Idea Cellular's stock has outperformed its rivals by a wide margin over the last one year, rising 24% compared to an over 20-25% decline in the stock prices of Bharti, Tata Teleservices and Reliance Communications
Idea Cellular's stock has outperformed its rivals by a wide margin over the last one year, rising 24% compared to an over 20-25% decline in the stock prices of Bharti, Tata Teleservices and Reliance Communications.
Operationally, the company has done well in the fiercely competitive telecom market, but analysts are more worried about the regulatory landmines for the sector as a whole. Idea lost 13 licenses--including 4 of Spice Communications which it had acquired in 2008-- when the Supreme Court cancelled all 122 2G licenses issued in January 2008 during former telecom minister A Raja’s tenure.
Making matters worse for the telecom sector in general are the recommendations by the Telecom Regulatory Authority for auctioning 2G spectrum , key among them being the 13-fold increase in reserve price and reallocation of the 900 Mhz frequency on which most operators currently offer services.
Of the 13 licenses that Idea lost, seven (including Tamil Nadu, West Bengal, Assam, Odisha, J&K) were operational. And while the licenses will remain operational till the spectrum auction, the deadline for which has been extended to August 31, Idea will have to retain them to be a pan-India service provider. So far, TRAI has shown no signs of budging on the reserve price despite protests from telecom companies, and analysts estimate Idea will have to shell out between Rs 12-15,000 crore for the licenses.
Like his counterparts at rival firms, Kapania too feels the TRAI proposals will deal a crippling blow to the existing operators.
"According to industry estimates, you will have to write off assets of Rs 25,000 crore and make fresh investment of Rs 1.25 lakh crore if the spectrum re-farming proposal goes in the present form,"says Himanshu Kapania, CEO of Idea Cellular.
Spectrum re-farming basically means TRAI will take back spectrum on 900 Mhz frequency from operators and instead allocate them spectrum on 1800 Mhz frequency. Telecom operators claim they had invested in infrastructure expecting to be operating on the 900 Mhz frequency in perpetuity. They will now have to invest in fresh infrastructure to operate on the 1800 Mhz frequency, which is considered less efficient than 900 Mhz. Also, the existing infrastructure created to carry signals on 900 Mhz, will not be good enough for 1800 Mhz.
"There are 900 million customers in the country, of which 500 million customers currently are on 900 Mhz. The minute you were to change spectrum size from 900 Mhz to 1800 Mhz, lot of coverage will get disturbed. Around 100 thousand villages immediately will have no coverage. Existing customers in Delhi, Mumbai who are on 900 Mhz will have quality issues. Call drops will increase, indoor coverage may not be available, so people who enjoy coverage in offices, in their homes will not get the coverage," says Kapania.
For idea, 50% of its 11 million subscribers are currently on the 900 Mhz frequency. Same is the case for Bharti and Vodafone, says Kapania.
And if the TRAI proposals are accepted, call charges could rise by as high as 50-100%, he says.
"Till now run, the spectrum cost was not a significant cost in an overall factor, but if spectrum becomes extremely expensive then spectrum and financing of spectrum will become a significant cost in the overall factor. Our calculation shows that tariffs would have to be hiked between 50-100% to compensate for the cost of spectrum and consumers will bear the brunt," says Kapania.
In addition to high spectrum costs, aggressive competition too will continue to put pressure on profit margins of all players. Call rates in India are among the lowest in the world and have remained that way for quite some time now. The choice for telecom companies is to either increase tariffs (and thereby margins) but cut the possibility of the mass market expansion or to retain tariffs at current level and grow revenues through higher user base and more minutes of usage.
Industry experts feel the market for voice calls may be nearing maturity and that companies will now to maximize revenues through the data business. But Kapania feels there is enough steam left in the voice business for telcos to capitalize on.
"While there are reported subscribers of 900 million, TRAI puts the number of active subscribers at 675 million. Most of the developed countries have a penetration of 120-130%. By that benchmark, there are another 400-500 million customers in India who are still to join the voice band wagon. So, voice business has still a potential to grow for the next 4-5 years. If you were to notice even last year results consistent 8-9 million per month active subscribers continues to get added, minutes of usage continues to expand and industry continues to grow on a gross basis of 14-15%," says Kapania.
In the quarter ended March, Idea’s minutes of usage went up by 9.1% month-on-month, driving a 6.7% growth in. Between the second quarter and the fourth quarter, Idea’s average realization per user has increased by Rs 5 to Rs 160.
Over the last year, non-voice business contribution to Idea’s overall revenues has grown to 14% from 13%.
"Across the globe in all important markets and even in emerging markets as markets mature and as customer usage pattern undergoes a change non-voice revenue contribution to total revenue continues to increase. In China for instance, non-voice revenue has grown in the last 3 years from 16-17% to 30% of overall revenue," Kapania says.
Another battle is now brewing in the 3G services segment, with market leader Bharti Airtel on Friday slashing tariffs by as much as 70% across some of its schemes. Other players, including Idea, will have no choice but to join the price war, since every company is trying to tap the mass market.
"While mobile companies are making investments in network and backend systems so that they can build huge data factories, what is also required are that all consumers will have to change their handsets. Current 3G smartphones are in the price point in excess of Rs 10,000 and the pick up of 3G smartphones has been slow in the country. It is our belief that once the handsets become more affordable, the growth will be exponential, like was seen in 2G services," says Kapania.
Idea Cellular stock price
On January 29, 2015, Idea Cellular closed at Rs 159.50, down Rs 6.5, or 3.92 percent. The 52-week high of the share was Rs 177.30 and the 52-week low was Rs 125.10.
The company's trailing 12-month (TTM) EPS was at Rs 6.89 per share as per the quarter ended December 2014. The stock's price-to-earnings (P/E) ratio was 23.15. The latest book value of the company is Rs 44.09 per share. At current value, the price-to-book value of the company is 3.62.
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