

among all the players but still they are far behind Bharti

and IDEA. Coming to the Net profit margin (See Exhibit

B), IDEA and Bharti are the only two players in the whole

industry who have made profits in 2011. IDEA‟s

depreciation expense is one of the major reasons for hit in

their net profit margin.



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IDEA‟s good performance in operating margin and net

profit margin when comparing the industry average is

translated to their ROC (See exhibit D) and ROE (See

exhibit C) as well. Although figures of 7% of 6.6% of

ROE and ROC is very less when compared with the Nifty

companies, it is still better than the telecom industry

average. Low ROE can be attributed to the fact that most

of IDEA‟s customers are rural people whose ARPU is less

compared to the urban customers.

We feel that Bharti have become mature, Reliance is

slowly deteriorating. Bharti and Reliance has a revenue

growth of 9.4% and (8.4%) respectively Y-O-Y during

FY‟12 (See Exhibit E). When we take IDEA for that

matter, we still believe that IDEA has lot of steam left.

IDEA still has the capability to become one among the top

3 players in India overtaking Reliance communications

IDEA’s Strategy going forward?

From our understanding of the Industry and the company

we have devised four recommendations for IDEA to

improve its performance. Firstly, IDEA should try and

increase their Average Revenue Per Use (ARPU). To

increase their ARPU they should target high value

customer or devise a pricing strategy that maximizes their

revenue. However IDEA‟s brand value from our survey is

comparatively less when compared to Bharti / Vodafone.

IDEA should focus on improving their brand value if they

want to capture high value customers. IDEA‟s ad-

campaigns that are set in rural areas are not the way for

IDEA going forward if they want to increase their ARPU.

Secondly, IDEA should set up passive infrastructure

through the Indus route instead of setting up their own

infrastructure. If IDEA wants to improve their standalone

ROE and ROC this should be the way forward. Thirdly,

we suggest IDEA to make judicial use of spectrum. TRAI

has recommended spectrum sharing policies and they will

probably come into force very soon. IDEA should lease

our their unused spectrum to other players to make the

maximum benefit and also in cases where is make

business sense to IDEA to lease spectrum from other

players rather than buying new spectrum, they should go

ahead and do it.

The Non-Voice revenues that include Value-added

services and Data revenues in India are about 15% (See

Exhibit F) of the total revenues. This figure in developed

markets is about 40%. We believe with the new

smartphone revolution that is coming up, there is going to

be huge demand for data. We suggest that IDEA should be

ready for the data revolution that is going to happen in

India very soon by investing in backend data

infrastructure.

IDEA’s Strategy for cancelled 2G Licenses

The Supreme Court during Feb 2012, cancelled 122 2G

licenses that were issue during 2008. IDEA lost 13 circle

licenses in that ruling which includes 4 Spice

communication licenses, a fully owned subsidiary of

IDEA cellular (See Exhibit G). Our focus was on 7 circles

that IDEA were currently had operations.

We took the gross revenue, license fee, and spectrum

charges data for IDEA in these circles from TRAI report

(See Exhibit H). We computed the Net revenue and

annualized it. From our analysis on IDEA‟s profit and loss

statements over the last 5 years we‟ve got the figure of

18% margin from the Average gross revenues. Hence we

computed the Net profit margins for all the 7 circles (See

Exhibit I). From our Analysis it was evident that it does

not make business sense for IDEA to bid for spectrum in

Kolkata and Tamil Nadu circle. Mobile telephony

penetration level in these areas is too very high (See

Exhibit J). Gaining market share in these markets is going

to be very difficult. It might need more spending on ad-

campaigns, infrastructure, human capital, etc. Hence we

suggest IDEA to go ahead with the other 5 circles leaving

Kolkata and Tamil Nadu.

ACKNOWLEDGEMENTS We thank our esteemed Faculty Prof. Kirankumar

Momaya for guiding through this journey. This case is

made as a part of “International Competitiveness” course

conducted at Shailesh J. Mehta School of Management

(SJMSOM), Indian Institute of Technology, Bombay

References

1. http://www.capitaline.com/

2. http://www.trai.gov.in/

3. http://www.coai.com/

4. Idea cellular FY‟07, FY‟08, FY‟10, FY‟11,

FY‟12 Annual report

5. Bharti Airtel FY‟07, FY‟08, FY‟10, FY‟11,

FY‟12 Annual report

6. Reliance Communication FY‟07, FY‟08, FY‟10,

FY‟11, FY‟12 Annual report

7. DoT FY‟12 Annual report

8. 2011 Census report

9. ICRA‟s Indian Telecom Tower Industry Report

Feb 2011

10. ICRA Spectrum Pricing Unveiled : Impact

Assessment Aug 2012

11. TRAI Financial & Economic Analysis Division

June 2012 Report

12. TRAI Press Release No. 171/2012

13. TRAI FY‟11 Annual report

14. PWC Impact of TRAI‟s spectrum

recommendations on consumers and industry

May 2012

http://www.capitaline.com/

http://www.trai.gov.in/




http://www.coai.com/



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EXHIBITS

Exhibit 1

Source: PwC & COAI White paper on Indian Mobile Sector – pg.26

Exhibit 2 – Consumer Decision Drivers for choosing a Telecom service provider

Source : Our Survey Results



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Exhibit 3 – Survey Results - IDEA

Exhibit 4

Source : www.trai.gov.in, Bhari, IDEA & Reliance Annual report




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Exhibit 5


Exhibit 6






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Source: www.capitaline.com



18.0%13.1%

35.9%

21.2%

-6.8%

13.0%

-24.8%-40.0%

-20.0%

0.0%

20.0%

40.0%

Industry BSNL Bharti IDEA TTML Reliance MTNL

Exhibit AOperating Margin (2011)

-23.8%

20.0%5.4%

-45.2%

-9.9%

-76.1%-100.0%

-80.0%

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

BSNL Bharti IDEA TTML Reliance MTNL

Exhibit BNPM (2011)

-3.5%-8.4%

19.1%

7.0%

-2.4%-10.0%

0.0%

10.0%

20.0%

30.0%

Industry BSNL Bhari IDEA Reliance

Exhibit CROE (2011)



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Source: www.capitaline.com, Our estimates

-0.3%-7.4%

18.5%

6.6%

-0.7%-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

Industry BSNL Bhari IDEA Reliance

Exhibit DROC (2011)

44.0%

32.3%

4.7% 6.8%9.4%

53.9%

46.7%

20.2%

29.4%25.7%

14.4%

1.4%

-9.7%

-1.3%

-8.4%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

FY' 08 FY' 09 FY' 10 FY' 11 FY' 12

Exhibit ERevenue growth (Y-O-Y)

Bhari Airtel

IDEA

Reliance




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Exhibit G

Circle Operational Non operational

Punjab

Assam

J&K

Karnataka

Kolkata

North East

Orissa

Tamil Nadu

West Bengal

Delhi

AP

Haryana

Maharashtra

Source: www.trai.gov.in

14.40% 14.30%

20%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

Airtel Idea Reliance

Exhibit FNon-Voice Revenues (Q4 FY’12)





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EXHIBIT H

In Rs. crores Gross Revenue AGR License Fee Spectrum

Charges

License fee +

Spectrum charges Net Revenue

Net Revenue

(Annualized)

Assam 13.11 4.25 0.26 0.14 0.4 12.71 50.84

J&K 12.17 5.72 5.72 0.34 6.06 6.11 24.44

Kolkata 41.98 3.46 0.35 0.11 0.46 41.52 166.08

North East 9.93 3.45 0.21 0.12 0.33 9.6 38.4

Orissa 29.21 13.09 0.79 0.44 1.23 27.98 111.92

Tamil Nadu 88.27 12.43 1.24 0.42 1.66 86.61 346.44

West Bengal 55.46 28.38 2.27 0.95 3.22 52.24 208.96

Source : www.trai.gov.in, Our Estimates

EXHIBIT I

In Rs. crores MHz TRAI spectrum

price (Rs.cr)

Net Revenue

(Rs.cr)

Net Revenue /

Spectrum price

Net profit (18%

Margin) Rs.cr

Net profit /

Spectrum Price

Assam 1800 8.97 50.84 567% 9.2 102.0%

J&K 1800 6.55 24.44 373% 4.4 67.2%

Kolkata 900 235.38 166.08 71% 29.9 12.7%

North East 1800 9.15 38.4 420% 6.9 75.5%




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Orissa 1800 20.98 111.92 533% 20.1 96.0%

Tamil Nadu 1800 316.78 346.44 109% 62.4 19.7%

West Bengal 1800 26.74 208.96 781% 37.6 140.7%


EXHIBIT J

Total Population

(Census 2011)

Mobile Subscribers

(Mar '12) Penetration level

No. of Idea‟s

subscribers Market Share

Assam 31,169,272 14,208,075 46% 5,263,373 37.0%

J&K 12,548,926 6,306,835 50% 181,623 2.9%

Kolkata 4,486,679 24,990,125 557% 1,324,453 5.3%

North East 14,418,710 8,518,317 59% 203,645 2.4%

Orissa 41,947,358 26,618,935 63% 5,443,540 20.4%

Tamil Nadu 72,138,958 77,678,330 108% 2,120,156 2.7%

West Bengal 91,347,736 46,272,843 51%

2,222,696 4.8%

West Bengal

(includes Kolkata)

95,834,415 71,262,968 74% 3,547,149 5.0%






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EXHIBIT K

IDEA's P&L Statement

Rs mn Mar '08 Mar '09 Mar '10 Mar '11 Mar'12

Income

Service Revenue 67200 98383 118502 153328 192753

Sale of Trading Goods 0 187 0 0 0

Other Income 175 216 801 562 470

Total Income 67374 98787 119304 153890 193223

Operating Expenditure

Cost of Trading Goods Sold 0 190 0 0 -

Personnel Expenditure 3418 4677 5699 7283 8588

Network Expenses and IT Outsourcing

Cost 10470 20762 34394 48725 56593

License Fees and WPC Charges 6851 10959 12945 17728 23232

Roaming & Access Charges 11334 18159 17453 24754 32799

Subscriber Acquisition & Servicing

Expenditure 6470 8146 11344 16428 20541

Advertisement Expenditure 3224 4266 4067 3848 4211

Administration & Other Expenses 2895 3825 4457 3837 4132

Total Expenditure 44662 70982 90358 122609 150095

EBITDA 22716 27804 28946 31281 43128

Finance & Treasury Charges (Net) 2776 4507 2063 2487 9078

Depreciation 7569 10967 13666 17230 20195

Amortization of Intangible Assets 1199 1461 1846 2500 5433

Profit before Tax 11169 10869 11688 9063 8423

Provision for Tax

-Current 425 1269 2071 1581 1808

-Deferred 651 764 1151 614 2657

-Fringe Benefit Tax 74 93

-MAT Credit -425 -1269 -2071 -1577 -1808

Profit after Tax 10444 10012 10537 8446 5795

Source : IDEA Annual reports

Competitiveness in Indian Telecom Industry: The case of IDEA Cellular Hyper-Competition in Telecom

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