Bullish on Indian telecom market as it is underpenetrated

Latha Venkatesh &Sonia Shenoy
CNBC – TV 18
23 July 2014

Idea Cellular Ltd reported strong earnings, exceeding analysts' expectations, with consolidated net profit rising 23.4% sequentially to Rs 728 crore in the April-June quarter, aided by strong operational performance and top line (revenue) despite higher tax rate. Managing director Himanshu Kapania is bullish on the Indian telecom industry. In an interview, he said revenue and non-voice revenue along with its focus on cost efficiency is aiding to the company's margin performance. Edited excerpts:

Your margins are at 332%, a six-year high. What was the key reason behind such an operational performance this time?
Our Ebitda (earnings before interest, taxes, depreciation and amortization) margin for this quarter is at 33.2% and over the last one year the margins have improved by 1.5%. There are multiple factors which are driving growth of margin — one, the revenue growth we have had over the last one year; an absolute revenue growth of over Rs 1,000 crore, primarily on account of increased scale of operations.

Idea has been steadily increasing footprint and today covers over 350,000 villages and we have added 15,000 new global system for mobile communications (GSM) sites. Two, a factor which is helping beside revenue growth is non-voice revenue, primarily led by mobile data and it has grown by 4.5% over the last one year to now at 11.5%, which is helping the non-voice overall revenue go to 7.8%. Three, better cost management; we have been focused and kept our sales and marketing costs under control.

Will the underlying strengths that you have pointed out-like the increase in volume, cost drive that you have been able to do and excellent growth in mobile data-continue? Can we extrapolate the numbers of the first quarter to the remaining three quarters?
Idea Cellular has been very bullish on the Indian telecom market. That is one of the reasons why over the last three years we have been steadily investing around Rs 3,500 crore on year-on-year basis. We have also made an investment of Rs 21,000 crore to buy additional 157 MHz of spectrum. The reason why we are bullish on Indian telecom market is it is an under-penetrated market. Currently, based on overall subscriber reporting by Trai (Telecom Regulatory Authority of India), India has only 63% penetration. We believe another 300-400 users who are currently non users for mobile, will enter into this category. Also, the current penetration for people accessing Internet from their mobile is very low. For Idea specifically, it is around 20%. So there is a significant growth opportunity and that's the reason why the significant investments and our overall bullishness on the sector.

One of the concerns that analysts have is that maybe a part of the revenue growth that we saw in the first quarter was because of election-related use of mobile, both data and voice. Was that a factor and therefore can a little bit of the speed of growth be trimmed in these coming quarters?
We are not worried about quarter-to-quarter results. We would rather focus on a longterm trend. There is no doubt that Q2 is a seasonally weak quarter, but that is not going to affect the overall line chart, which will continue to grow upwards. One, there is a significant unmet demand for voice telephony in the country... Two, there is no other alternate sources to access Internet beyond the metros, there is no fixed-line penetration as well as cable penetration, so mobile remains the only source to access Internet. I am not worried. However, for us the most important driver for growth remains subscriber and volume of growth both in minutes and data and then, if possible, to get stabilization and improvement of rate.

It is interesting that both your minutes of usage and your revenue per minute (RPM) have gone up. Normally, when tariffs go up, we see minutes of usage come down, but that has not happened this time. So on both these parameters, do you think there is headroom for an increase both in RPMs and minutes of usage and if yes, what kind of ballpark increase can we expect In the next couple of quarters?
If you notice over the last five quarters, last year same quarter we had a model of high rate improvement and low volume growth. In Q4, preceding this quarter, we had high minute growth and decline in rate and we have had Q3 of different business model of balanced growth. We continue to tweak the overall model so that we can get robust growth both on voice and data. However, for us, the important thing is subscriber growth and revenue growth should continue to flow at a level of 15-20% on an annual basis. We can continue to deliver 20-30% of Ebitda growth on an annualized basis.

Let me come to the Trai recommendations on spectrum sharing. How much will that take cost pressure off your books?
I will read this recommendation along with previous two recommendations which is, one, spectrum trading and two, road map for spectrum. First and foremost in our list of priorities, government should approve spectrum trading policy recommended by Trai. Second, the government should come out with a road map to increase the quantum of spectrum in 900-1,800 MHz and 2,100 MHz (band) so that we can increase our 3G presence. Currently, there are no pan-India 3G operators and depending on the overall quantum that is available, we will decide how much component needs to be shared. This is obviously third in the priority list.

Source: Mint