Incremental network cost impacted margins: Idea Cellular

After Idea Cellular announced its third quarter numbers on Thursday, the thing that stood out was the margin pressure, despite profit and revenue coming in line with street expectation.

Himanshu Kapania, MD of Idea Cellular, said this is on account of the fact that the company is trying to build massive wireless broadband infrastructure. Additionally, the company had also committed Rs 30,000 crore in March 2015 spectrum auction, he added.

He further said data volume grew at 76 percent Year-on-Year (YoY), while data realisations declined 17 percent during the same period.

Idea Cellular's third quarter consolidated net profit declined 5.6 percent sequentially to Rs 764.2 crore, impacted by lower margin and other income and higher interest cost. Revenue increased 3.7 percent to Rs 9,009.7 crore quarter ended December 2015 compared to Rs 8,689 crore in preceding quarter with better-than-expected volume growth of 5.1 percent. Voice minutes (volume) rose to 199.2 billion minutes during the quarter from 189.5 billion units in previous quarter.Below is the transcript of Himanshu Kapania’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.Latha: Do you see margin pressure alleviating at all? That has been taken rather negatively by investors.A: You are right. Idea Cellular is in a midst of building a massive wireless broadband infrastructure, which is going to take the company into the next level of growth over the medium-term. However, we are obviously, facing a lot of short-term pressures. There are two or three pressures that I would like to highlight. Number one, we had participated in March 2015 auction and the company had committed excess of Rs 30,000 crore primarily for the renewal of its licences, nine licences as well as to purchase 3G and 4G additional spectrum.The second factor is that we are in the midst of a massive growth in subscriber numbers, especially in the rural markets. This calendar year 2015, we have had the highest subscriber growth of 81 million, which is resulting in a very large battle at the distribution end for market share. Idea is getting one out of three new subscribers. We were adding almost 29.7 million and if you see, our sales and marketing costs have been higher than usual.Thirdly, as I explained to you, we are in the midst of a massive rollout. We have added last year, 32,500 additional sites, both on platforms of 2G, 3G and recently on 4G. So, there is an incremental network cost. These are all investments for the future and it will take the company to a next zone when this investment is done.Sonia: I will come back to that marketing cost because of higher subscriber additions, but before that, the bigger worry for me is your data revenue growth trajectory that has slowed down quite a bit and that is the biggest engine of growth. This time we have seen just a 46 percent year-on-year (Y-o-Y) growth versus the 80 and 100 percent growth that you have done for many quarters, any reasons for the slowdown and would you expect this pressure to continue?A: Let us dissect mobile data revenue for this quarter vis-à-vis same quarter last year. Our volume growth is in excess of 76 percent. However, because of rate pressure, we have had rate drop on a (Y-o-Y) basis by 17.2 percent. So, it is our belief as far as rate is concerned that market is adjusting to a new level of rate. What was earlier mobile data rates, were unsustainable and the reason for that is we are moving from what I call the top-100 elite knowledge workers, who understand the power of internet to the first time users. We are rolling out our 3G services as well as 4G services, to small towns, rural markets, mid-sized towns. We are attracting consumers who are currently not savvy internet users and are buying smartphones, they are entering the category.So, it is important that we do a lot of trials and we do a lot of promotions, so that they become long-term users of internet. So, this is work-in-progress and there would be a price pressure on mobile data. I would also like to add that the industry is in the midst of a massive infrastructure building because both 3G expansion and 4G expansion is happening at pace we have never heard before and there is a short-term oversupply versus demand but in the mid-term, this will all settle down.Sonia: So when you say price pressure on mobile data, can you quantify that for us because the revenue per minute (RPM), this time, fell by almost 5 percent. What could the pressure be in the second half of the year or the quarters to come?A: Our belief at this point of time is that there will be a short-term respite, that it will settle at this for two or three quarters and then, in the medium-term, it is likely to settle anywhere between 20 paise to 22 paise as our internal company estimates.Latha: I will come back to you for a couple of more doubts on the margin front, but I wanted to ask you what will the payment bank mean to you? Will it mean more stickiness? How does it affect your profit and loss (P&L) or performance?A: You are absolutely right. Payment bank is an extremely important extension business for Idea Cellular. First from the point of view of the mobile business, we currently have 182 million subscribers. We have currently 41 million subscribers who are using internet to access and we believe that the business is moving away from physical form both banking instruments and cash economy into digital economy. We are expecting by the end of two years, the company would have over 100 million subscribers who are going to be internet users.So, this 100 million subscribers who are interacting or doing commercial activities on the internet would need digital services and for us, through starting with digital wallets and then finally, as the consumers need more payments and more specialised product, we will move on to our payment bank services.So, this will be one critical segment for us, which is existing banking customers but now transacting on the digital. The second segment is obviously, the power of distribution. We have currently present over 3,85,000 villages across length and breadth of the country and we have retail presence of over 1.5 million retailers. We are gearing ourselves to be able to upgrade a large percentage of these retailers who can help us acquire customers for payment bank who are currently unbanked or casual users of banking and will join us.So, massive work is happening on IT platform and to be able to provide cost effective solution to these consumers, where it is viable for us even a customer who keeps Rs 100 to Rs 1,000 of deposit and uses innovative products, which currently not available from banks which are mainly focused on high networth individual (HNI) and small and medium enterprise (SME) segments.Latha: So, when will you be up and running?A: Anywhere between Q3 and Q4 of next financial year.Sonia: I have final question and this is something that has worried a lot of investors on the street, the fact that you have once again gone ahead and raised your capex guidance, to about Rs 7,500 crore. This, at a time when not only are you facing competitive pressures, but you are also facing high auction costs that you have to deal with. Why did you guys take this decision? This is the second time in three quarters that you are raising guidance and would you have to do it again given the kind of competitive pressures that you are facing?A: There is obviously a demand from the share market but as management, we have to look at more medium-term to long-term business of Idea Cellular.I just want to remind you. You are absolutely right. In the month of April, we gave a guidance of Rs 5,000 crore, which was later revised to Rs 6,500 crore in June. The reason when we revised was initially, we were reviewing whether we are going to launch our 4G services in this financial year and by June, we had made up our minds when we reviewed the ecosystem. Once, having made up our mind, we got approval for rolling out of 40,000-45,000 sites.However, I was very unsure whether our network team would be in a position to roll out as many sites and roll out so much fibre as in the past we were doing less than half of that number but we are presently surprised with the work done by our network team and the pace at which we have been able to roll out.Now, that we have already spent Rs 5,400 crore in the first nine months, it is best to continue with this momentum. That is why we have given the street the right guidance of Rs 7,500 crore. So, we want to reach all the markets, which are digitally savvy markets where they have huge demand for internet services and be there as fast as possible, capture this demand and then wait from there.