 Only a handful tele cos will survive in the long-term: IdeaPublished on Wed, Nov 04, 2009 at 11:48 | Source : CNBC-TV18 Updated at Thu, Nov 05, 2009 at 16:14 47197 Investors following Idea Cellular. Share this News with them.
Telecom sector has been under intense pressure owing to fears of diluted earnings due to the new aggressive tariff plans, which are being announced. In an interview with CNBC-TV18, Sanjeev Aga Managing Director of Idea Cellular spoke about the latest happenings in his company and sector. Below is the verbatim transcript of the exclusive interview with Sanjeev Aga on CNBC-TV18. Also watch the accompanying video. Q: Investors are quite worried looking at the current tariff plans that your earnings and margins will come under intense strain while this competitive battle plays out. Would it be a fair estimate that you would operate on significantly lower profitability or margins over the next 2-3 quarters? A: You started off saying, "The stock is under pressure and investors worried." But I am not worried at all. We have seen this happening for the last two-years and we are sort of prepared and equipped. We just have to go through this period. What you are seeing is uncommon times. You are finding prices are tumbling and they have to tumble. But this is not because the sector is seeing great efficiency or it has got great capacity utilization. It is the kind of desperation coming from overcapacity with a lot of subscale operations. This period has to be worked through the system. We just have to go through this period. It is my expectation that this period of what people call consolidation but I really believe it is going to be the separation - is not going to be very far away - it is going to be very rapid. We as a company are really focused on strengthening ourselves and coming out even stronger. Q: What could it do to you in the interim - that is what people are worrying about? Your average revenue per user (ARPUs) have come off to Rs 209, revenue per minute (RPMs) are down to Rs 0.56. Will they drift down significantly lower in this interim period however long its lasts and what kind of levels could they be dragged down to? A: I never even look at the ARPU because it is inconsequential. Yes, with the kind of pricing happening and the pricing is not related to the cost - it is related to just lack of opportunity for various people - who can rule out that margins can go down for 1-3 quarters? I don't think it can be ruled out. I would certainly say that my guess that the people will be surprised by the resilience of our profitability because of various countervailing forces which come into play given the scale of decline of the prices. But the larger point I want to make is that at moment the market keeps looking at ARPUs, they keep looking at subscribers - what they don't look at is what is the potential difference in long-term sustainable profit margins. My assessment of the sector is that the difference between businesses, companies is so wide and that is the reason that so-called the consolidation period is not going to last very long - the dust will settle - the companies which are intrinsically stronger - I am not claiming that mine is one of those companies, I am making just an analytical statement - I think there will be a separation. Eventually in this big telecom market, there would be a handful of companies which would be there for the long-term. So if you take a long-term view what is happening has to happen - it is good it happens fast. I am infact happy that the prices are tumbling because it has to happen and better to get done with it and to have this separation. Q: There is a counter point or counter argument to that which is that in the past when tariffs fell, it usually led to a bump up in volumes for telecom companies. But that is being seen as a different case now because everyone has moved into a per-second rate, which may not necessarily mean that minutes of usage will go up substantially for telecom companies. How would you respond to that? A: As a general rule, you will not get elasticity of demand of the same scale when prices go from 60 paisa to 50 paisa, as you got when the prices went from Rs 6 to Rs 2. So, I think that is a general statement. But there is always elasticity of demand because we are a poor country and this is one of the countervailing forces, which I referred to but there are many others. You will find in the long-term, the market share of the stronger companies will tend to consolidate as the price differentials are narrowing. You will also find capacity utilization and spectrum efficiency playing a devastating role because we have about the four times the capacity in urban areas, which the country requires. With this difference in terms of economics is going to be tremendous. Therefore you will find what really is important is not how Idea is doing relative to what it did two quarters ago. The important thing is how Idea is doing relative to others. So long as that gap is widening with people behind us and narrowing with people ahead of us, these are small ups and downs of the market. If you take a 10-year view these come and go. Continued on next page...
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