See new circles as hedge against competition: Idea Cellular

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See new circles as hedge against competition: Idea Cellular

Typically, quarter three is a seasonal strong quarter for the rural subscribers and as it is known, Idea Cellular has a stronger percentage of its subscribers with rural base.

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Excerpts from Markets Midday on CNBC-TV18 Watch the full show » ALSO READ See latest News about Idea Cellular See previous management interviews See what other Experts & Brokerages are saying about Idea Cellular

Typically, quarter three is a seasonal strong quarter for the rural subscribers and Idea Cellular has a stronger percentage of its subscribers with rural base, informs Himanshu Kapania, MD of the company, in an exclusive interview with CNBC-TV18.

Below is the edited transcript. Also watch the accompanying video

Q: The biggest positive this quarter was the 7% growth in the minutes that you saw aided by subscriber addition. Do you think on both these parameters you can maintain this run rate or was this just an aberration because it is seasonally such a strong quarter for telecom?

A: As it is known over the various years, that Idea Cellular has a stronger percentage of its subscribers with rural base. Typically quarter three is a seasonal strong quarter for the rural subscribers. They come back and we have seen it in the past and this year is no different with a growth, both in terms of minutes of usage as well as strong growth of 7.5 million in terms of visitor location register (VLR). We believe this trend of voice minutes growth and VLR will continue for lot more time. While there is far larger numbers which is reported, but overall as per TRAI report, the VLR subscribers in India is about 625 million as of November 2011. We believe another 300-350 million customers are going to join fresh into the mobility category.

Q: That's where a little bit of nervousness stemmed for the market last quarter because the sense one got was that volumes and prices are not fitting together. This quarter has looked much more different - I think what people are trying to a get hand of is whether there is any consistency that you hope to see in the next few quarters both in terms of what happens with your growth in minutes and whether that will be matched with revenues per minute. Basically will prices and volumes continue to go hand in hand?

A: I had mentioned it last quarter that typically Q2 is an aberration. It is a seasonally weak quarter and we should not have read too much into the last quarter's performance. We believe that the minutes of growth will continue to grow obviously not at a pace when the rate was declining, but I believe there is no negative elasticity on an overall basis.

We have said it that the overall rate realization in this quarter has been flat. As a company we have gone up on GRR from 42.7 to 43.3, (registering) almost a growth of 1.4%. It is primarily lead by non voice revenue and roaming revenues. The rate remains flat. So in an environment when we continue to offer flat voice rates, we believe the number of subscriber will continue to add into the industry. Usage per subscriber will also continue to grow.

Our strategy will be to continue to focus on our established circles. The EBITDA and cash flows generated from these established circles, we intend to plough back into the new circles as well as into the new business area including the 3G investments in a calibrated manner.

Q: I think the concerns stems from the facts that new circles, depite a revenue growth, are still seeing EBITDA losses although they have been contained from previous quarters. In terms of a time line, when do you think the EBITDA losses could completely get erased in the new circles from hereon?

A: That is true. We continue to make losses in the new circle but it is part of our overall strategy. I would like to remind our viewers that there is still hyper competition in the market place. There is still over 10 players in the market competing for the pie of the business. The market itself is extremely competitive. Our approach has been to give the best coverage in our 13 circles. We have decided to reach the new circles primarily so that we can get benefit of our all India brand spends. We can get benefit of roaming for our 13 circles as well as get benefit of enterprise sales. We are investing in new circles in a calibrated manner. Whatever profits that we make out of our established circles, we are redeploying in the new circles. We are in an investment mode and going to be a little bit while before we can look at profits from the new circles. It is also important strategy for us in case there is an all out war was to happen. These new circles are going to be great hedge for us.

Q: Since you are expecting positive subscriber growth from hereon, what kind of a target do you have for both FY12 & FY13 in terms of subscriber growth because some analyst feel that Idea could manage 16% subscriber growth in the next fiscal that is in FY13. What do you feel?

A: I have maintained that the current business environment is tough and we are going through what is called a combination of headwinds and tailwinds. There is a paradox that currently exists. In this challenging headwind environment where regulatory intervention is uncertain and macro economic factors are disturbing, it will be very unfair for a company like ours to be able to give guidance to the market - it is not a stable environment so I would resist from making any guidance for the investor community.

Q: Two part question on issues that are key to your industry - A) would you say we have indeed seen the worst in terms of the tariff wars and B) some of your peers have been quite vocal about their views on spectrum pricing issue. I believe it was heated discussion that all of you had with the ministry - where do you see things headed both on spectrums and on tariffs?

A: Let me take on the tariff first. In the first quarter we started an experiment to test whether we can modify our promotional tariff and whether the market can take the promotional tariff. We are happy to report that market has accepted the promotional tariff but contrary to media expectations and analyst expectations, overall rate per minute on voice has remained flat. This is because there still exists competition in the market place and outgoing calls normally move to the lowest rate operator. So the current tariffs are likely to stay on and there is an unlikelihood of any further increase in tariffs. Given the fact that the number of new operators are cash-trapped and the fact that top five operators continue to increase our revenue market share, we don't expect the current tariff profile to go up or down.

The second part of your question is in regards to spectrum pricing. Spectrum has a significant role for growth of GDP in the country. Currently India is suffering the issue of correct spectrum pricing. What has probably not been noticed by a number of our investors and analyst friends is that telecom spends in India is amongst the lowest across the world, both when compared to developed markets and emerging large population countries. Telecom spends in India is at 2.4% of GDP while even emerging markets are anyway between 2.7% to 3.7%. So there is under-penetration in telecom spends and it is only possible to increase spends if there is significant investments in rural markets as well as significant investments in wireless broadband. If spectrum is going to be priced (disproportionately), it will be difficult for all of us to increase our investments and (hence) on behalf of the society, on behalf of the consumers and on behalf of our investors it is our right to agitate.