There has been a pretty serious transformation at Idea Cellular over the last decade. Not very long ago, it was still touted as a marginal player with a limited presence across just eight of out 23 circles, and an subscriber base of 5.7 million when those like Bharti, Hutch, which is now Vodafone, and Reliance had over 10 million subscribers each around the time. It was a company with an uncertain future and aggression was a term never associated with it.
Today, Idea with 167 million subscribers, stands third in the pecking order with Bharti Airtel and Vodafone at 237 million and 189 million respectively. If the growth has been impressive, there is good reason. In March this year, it coughed up a massive ₹30,300 crore at the spectrum auction, making it the highest bidder.
This was for nine key circles among which were Andhra Pradesh, Maharashtra, Madhya Pradesh and Gujarat, where the company had to renew its licenses or face a very uncomfortable situation of inadequate spectrum. That development was followed up, as recently as late November, where Idea acquired 5 Mhz spectrum each in two circles, Uttar Pradesh (West) and Gujarat, from the troubled Videocon Telecom for ₹3,310 crore. This is a steep buy given that is almost twice as much compared to the spectrum prices discovered during the auction earlier this year.
Is this a prudent strategy? It’s a question of survival. Overall, for operators, data has become a key determinant of growth with voice tariffs plateauing. This has been the case for the last four quarters at least now. For instance, data brought in 10% of Bharti Airtel’s revenues for the second quarter of FY14. That has increased to 21.5% for the second quarter of FY16. For Idea Cellular, for the second quarter of FY14, data brought in 9.5% of its revenue. That has increased to 19.6% for the second quarter of FY16.
Finally, the big data story seems to be unravelling for telcos. “The data explosion has taken off in a big way over the last two to three years and is unlikely to abate,” says Romal Shetty, national head of telecom, KPMG. With data taking off, high-speed connectivity is becoming central to retaining high-end customers. Of Idea's total subscriber base of close to 170 million, 2G accounts for 13% or approximately 22 million.
3G accounts for 12% or approximately 19 million subscribers. Within those Idea subscribers who use data, 3G accounts for 47% and is growing rapidly. The important thing here is that growth in the last eight quarters for 3G has been 18-19%. 2G by comparison has been barely half of that. Growth in data is coming from 3G at the moment.
Even then, the biggies in the business are already preparing for 4G, even though it calls for big investments. Existing operators will have no option but to get on to the 4G bandwagon quickly with the impending launch of Reliance Jio and its expected focus on high-speed and affordable data. For Idea to continue to be in the reckoning, it’s perhaps even more important to keep pace with the changes happening in the marketplace.
Already, Idea’s capex investments were lower than its other two large rivals and that has now come to trouble the A V Birla group-owned company. As a proportion of revenue, Idea’s capex is around 13% of revenue, compared with Bharti Airtel at 18%, and Vodafone at over 20%. For Idea, most of its capex went into strengthening its presence in rural India and distribution, while the others, especially Bharti, put their money largely on 4G. With players like Videocon still in possession of spectrum in four more circles, more big ticket buyouts are only to be expected. “With the expected launch of Jio, smaller players will find the going extremely difficult. That will lead to serious consolidation of spectrum,” thinks Shetty.
Clearly, Idea has been forced to pay some serious money for its own survival, just the way it did to acquire spectrum to protect its turf in its existing circles earlier this year. It has come at some serious financial cost. A note put out by India Ratings pointed out that Idea’s gross debt could increase by over 10% from a level of ₹23,500 crore today. It seems to be a conscious trade-off. “With the acquisition of this spectrum, Idea will increase its 4G footprint from 10 to 12 circles, which currently account for 80% of the total revenues,” it stated.
The worry however is the 4G story has all the makings of a grand price war. Whether this is add to the financial stress or catapult growth with everyone getting a fair share of it is something to wait and watch.