Well-placed to renew existing spectrum in 900 MHz: Idea

Declining to get into a debate on whether this year's auctions will be aggressive or not, he says the current debt of the industry stands at Rs 2.7 lakh crore.

Kapania believes the cost structure of the industry is undergoing a change and consolidation is inevitable due to high cost of entry.

After the company came out with its Q3 numbers, JP Morgan noted that Idea's EBITDA margin beat was driven primarily by lower-than-estimated network operating costs. "Very strong data consumption growth continues and solely drives blended ARPU growth. However, data pricing needs watching in CY15/16," it added.

JP Morgan believes Idea has the most at stake in the upcoming spectrum auction (900 MHz).

In its base case, Morgan Stanley assumes that operators will fill gaps in their existing 3G portfolios by acquiring spectrum in the 2100MHz band. According to the brokerage house, Idea valuation will be impacted by -2.3 percent, Bharti Airtel by -0.2 percent. It forecasts 2100MHz spectrum cost rising to Rs 7970 crore for Idea (from Rs 7330 crore) and to Rs 6210 crore for Bharti (from Rs 5710 crore).

For Idea, MS continues to assume that it will not purchase additional 3G spectrum in the Delhi circle, where they plan to launch 3G services on the 900MH band.

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Below is the verbatim transcript of Himanshu Kapania's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Q: Could you tell us if Idea Cellular will go ahead and participate in this 2,100 MHz auction? Is there a possibility of that or given that you have a huge 900 MHz retention option coming up, you may stay away?

A: We are now entering the final phase of the auction and no telecom operator is going to discuss in media its specific strategy of where it is going to decide to participate. All I can say for the interest of the viewers is that Idea Cellular is now going to participate in the fifth telecom auction. Over the last three auctions, Idea has displayed a fair degree of prudence, a right balance between meeting our needs for spectrum as well as ensuring there is significant shareholder returns. During the last three auctions Idea Cellular has spent Rs 18,000 crore for spectrum but also in this same period of four years Idea Cellular has invested Rs 12,000 crore in capital. After every auction the company has strengthened its overall position.

In the last three auctions our return on investment (RoI) post auctions in spite of very large outlets, the company’s RoI has improved so has return on capital employed (RoCE) and return on equity (RoE) has improved. All I can tell the viewers is that we will make sure that our participation will be such that there is incremental shareholder value.

Sonia: Are you well placed with cash to bid for these auctions? How much will you have to spend to retain these 900 MHz and how much will your debt go up by?

A: Let me answer this question in two parts. First part, our cash availability, we just announced our quarter three results and we have declared Rs 2,030 crore of quarterly cash profit, so if you were to annualise that our cash profit would be at a level of Rs 8,100 crore. Our this quarter cash profit has grown by 29.5 percent even if we take compound annual growth rate (CAGR) of 25 percent, the company next year is expected to generate about Rs 10,000 crore of cash profit.

As far as financial leverage is concerned the company has a financial leverage as of December 31 of Rs 11,090 crore but we have reduced from April 1, 2014, there was Rs 8,000 crore of net debt, we placed qualified institutional placement (QIP) and rights issue and we received Rs 3,700 crore from the capital placement but also operations are generated over Rs 4,200 crore during the last nine months. We believe in terms of net debt to EBITDA our level is 1.12, which places us among the lowest leverage in the industry.

The second part of the question was on 900 MHz. Important thing that we have to remember is that this auction as an outlay of about 465 MHz of total spectrum. Idea Cellular 900 MHz, which is coming up for renewal is between 55-60 including the 1,800 MHz which is coming for renewal, which is about 12 percent of the total quantum which is on auction for this. The government reserve price is Rs 80,000 crore. Therefore, Idea Cellular is well placed to be able to take care of itself as far as renewal of auction is concerned.

Latha: How aggressive do you think bidding in this current round could be for the 2,100 MHz? After all the price already is 11 percent higher than the previous 2,100 MHz auction, it is 36 percent higher than the Telecom Regulatory Authority of India (TRAI) recommendation, it is 63 percent higher than the cleared price for that 1,800 MHz. Considering it is high, you think that bidding may be less aggressive?

A: Obviously you will not expect me to get into this debate, now that the price has been finalised by the Cabinet, there was a recommendation by TRAI and finally in the wisdom the Government of India has chosen to be able to price it at a particular level.

I would rather focus my attention on two things which the investor needs to really focus on (1) on an industry side, the industry has an overall debt of Rs 2,70,000 crore and if additional Rs 80,000 crore were to be done the debt of the industry will go up to Rs 3,50,000 crore, given the fact that other than Idea and one more player which has a double digit return on investments, most of the industry is at a single-digit level and large number of players are at negative return on investments (2) such large outlays actually change the contour of the overall industry and we are expecting that a consolidation will be inevitable because what was about five-six years back low cost of entry to the telecom sector, we have a very high cost of entry to the telecom sector now (3) I want to come back to Idea Cellular. If you notice we have a depreciation, amortisation at this point of time of about Rs 1,350 crore in a quarter, about Rs 5,500 crore a year. So, for every Rs 10,000 crore that we spend for a auction, amortisation will go up because this is a 20 year license period, it will only go up by Rs 500 crore and which would mean for a company which is growing its profits by 60-70 percent year on year basis it will be a small percentage.

We are extremely confident that we will be able to pass through this auction and in the end it will improve shareholder value and like the past three auctions; it will only improve the performance of the company.

Latha: Two questions – (1) you spoke about this high entry barrier and yet a lot of small players which have a lot of nuisance value. Do you think because of them you are not able to pass on higher prices which will be needed because of the amount you all have to pay for the spectrum and (2) what are Idea Cellular's ideas on consolidation, something on the radar in terms of inorganic developments?

A: Taking the first question first. You are absolutely right, the cost structure of the telecom sector is undergoing a change. Earlier below EBITDA the cost was low because spectrum was available at administered price of Rs 1,650. In the last three auctions new spectrum has been available at nine to ten times - that reserve price. However, there was a large quantum of old spectrum which continued at old price. This is all changing and with the raw materials costing about nine to ten time, the cost of telecom sector is definitely going up and finally it has to be passed onto the consumers. As regards consolidation, the industry is waiting for the revised guidelines on M&A, the industries are also waiting for the announcement of the new spectrum trading and spectrum sharing policy and we believe this will lead to consolidation.