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There are two ways to win a marathon - either lead the race from the beginning or stay close to the leaders while conserving energy for that final push. Idea Cellular seems to be following the second strategy.
At the time of its initial public offering (IPO) in May 2007, the AV Birla Group company was the seventh-largest mobile operator and such a small player that few noticed it. Five years on, the company has emerged as India's third-largest mobile operator by revenue and is now in a position to not only survive the current industry upheaval, but to also come out stronger once the dust has settled.
Its numbers are irrefutable. Since its IPO, Idea's revenue market share has nearly doubled to 15 per cent; its revenue has shot up five times to cross Rs 20,000 core during the 12 months ending June and its annualised cash profit is in excess of Rs 4,000 crore - more than enough to meet its recurring capex. Most importantly, it has achieved this without stretching its finances. Idea is currently the least leveraged among its peers despite investing nearly Rs 32,000 in network expansion in the past five years. No wonder, for analysts and industry observers, it is the company to beat.
"The industry has reached an inflection point, with most operators running at losses and reeling under debt. The stage is set for consolidation through a wave of mergers and exits. This is an opportunity for Idea Cellular to further scale up its operations," says an industry analyst with a leading brokerage who didn't want to be identified.
In November 2005, when the Birla group company decided to buy out AT&T and the Tatas in order to take over Idea, the company was relatively unknown. At that time, Idea was a regional operator, restricted to just eight circles in Western, Central and Southern India despite being one of the original licensees along with Bharti Airtel and Hutch-Essar (now Vodafone). Idea's rise since then has been a lesson in corporate financing, project execution, as well as branding and marketing. "We really like the management and their execution abilities. In just a few years, they have transformed Idea from a regional player to a pan-India operator," says a telecom analyst with a leading brokerage in Mumbai.
"We have analysed the company's revenue market share (RMS) in detail and note that it has gained RMS in each of its 22 circles in the last three years. Idea remains our top pick to play the improving outlook for the Indian telecom sector," says a recent report by BNP Paribas.
Birla, the game changer
Idea Cellular Managing Director Himanshu Kapania says Aditya Birla Group's taking control of Idea was the game-changer. "For 10 years, we had three parents but no godfather to provide a clear-cut vision. This was a recipe for failure and, obviously, the company failed to compete," says Kapania, who re-joined the company in 2006 after it came under the Birla umbrella.
"Our chairman (Kumar Mangalam Birla) prodded us to ask the most obvious question. How do we become one of India's top operators?" says Kapania. The question made sense as Idea had the backing of one of India's largest and most cash-rich groups. The rub-off effect began to show in its capex plans. In the first 30 months after the Birlas took control, Idea invested Rs 6,500 crore in expanding its network, one and a half times more than what it invested in the previous 10 years. Its cumulative investment in equipment and network has since jumped by nearly 10 times to around Rs 40,000 crore at the end of FY12 against Rs 4,000 crore at the end of FY05.
Spending billions however doesn't automatically translate into higher number of subscribers and revenue in the mobile business. Industry experts attribute Idea's success to its on-ground execution skill and its singular focus on the mobile market. "Idea has done a great job in aligning its strategies and economics to the high growth segments in the market. Additionally, its focus on mobile GSM market has helped align the organisational efforts towards the strategy," says Mohit Rana, partner and vice-president at AT Kearney India.
Mobile is a capital-intensive business to begin with; it becomes an FMCG business during customer acquisition and ends up as a service industry while retaining and servicing the customers. Given this, operators always run the risk of spreading themselves too thin. And, in the heady days of 2006 and 2007, new entrants always ran the risk of getting into a high-cost war for subscribers. "We had two options then. Either join the race and spend billions to buy subscribers wherever we can get them, or focus on the quality of growth. We chose the latter," says Kapania. By quality, he means the incremental revenue that each new subscriber brings against the cost of acquiring and servicing her.
The company knew its limitations and decided to follow a calibrated growth strategy. "We were not democratic in our resource allocation. We over-invested in circles where Idea was strong and could increase its revenue share and under-invested in circles where it was financially prohibitive to get market share," says Kapania. Specifically speaking, the company focused its attention on its circles in Western, Central, Southern and Northern India and under-invested in Eastern India where it was a late entrant.
Idea is the original licensee in seven circles, namely Andhra Pradesh, Gujarat, Maharashtra, Haryana, Kerala, Madhya Pradesh and Uttar Pradesh (West). The company used its incumbency in these large and economically well-off circles to expand in neighbouring ones. "We grew in concentrating circles, drawing on our strength in our core circles to pull-in customers in adjoining areas," says Kapania. For example, it used its long-time presence in UP (West) to become one of the top operators in UP (East) with 13 per cent revenue share at the end of FY12, within six years of launch. The company followed a similar strategy in Mumbai where it launched services in 2008. The Mumbai circle has a strong synergy with Idea operations in Maharashtra, Gujarat and Delhi.
The pick and choose model of growth helped Idea Cellular in many ways. First, it helped it in conserving cash. Secondly, it avoided a costly and high-risk competition with national operators and most importantly, didn't allow the company to spread itself too thin-something that proved costly for ambitious players like Reliance Communication, Tata Indicom and Aircel.
But what really shifted the tide in Idea's favour was its branding and marketing campaign. When Idea went national with its new brand campaign in 2005, most others in the category talked about features and various tariff plans and they mostly talked to metro and urban consumers. Idea decided to break the mould. It positioned mobile as a life changing device and began to talk in universal themes. "We always believed in the transformational power of mobile and its potential to change the life of an average Indian," says Kapania. This is the genesis of the brand punchline – "An Idea can change your life" –and brand campaigns themed on universal themes like caste wars, identity (at the time of the Mumbai launch), saving paper by increasing the usage of mobile, how mobile usage can cut population growth etc.
Talking about these universal themes helped the company to cut through the clutter and convey its message to rural India, where two-third of its subscribers reside. "Among leading operators, we were the last one to enter metros, so we tried to speak in a language that would be relevant to the widest possible audience," says Kapania.
Not surprisingly, Idea is the only operator among eight new entrants that went national in 2008 to have crossed the "hump" and become a relevant and financially viable operator. The company now expects to raise its share further as it expands it footprint in the circles where its 2G licence was cancelled by the Supreme Court. The company will bid for spectrum in these circles during the November auction. "Currently, we are meaningfully present in just two-thirds of the circles. Our next target is to become a truly national player," says Kapania.
Obviously, analysts are impressed. "Though we are advising clients to stay away from telecom stocks given the regulatory uncertainty; if an investor still wants an exposure in the sector, we are recommending Idea," says the telecom analyst at Motilal Oswal Financial Services. Others want the company to come up with a clear strategy to take advantage of the impending consolidation in the industry. "Going forward, Idea needs to decide its role in the industry consolidation," says Rana. There could not be a better compliment for a company, which didn't even feature on the radar screens of experts and analysts until three years ago.
However, for all its achievement in past few years, Idea is still to deliver meaningful returns to shareholders. "What growth? Idea shares trade at the same level as they were during the IPO. And given the regulatory uncertainty and likely capex on additional spectrum acquisition, nobody knows when it will start delivering," says an analyst. He is not exaggerating. In FY12, Idea's return on capital employed (on consolidated basis) was just 8.14 per cent while return on net worth was even lower, at 5.7 per cent. At these return ratios, a shareholder is better off putting money in a bank deposit than investing it in Idea.
Some analysts have begun to worry about the sustainability of the Idea growth engine. "Idea has been overly aggressive in its quest to be the fastest growing company in the sector. It had to pay a price in the form of margin dilution due to this strategy," says a recent report by Edelwiess.
The management is aware of these issues but seems to be helpless at the moment, given the regulatory headwinds and is asking shareholders to be a little more patient. "It is a matter of time when pricing power returns to telecom operators. Though no one knows the path it will take," says Kapania.