To launch smartphone to promote 3G services: Idea Cellular

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Speaking to CNBC-TV18, managing director of India's third largest telecom operator, Idea Cellular , Himanshu Kapania says that they are on the anvil of launching an Idea smartphone.

"Priced around USD 100, we hope to be able to help consumers transition themselves from a 2G phone to a 3G phone," he explained.

Idea's second quarter results were slightly lackluster on the back of higher interest costs and depreciation. Profits fell 40% to Rs 105 crore, aided by a forex loss of Rs 31 crore and revenues also came in below expectations.

On the bright side, Idea's revenues per minute (RPM) increased by 4% this quarter despite the price war in the sector. "Improvement in non-voice revenue and arrival of 3G services," explained Kapania. He further said that revision of promotional tariffs also helped RPM.

Going forward, Kapania says that the company is trying to maintain a balance between growth and short term profitability.

Below is an edited transcript of his interview with Latha Venkatesh and Gautam Broker. Also watch the accompanying videos.

Q: Volumes declined this quarter by about 2.2% sequentially for the first time in recent years. Was it really impacted by seasonality or have tariff increases actually put a bit of pressure on that?

A: I think we have to see it in the right context. Even in the past, quarter two growth over quarter one in terms of revenue was almost flat. But this time, we have had over 2% revenue growth. That has happened on account of rate improvement by 4.2%.

But, there has been a decline in minutes of usage (MoU). We believe the MoU decline is primarily on account of seasonal factors as the impact of rate improvement still has not come. We believe that this is only one quarter factor and in the long run growth of MoU and growth of revenue for the industry will continue unabated.

Q: You rvenues per minute increased by over 4% for a second consecutive quarter. So surely we assume that the worst of the price war is over. Therefore, how much can you improve in terms of your revenues per minute?

A: I think you have to see RPM in a different context overall. There is an improvement of 4% that is because of three factors. The first factor is improvement of non-voice revenue. In the last quarter, we were having non-voice revenue of 12.1% which improved to 13.2% in Q2. This is one significant factor which improved rate per minute.

The second factor improve rate per minute is the arrival of 3G data and 3G roaming revenues. The third factor has been because of revision of our promotional tariffs. The impact of the revision of promotional tariffs is going to be over one year and not more than 3-4%.

Q: EBITDA losses in new circles have increased to Rs 177 crore compared to Rs 139 crore in Q1. How does that pan out, what's the outlook for the new circles?

A: Idea has two portfolios of its circles - 13 established circles where over one year period we have improved our EBITDA margin by almost 2.5% from 27% to 29.5%. Now the cash being generated of over Rs 1200 crore of EBITDA in our established circles is reinvested in three major investment strategies. One is further penetration of rural markets in our established circles, second is investment on our 3G front and third is calibrated investment in our new circles.

As our revenue market share in the new circles is extremely low, we continue to make losses in these new circles, but we have always pegged it at a particular level. Earlier we have pegged it at level of Rs 135-140 crore, but with the arrival of 3G and a new business model, we believe we will be able to peg it at Rs 175 crore level.

Q: With network costs going up and with 3G investments, what is your outlook on margins? Could there be pressure going forward?

A: On an overall basis, we never give guidance on margins. We are currently trying to maintain a balance between growth and short term profitability. We believe that in the long run, telecom revenues will continue to grow because the market is deciding to be firm on voice and there is a lot of news left in voice.

We are in the introduction stage on wireless broadband business and this will help grow the overall market and that is why we need to continue to invest in the market. Our strategy has been balanced growth with profitability.

Q: The other concern has been that 3G subscribers are not growing a lot. It stands at about 2.5 million which is only 30% active. How will you monetize your 3G investments going forward?

A: You are absolutely right. As far as short term is concerned, we are not able to see large volume outflow growth on 3G wireless broadband business. But we believe that this is a wrong reason to evaluate the 3G business. 3G is a completely new business and we have to measure the 3G business in the way it has been in other countries. We are just about six months into the launch of 3G and we are seeing similar trend in India that was seen in the countries which launched 3G three to four years back.

However as time passes by, as eco systems improve and with that I mean as the coverage improves, as the availability of affordable smartphones improve, as well as relevance of internet access improves in the masses, the overall 3G business is expected to improve. Idea is still extremely optimistic and today we continue to expand our 3G coverage. We cover over 1600 towns and 10,000 villages and are on the anvil of launching Idea smartphones around USD 100 price point with the hope to be able to help the consumers transition themselves from a 2G phone to a 3G phone.

We believe a lot of what is happening on the content side as well as the application side, especially the local content which will what will make consumers shift from current environment of using mobile phones primarily for voice and analogue data services into the newer exciting world of digital lifestyle.

Q: Do you have any plans to reduce debt and where does the debt stand by the end of the year?

A: Currently Idea has a debt of Rs 11,500 crore, but our overall balance sheet is strong. We are hopefully that we will be able to manage our overall capex requirements from out internal cash flow next year.

For this year, our estimates for overall cash flow in the system would be in the order of Rs 3,200-3,500 crore and our capex requirement is Rs 4,000 crore. So our need for immediate cash is low.

Specifically in towers we have two portfolios. One is 16% investment in and second is 9000 towers. We will like to monetize our towers only then we are sure that our mobile business is safe and we get the best kind of returns of this investment.