Significant tariff hike will balance out rise in debt: Idea

This is because after having paid the upfront money we have two years moratorium that would be available and our payments are the first payments for both interest as well as installments which is over a period of 10 years after the two year moratorium starts in April 2018. There would be no impact on the cash flows both in 2015-2016 as well in 2016-2017.

Q: Post that there could be an impact going ahead?

A: Yes and so we would urge the market to start looking at not net debt to EBITDA but our cash flow situation and cash earnings per share (EPS) will remain strong.

Q: For the immediate quarters there won't be any impact and the whole talk about possible negative cash flows, that is completely incorrect? A: Absolutely. Q: The big question that investors, analysts, consumers are asking is that given the exceedingly high price of spectrum does it not make obvious sense to look at passing this on to customers? If yes what is the kind of increase that would be necessary for individual telecom players and Idea? A: The cost to telecom companies if we leave out the timing issues it is definitely going to go up. We have to recover the cost. Would we recover the full cost or bear some of it is matter of details and it will unfold over the next few quarters. Our effort is that we want to sustain.

In the last 3-4 years we have been delivering anywhere between 20-25 percent of revenue growth and anywhere between 25-35 percent of EBITDA growth. We want to sustain these levels of growth and we also want to make sure that the fall in PAT is not too dramatic. So, we will take all corrective actions.

First and foremost we will try to see if we can continue to sustain the growth momentum both in volume of minutes as well as growth of mobile data and whatever is not possible through those sources we would like to balance it with an improvement in realisation rate not only in voice but also in mobile data. Q: So, there could be a partial passing on to customers or a partial tariff hike that would be necessary? A: I think it is inevitable. Q: Analysts are working with 10-15 percent for individual customers. Essentially your bill will go up by around 10-15 percent on a full year basis. Would you say that is correct? A: It is premature to speculate and give you a specific number but there is going to be a significant rate increase.

Q: Largely in voice I am assuming? A: It would be in both – voice and data. We would like to balance it so that the impact is not on one segment of the customers but it is on both segments of customers.

Q: Let me ask you about data in that case, where are data prices now headed? If I see the last couple of quarters Idea has seen a significant jump when it comes to data revenues. Now the question is given the amount that you have already spent in renewal of spectrum there could be paucity if at all in terms of capital expenditure when it comes to data network expansion for the next couple of years, that is what analysts are working with. Going ahead would you see some amount of pressure when it comes to data? A: I am going to make three points. Number one is, our cash flows will remain strong as I explained to you that we do not have to make instalment payments till 2018 and that cash would be utilised to sustain the level of capital investments that we have followed in the last 2-3 years.

When Idea acquired 3G spectrum our capital investments jumped from earlier level of Rs 2500 crore to a level of Rs 3500-4000 crore. We are capable to sustain that and probably up it because there is a lot of unfinished job on expansion of digital services. As you are aware Idea presently provides GSM 2G voice services over 3 lakh 50 thousand villages but our 3G services on our own spectrum just covers about 30 thousand villages. We would like to expand our 3G footprint.

Over the years as the ecosystem for 4G does settle down we would also like to expand that. We will do all of that as and when we are convinced that there is sufficient ROI available and there is a sufficient returns that is available. We are very confident that every investment that we are going to do is only going to add up to and improve our returns from the business.

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Q: In terms of network expansion, what is the capital expenditure that you are looking at for FY16 and FY17, is it safe to say that it will naturally go up now and the other two peers, the larger peers Bharti and Vodafone work with around Rs 6,000 to 7,000 crore, would that be an estimated amount ? A: You know that the company was very focused over the last six to nine months on spectrum renewal and we are in the midst of a budgeting cycle, we will complete that and in the next earning call we would be able to give a definite number but I am going to give you a philosophy on basis on which we have been following this. Before 2010 when we had only 2 G spectrum, the company was spending about Rs 2,500 crore on an average for expansion of 2G services.

After that we started our digital journey and in the last three years we have expanded our fibre network to about 90,000 kilometres. We are currently handing 46 billion MB per quarter in volume of data and we have launched around 28,000 3 G sites as of I January, 2015 and we have been able to do all of this by expanding our investment capex from earlier level in 2010 of two and a half thousand to Rs 3,500-4000 crore.

We will make investments as much as we can absorb, we do not make investments ahead of time and we do not see that we are going to make returns in the same year. So, there may be little realignment of our investments, there is a possibility of reduction of investments in 2G and expansion in 3G for a short period of time and in the longer run the 2G investments will shift over to 4G in FY15 so this is a philosophical number, the specific numbers hopefully by the earnings call we should be able to give you for FY16. Q: After the spectrum auction around 10 circles currently have 4G and so, what is the way ahead for 4G and by when are you looking at launching 4G? You have so far not heavily gone into 4G but now that you have the possibility would this be a big play for Idea?

A: We have focused on 1,800 megahertz spectrum and now we have acquired 4G for 10 circles but it covers 61 percent of our overall revenue. The methodology that we are presently debating internally is we would first like to finish are roll out on the 3G front and in markets where there is spectrum crunch evaluate roll out of 4G.

However, our rollout of 4G is very dependant on ecosystem both 4G handsets being available in the price point of USD 50-75 and multiple model being available and 4G equipment prices falling from a current levels so we are closely evaluating that. We are not going to jump into 4G because we believe that there is still time for both these events to take place. Q: So, in that case by when will the 3G rollout be completed? A: I do not think we can give you a time frame because we are in the cusp of a beginning of a data revolution. Even though we do 46 billion MB in a quarter, our expectation is these volumes will continue to grow at 100 percent.

Today, 3,50,000 villages will be covered for GSM services, we have on our own spectrum on 3G only 30,000 villages and hardly about 30-35 percent of towns where we provide 3G services.

So the journey has just begun. As we say in a T20, the first over has just been played on the 3G and there is a long journey that we have to sail so let’s not expedite that. Let us earn and then keep investing in these markets. Q: In the 900 Mhz space you have gotten additional five Mhz over and above your renewal in Maharashtra. Would you say that now it would make sense to re-launch your 3 G services in Maharashtra, even Delhi for that matter and if yes by when? A: We have three markets where we have possibility of using 5 Mhz in 900 space. The number one market in India which is Maharashtra, number three market in India which is Delhi as well as we have ignored MP at 7.4. Now these markets we will use as second carrier. We have 2100 in Maharashtra and in Madhya Pradesh but we will use the 5 MHz available for rural markets to roll out 900 Mhz and use it as a second carrier. Q: Would you stay away from re-launching 3 G services in Mumbai give how high the cost is right now? A: Mumbai we believe that there was an error of judgement by a department telecommunication. Having 800 available at Rs 2,200 crore, 900 available at Rs 2,800 crore and 2,100 which is where profile is inferior to that both of 800 and 900 at much higher price. We are hoping that they will correct it, if it does not correct, we will stay away from Bombay. Q: you will stay away from Bombay if the prices are not correct that is.In terms of the 21 MHz, I would want to clarify, you have only bid in Calcutta, would it not have made sense to probably create a larger portfolio in 2100? A: There is always a lot of desire but there is a ability of the company, how much it can absorb and maintain and in fact grow its return. So, there is so much and more that we have to do both on the digital space as I remind you that even though we have only 13 out of 22 circles, they represent over 80 percent of the revenues on 3 G even though we have 10 out of 22 circles but it represents 61 percent of our revenues so there is so much and more work that needs to be done that we do not have to just go around gathering spectrum with no ability to go to launch.

Q: I wanted a clarification from you. Around 90 percent of the investment that you have put in has of course been for very required renewals but if you compare this to Bharti Airtel and Vodafone then they have not only renewed but they have also bought in additional spectrum. Some analysts have criticised that this could be a little bit of a setback when it compares to the other peers. Would you say that there would be a little bit of lag in terms of market share? A: I don’t think so, that is my estimate. We have to remember that the company is currently at 17.5 percent revenue market share and we have been growing at a pace of 1 – 1.5 percent on a YoY basis. We are been the fastest growing company not only growing at almost two times the pace of the market but also an incremental revenue market share delivering anywhere between 27 to 35 percent of incremental revenue market share. We have enough and more on our plates at this point of time of doing capital investments and expanding our presence. Both in the 2G space there is seven new circles which we acquired in 2012-2013 where we have to complete our rollout in these markets. We have now 13 circles and even in the original 11 circles that we acquired in 2010 we have as we call only done about 25-30 of rollout. There is so much more expansion to be done and 4G the game has not even begun. So rather than going around in focus of gather spectrum and putting it on our balance sheets we would rather have utilise this spectrum and monetise it as early as possible. Q: In terms of the 3G model if I look at. You don’t have 3G in nine circles. The government has hinted in the next one year they will look at another round of 3G auction. Would you now look at investing further in another set of spectrum auctions or would that be something that you will stay away from? A: The company’s first priority is to make sure that whatever we have gathered we are able to do a good job and monetise that as early as possible and start generating significant returns on that. As regards incremental investments and expansion of our spectrum footprint it is going to be again business model lead rather than share process of gathering with not any hope of making money of that.

Q: Consolidation is the name of the game. There is a lot of talk about smaller players being bought out now from the TTSL to Aircel, would you agree, are you in the race to acquire smaller companies? A: I don’t have a response to are we in any race but all I can say is inevitable outcome of this auction and 2014 auction that the spectrum prices have become 9-10 times administered prices. The industry has at this point of time an overall net debt of Rs 3,50,000 crore.

We are only at a level of about 12-13 percent while our market positioning is much stronger. It is going t o put a lot of pressure on low market share operators who are currently losing EBITDA and whose renewal is upcoming to find resources and they will have to start taking calls whether they would like to participate in the next 20 year growth or would like to call it quits at this point of time. Q: Would you look at acquisition? A: It is premature to have that discussion. Q: You are not talking to Aircel or Tata Teleservices? A: No.