Growth momentum for data services is expected to accelerate and Idea Cellular's MD Himanshu Kapania sees the company's share of revenue from data doubling to 40 percent over the next few years.
Growth momentum for data services is expected to accelerate and Idea Cellular's MD Himanshu Kapania sees the company's share of revenue from data jumping to 50 percent over the next four years from 20 percent now.
As the ratio of data customers increases, earnings before interest, tax, depreciation, and amortisation (EBITDA) will improve. Short-term pain will bring in long-term benefits, he says.
Idea, which currently owns nearly 900 MHz spectrums, also participated in the recently concluded spectrum auction. Explaining the impact of the investment on the balance sheet, Kapania says the government has kept the payment terms attractive but there may be some pain for 6 months to a year.
Most part of interest repayment for debt taken on for the spectrum investment will start 2020 onwards, he says.
However, the company is more or less done as far as spectrum acquisition is concerned, he notes.
The company is comfortable with net debt to Ebitda of 4.0-4.2x, he says. He expects the company's net debt to EBITDA ratio to start declining after 12-18 months as the share of data services increases.
Below is the verbatim transcript of Himanshu Kapania’s interview to Reema Tendulkar & Kritika Saxena on CNBC-TV18.
Reema: Could you give us a sense of how much impact the recently concluded spectrum auction will have on Idea's books and what is the company's strategy to counter it?
A: First and foremost I would like to bring to the notice of all your investors that since 2014 Idea Cellular has participated in three large auctions and Idea on overall basis has committed Rs 60,000 crore for spectrum purchase. This has been the bunching of our investments. Now Idea has nearly 900 MHz of spectrum out of which only about 250 MHz will be used for GSM and 650 MHz has been procured for expanding our coverage for wireless broadband. India is in the midst of its largest digital initiative and we expect a very large growth momentum as far as the data service are concerned. No doubt that we have had in the last three years large bunching of our commitments on spectrum.
The payment terms are very attractive. The government has given us an opportunity to pay between 25-50 percent upfront and rest of it after three years moratorium with the 10 year period. So, the debt that we have acquired actually instalments and even interest payouts start much later more from 2020 and there onwards. So, what we have to see that there may be a pain for a six months to one year period. However, with this procurement, Idea Cellular will move to a completely different zone from where it is.
We have 180 million overall subscriber base. Most of them have been voice users. Only about 20 percent of our revenue comes from data. Worldwide the trends are in a very different area where we expect mobile data to move from current 20 percent to 40 percent and maybe in the next four years to 50 percent. Data is highly earnings before interest, tax, depreciation and amortization (EBITDA) accretive. As you see in the last four years Idea has improved its EBITDA margin by over 10 percent. As the ratio of data customers improves, we will continue to improve out EBITDA. For a short-term pain, I think we have long-term big benefits coming in.
Reema: Just some numbers, net debt to EBITDA how much does it arrive for FY17- FY18, your total debt, if you could give us these numbers, your projections?
A: Let me give you big ticket first as the strategy, we were always okay to be able to operate in a net debt to EBITDA between 4 to 4.2 levels. Post this auction we have achieved our target. Secondly, if you see our last three years cash profits we have been growing at 25 percent plus year-on-year basis. Last year we generated Rs 10,000 crore of cash profit. This year we are on route for generating between Rs 11,000 to 12,500 crore of cash profit.
With a larger percentage of data going forward and on overall market consolidating, we remain extremely confident that while the net debt to EBITDA may remain at this level for 12-18 months, but post that period the net debt to EBITDA will start to fall. We would like to remind all the viewers that we are more or less done as far as spectrum procurement is concerned. The CAPEX intensity of the company will fall from here. Last two years we had upped our CAPEX spends from earlier levels of 12-13 percent to 18-20 percent of CAPEX.
However, with this large CAPEX outflow last year of Rs 7,500 crore, this year of Rs 7,000 crore and in fact we are increasing our CAPEX guidance for incremental Rs 1,000 crore for the additional spectrum that we will procure so that we can roll out. We would actually touch from January 2015 where we had broadband sites of 35,000 to about 110,000-115,000 broadband sites which will be almost a 600 million coverage and incremental 500 million population coverage. So, we will have a very large capacity and we are looking forward the demand to catch up with it.
Kritika: Rs 6,000 crore is the upfront payment?
A: We will have to pay 50 percent of our commitment as an upfront payment.
Kritika: You said that you are done with the most of the spectrum acquisition. 700 MHz very obviously hasn’t been taken because of pricing. If government revises the pricing downwards in the near-term or in two years time which is what COAI has asked will you still bid for the 700 MHz band?
A: Idea Cellular has two views now on the spectrum. One is – it is not always important to have sub 1 gigahertz spectrum. There is no doubt in the past 900 MHz have been the most successful spectrum in the voice but one of the reasons also has been that it was the first spectrum that was then auctioned and it had a lead of anywhere between four to eight years over the second round of spectrum that came in.
Secondly, 1800 MHz is the worldwide standards for 4G spectrum and we have procured a single carrier in 20 circles and two carriers of 1800 in 11-12 circles. So, this is a gold standard spectrum. We have also got capacity spectrum and now we have overall 47 carriers for 3G and 4G with the over 35 carriers available for 4G. So, this is a very large quantum of spectrum.
Our capacity with this, when I deploy all this spectrum at current utilisation will go down to 4-5 percent and we have to first and foremost fill this capacity before we start looking at the incremental spectrum. I think the TRAI and government have focused on using spectrum as the means to be able to balance their Budget gaps. If they had focused on building an ecosystem of 700 it would have been useful. As time passes the importance of 700 is dramatically going to fall.
I would give it a value much lower than that of 1800, not as the ecosystem is going to be weak, equipment are not going to be available, handsets may not be available and it is going to take three-four years and who knows what happens after three-four years. So, at this point in time, the intrinsic value of 700 is much lower than 1800.
Reema: Would you look at some sort of an equity infusion or your thoughts on monetisation of your tower assets. Is that a route that you would take to bring down the leverage?
A: The market has been talking about monetisation as the only solution as far as Idea is concerned. For us number one priority is internal accruals. We are very optimistic that revenues will grow and we will be again on the path of EBITDA growth and margin improvement. So, if we continue to generate cash timelines will be very much in our control. After seeing how the market evolves over the next 4-6 months, once we have rolled out such a large capacity and we reach population areas which currently are not covered for broadband the second focus would be on towers. Towers are strategic assets and while we will continue to have management control on towers, we will continue to look at opportunities on while maintaining management control how we can monetise.
Reema: So, a financial investor in it?
A: All options are open. It is premature to talk about it.
Reema: 4-6 months hence you will look at some sort of monetisation of your tower assets while retaining management control. What would about equity infusion?
A: That is the last option. We don't feel the need to do that but we will wait to see what happens.
Kritika: There is consolidation actively in the market. What are the gaps that are left right now and if there are assets at this point in time, there are smaller companies, would you participate actively in M&A?
A: Idea has now procured almost 650 Mhz of broadband spectrum. It is our largest procurement. In fact this auction has been the largest spectrum that Idea has ever procured with our 350 Mhz of spectrum. So, the first and foremost focus is to monetise this spectrum and take it to the people and our customers so their experience improves and lot more customers upgrade themselves to data.