"Idea Cellular Limited Earnings Conference" - April 30, 2018
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“Idea Cellular Limited Earnings Conference”
April 30, 2018
Page 1 of 28Idea Cellular Limited
April 30, 2018
Moderator: Good afternoon, ladies and gentlemen. This is Margreth, the moderator for your
Conference Call. Welcome to the Idea Cellular Conference. For the duration of this presentation, all
participant lines will be in the listen-only mode. After the presentation, a question and answer session
will be conducted. We have with us today Mr. Himanshu Kapania – Managing Director of Idea Cellular
and Mr. Akshaya Moondra – Whole Time Director & Chief Financial Officer of Idea Cellular along with
other key members of the senior management on this call. I want to thank the management team on
behalf of all the participants for taking valuable time to be with us.
Given that the senior management is on this conference call, participants are requested to focus on
the key strategic and important questions to make sure that we make good use of the senior
management’s time. I must remind you that the discussions on today’s call may include certain
forward-looking statements and must be viewed, therefore, in conjunction with the risk that the
company faces. With this, I hand the conference call over to Mr. Himanshu Kapania. Thank you and
over to you, sir.
Himanshu Kapania: Thank you, Margreth. On behalf of Idea, I welcome all participants to this Earnings
Call. On 28th April 2018, our Board of Directors adopted the audited Results for the fourth quarter
and full financial Year 2017-18. The detailed Press Release, Quarterly report and Company results have
been uploaded on our website and I assume you had a chance to go through the same.
Idea is gearing itself to conclude last leg of regulatory approval and remaining activities for merger
with Vodafone India’s mobility assets. The new leadership team for the merged entity has already
been announced on 22nd March 2018 and will take charge with effect from merger transaction
completion date. This is possibly my final earnings call. I have thoroughly enjoyed my interactions with
all the institutional investors and telecom analysts during the last 7 years, and wish all of you happy
investing in future.
My opening remarks will cover the key developments in the mobile sector during the last financial
year FY18 and how Idea Cellular is gearing itself to operate in the new paradigm. While Mr. Akshaya
Moondra, the company CFO will provide details on Idea’s financial performance for the fourth quarter
as well as the full financial year 2017-18.
First: The Indian mobile industry witnessed significant structural changes in FY18
Page 2 of 28Idea Cellular Limited
April 30, 2018
The Indian mobile industry saw increase in hypercompetitive intensity in FY18 following significant
disruptions in telecom sector, post entry of the new 4G mobile operator in September 2016. The super
aggressive price plans including the deep discounted unlimited voice bundled data plans, offered by
most of the incumbent operators to retain existing subscribers, in response to below cost abysmally
low priced tariff plans of new operator, resulted in explosive growth of voice and data volume. But the
sharp drop in mobile services rate realization and subsequent decline in customer ARPU has led to an
unprecedented steep decline in industry revenue in FY18.
Paradoxically, therefore the industry is in an unsustainable revenue and customer ARPU decline
period, unnatural voice and mobile data volumes explosion and front loaded high investment phase
especially for wireless broadband coverage and capacity, content and new digital technologies. These
sustained rate pressures along with TRAI led regulatory headwinds has deteriorated industry’s
financial health forcing at least 5 subscale mobile operators to exit/consolidate and others to merge
or monetize non-mobility assets.
As per TRAI release, the ‘Adjusted Gross Revenue’ (AGR) of the industry fell in the calendar year 2017
by Rs. 322 billion, i.e. @21.7% against CY16 AGR revenue. In comparison to the top 3 industry
operators excluding the new entrant, Idea’s benchmark AGR and subscriber VLR market share showed
resilience -
1. Idea AGR Revenue Market Share declined from 20.0% in CY16 to 19.5% in CY17, the lowest fall of
0.6% among the top three operators, in spite of new 4G operator reporting positive AGR revenue
@6.4% in the last two quarters of CY17.
2. Idea improved its subscriber VLR market share between February 2017 and February 2018 by 1.5%
to 20.9%, in spite of new operator garnering 15.5% of industry VLR share as per TRAI release.
Some of the key structural changes that impacted mobile industry in FY18 are -
A. Regulatory environment worsened in FY18
Effective 1st October 2017, TRAI amended the domestic ‘Interconnection Usage Charge’ (IUC)
Settlement Regulation reducing the ‘Mobile Termination Charge’ (MTC) from 14 paisa to 6
paisa per minute, aggravating the financial stress of the industry.
TRAI also amended the ‘International Mobile Termination’ settlement charges effective 1st
February 2018 from 53 paisa to 30 paisa per minute.
Page 3 of 28Idea Cellular Limited
April 30, 2018
Cumulatively, both these interconnect regulations have negatively impacted Idea’s revenue
and EBITDA for FY18 by Rs. 18.45 billion and Rs. 5.29 billion respectively.
Combined domestic and international MTC downward revisions remain a body blow to most
operators and reduced investable funds for the critical ‘Digital India’ Program.
B. Deep discounted unlimited plans are becoming the new norm
The introduction of deep discounted unlimited voice bundled data plans by most mobile
operators during FY18 have been extremely well received by the Indian mobile users.
Over the last year, the price of monthly unlimited voice plans bundled with data at high levels
of 1.4 to 2 GB per day for 28 days validity has fallen from April 2017 level of Rs. 300 to Rs. 165
or lower, net of taxes, effective January 2018.
Based on our internal estimates, India has over 400 million consumers as of March 2018 end,
who have chosen one of the top 4 mobile operators bundled unlimited plan offering. Within
a year of its launch, nearly 35% of Indian mobile users have migrated to unlimited bundled
voice and data plans. With increasing popularity of these plans, we estimate within next few
quarters nearly 50% of the 1.1 billion SIM users of Indian mobile services will migrate to such
unlimited usage plans.
Following mass market adoption of these ‘eat as much as you can‘ bundled plans, the
consumption habits of the Indian mobility users have now undergone a seismic shift with
marked higher per subscriber usage.
Industry voice usage per subscriber has increased 40% YoY in FY18. The voice usage per
subscriber for Idea has risen sharply to 577 minutes in Q4FY18 from 412 minutes in Q4FY17.
Similarly, broadband mobile data usage per subscriber for the company has seen a meteoric
growth to 7 GB per month in Q4FY18 compared to 1.4 GB per month a year back.
C. Unlimited plans driving exponential volume expansion
The adoption of unlimited bundled plans has led to an explosion in voice volumes with Idea’s
highest ever sequential quarterly voice minute growth @16.9% in Q4FY18 (on top of 10.8%
growth in Q3FY18). The mobile data volume also witnessed robust sequential growth of 43.2%
as Idea’s pan India wireless data network carried 818 billion MB of data volume this quarter,
more than 6 times the mobile data volume compared to one year back volume of 127 billion
MB in Q4FY17.
Page 4 of 28Idea Cellular Limited
April 30, 2018
However, such unlimited plans continue to erode wireless voice and data realization as the
voice rate (including the impact of reduction in IUC rates) sharply declined by an unbelievable
level of 48%, from 25.9 paisa per minute in Q4FY17 to current levels of 13.4 paisa per minute.
The impact on mobile data realization rate was even higher. Idea’s mobile data realization also
fell to less than 1/10th level to world’s lowest data tariff rate from 11.5 paisa per MB in Q4Y17
to 1.4 paisa per MB in Q4FY18.
The steep fall in overall rate realization has led to overall consumer ARPU downgrading from
Rs. 142 in Q4FY17 to Rs. 105 in Q4FY18, while today the same customer enjoys 40% more
voice volume and 6.3 times data volume, a position clearly unsustainable in the future.
Second: Positive underlying trends pave the way for a brighter FY19
While industry has remained in tremendous financial stress in FY18, we remain cautiously optimistic
as following underlying trends suggest encouraging long term prospects for the surviving operators:
A. Industry witnessed faster than expected consolidation in FY18
Significant financial pressure over last 18 months has forced at least 5 subscale operators to
exit or combine with other operators. Charging of services by Jio, albeit at very low price
bundles, has also prompted number of multi-SIM subscribers to choose amongst operators,
further exerting pressure on fringe players.
Multiple operators such as Videocon, Tata, RCom and MTS have shut down their network
while Aircel has filed for bankruptcy in February 2018. Telenor is waiting for its final approval
for merger with Bharti Airtel which is expected shortly.
Idea witnessed strong return of subscriber addition with 12.2 million net customers adds on
VLR in H2FY18 supported by the launch of competitive mass market voice bundled data plans,
gaining subscriber share from the existing operators. The company’s overall subscriber VLR
stands at 208 million as on 31st March 2018.
B. Unlimited bundled plan leading to further SIM consolidation, which is expected to boost future
ARPU trends
Unlimited bundled plans are paving the way for the second phase of SIM consolidation as
consumers who earlier used to split the usage on multiple SIMs are now committing all their
usage to a single SIM, after opting for fixed period unlimited voice with data plans.
Page 5 of 28Idea Cellular Limited
April 30, 2018
As the initial adopters of this plan were primarily from Idea’s high ARPU base, Idea’s ARPU for
the full year dropped from Rs. 162 in FY17 to Rs. 123 in FY18 and in Q4FY18 was at an even
lower level of Rs. 105. We are however confident that subsequent takers of unlimited plan
from existing Idea consumer base will be value accretive, as casual and multi-SIM consumers
begin to commit larger spends to the company on these bundled plans.
To focus on driving improvement in ARPU, Idea’s strategy continues to be – (1) Building a
companywide culture of selling unlimited voice and bundled data plans; (2) Promoting the
attractive postpaid ‘Nirvana’ plans with feature-rich postpaid portfolio such as data rollover,
free Idea phone security etc., besides unlimited voice bundled with mobile data; (3) Targeting
low and pure incoming customers who are currently in non-unlimited category with aim to
upgrade these customers at least to Rs. 25 to Rs. 150 ARPU levels through a series of tariff and
product interventions.
C. Accelerated broadband penetration provides tremendous long term opportunities
During FY18, industry broadband coverage has improved multi-fold and top 4 companies 4G
services have become increasingly affordable for the masses, with tariffs declining from Rs.
150 per GB a year back to current levels of Rs. 14-15 per GB. As a result, India had an
impressive addition of 127 million broadband users in the CY17.
Idea also witnessed record broadband subscriber addition of 15 million this year improving
the overall company wireless broadband penetration from 13.0% in FY17 to 20.5% in FY18.
Idea’s wireless broadband subscriber base now stands at 39.8 million out of the total 46.8
million mobile data users as of 31st March 2018.
The country is poised to add another 400 to 500 million wireless broadband users in next 3-4
years as proportion of 4G smartphones continue to rise and device affordability further
improves. Idea continues to gain its fair share in the 4G device upgrades and now has nearly
67 million 4G devices on its network, which provides it a significant revenue opportunity as
we encourage our existing customers to move Idea’s SIM to first slot.
Idea is working closely in partnership with the 4G device manufacturers and its ecosystem to
further improve smartphone penetration including - (1) Tie-ups with ecommerce companies
such as Amazon and Flipkart and partnership with important brands like Oppo, Vivo, Xiaomi,
Motorola etc. for sale of Idea 4G SIM with their new 4G handset models; (2) Cash back offers
on a range of entry level 4G smartphones from Karbonn, Sansui, iVoomi etc. priced at less
than Rs. 5,000, provided customer stays and continuously uses Idea's network over 2-3 years.
Page 6 of 28Idea Cellular Limited
April 30, 2018
In February 2018, Idea introduced country’s most attractive 4G smartphone cash back offer
of Rs. 2,000. This scheme is available for all existing and new customers till 30 th April who
upgrade their existing phones to any 4G smartphone irrespective of the brand and model of
the phone. The customer only needs to ensure Rs. 199 or above plan recharge per month over
36 months to avail the new handset linked cashback benefit.
Nearly 3 million new 4G smartphones are being added to Idea’s network every month. Idea’s
customer broadband handset (3G or 4G) has now risen to 111 million as of March 2018.
Third: New subscriber growth after SIM consolidation
While existing customers consolidate their multiple SIMs, nearly 300-400 million Indians who
currently do not use any mobile services are at an inflection point to enter the voice category,
primarily on 2G network aided by lowest ever consumer tariffs and availability of 2G feature
phones for as low as Rs. 300-500 per handset.
Idea and Vodafone India combined will have the deepest 2G network presence covering an
expanse of over 1.1 billion Indians across 500,000 towns and villages and is best positioned to
be the biggest beneficiary of this voice growth post-merger.
The merged entity has 2G voice coverage and capacity of over 270,000 GSM sites, far in excess
of the current market leader, even after adjusting for overlaps between Idea and Vodafone.
Fourth: Massive investments continue in broadband infrastructure to support the exploding data
demand
During FY18, Idea continued aggressive expansion of its wireless broadband infrastructure
adding 44,856 broadband sites in the year. The broadband sites increased from 110,054 sites
as of March 31st 2017 to 154,910 sites as of March 31st 2018, taking the overall network
footprint EoP to 286,356 sites including GSM, 3G and 4G technology sites.
This quarter Idea also integrated 11,345 broadband sites including TDD capacity sites on 2300
MHz and 2500 MHz spectrum band in leadership markets of Maharashtra, Kerala and Andhra
Pradesh to further augment its wireless data capacity.
Idea’s wireless broadband population under coverage now spans beyond 650 million Indians
spread over 164,000 town and villages across all the 22 service areas, which will expand
rapidly post-merger as overlapping 3G and 4G sites will be redeployed.
Page 7 of 28Idea Cellular Limited
April 30, 2018
Idea also launched voice over LTE (VoLTE) services for employees in select circles recently. The
company intends to launch its VoLTE services for Idea customers from May 2018 in a phased
manner pan India.
The proposed merged entity of Vodafone and Idea already have an installed broadband
network equipment base of over 300,000 sites and post-merger intends to move fast to
expand the merged entity broadband coverage from present 750 million to over one billion
Indian population, offering high speed data services pan India by relocating overlapping 3G
and 4G sites into non covered areas. The combined entity already has mobile data capacity of
nearly 23 petabytes per day and will build on from present level higher capacity on the power
of spectrum consolidation using nearly 170 broadband carriers and existing overlapping 3G &
4G as well as new 4G broadband equipment.
In the interim, both the entities have entered into active infrastructure sharing arrangement
to utilize each other’s spectrum and build capacity in high demand areas.
Besides active infrastructure sharing program, both companies have entered into 4G ICR
arrangement and expanded scope of 2G ICR arrangement to offer services across large
number of new towns and neighboring villages, where one of the operators previously did not
have presence.
On an overall basis, the combined entity is already sharing 49,000 sites either under 4G ICR or
2G ICR or active infrastructure sharing arrangement.
The overall Idea’s capex spend for FY18 stands at nearly Rs. 70 billion, in line with our
guidance. As the company is in transition and merger is expected to be completed in H1CY18,
Idea will not be able to provide full year’s capex guidance. In the interim, the company will
maintain recent quarter’s capex run rate for Q1FY19.
Fifth: Idea transforming from pure play mobile operator into integrated digital service provider
Digital Idea, launched in January 2017, has now completed more than a year and offers
exciting suites of mobile apps and services such as Idea Music, Idea Movies and TV, Idea
Games, Idea News and Magazines along with the self-help MyIdea app.
Idea has been successfully on boarding subscribers digitally for self-help on the MyIdea app
with over 33 million of the present subscribers using the digital app services. This is the
topmost rated mobile app amongst all telecom utility apps with 4.8 rating on the iOS store
and 4.3 rating on Google Play store.
Page 8 of 28Idea Cellular Limited
April 30, 2018
The company has entered in deep relationship with strong content owners for powering our
products such as with Sony Music, Zee Entertainment, Universal Music, Hungama, Saregama
for music and with Eros Now, dittoTV, YuppTV, Discovery for movies & Live TV content
amongst others.
The Idea Music app constantly appears amongst the top ranked apps on the Play store. The
app offers a rich library of nearly 3.5 million tracks.
Our awarding winning ‘Idea Movies & TV app’ offers 400+ live TV channels and is seeing strong
increase in consumption in regional and vernacular genres. The Idea app offers an assortment
of over 8000 movies across Bollywood, regional and international films and the app has over
75,000 pieces of content for our customers to watch. At strong 4.4 rating, it has been amongst
the top rated app on the Android Play store.
In a short span of one year, nearly 18 million of company’s subscribers are today enjoying Idea
Digital content services.
Sixth: Merger of Idea and Vodafone India in final stage of completion
Idea and Vodafone India merger is in final stages of regulatory approvals.
Specially designated teams across Network, IT, Marketing, Sales, Services, Commercial,
Finance, Human Resources, Regulatory etc. from both the companies, within the framework
of law, are presently working extensively preparing for the ‘day 0' of the merged entity. Both
the companies are committed to deliver the guided capex and opex synergy. Detailed synergy
planning is progressing well and granular details are currently being worked out with focus
towards achieving faster opex synergy realization than originally planned. Capex synergy is
also being assessed to evaluate the quantum of overlapping equipment especially on 3G and
4G technologies and identifying 2G equipment upgradable to 4G. Work on realizing network
fiber synergy has started with first leg expected to be completed for the bandwidth hungry
and critical top 220 cities across 22 circles by September 2018.
As already mentioned, from ‘day 0’ the benefits of coverage extension and capacity upgrade
post spectrum consolidation could accrue quickly to the merged entity, which should help
accelerate subscriber uptake, revenue and superior customer experience.
As already shared, post completion of merger Idea and Vodafone India shall own amongst the
largest spectrum block of 1,850 MHz with nearly 170 broadband carriers including spectrum
re-farming in the efficient 900 MHz band. Both the companies are seriously contemplating
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April 30, 2018
introduction of 4G services on 900 MHz in 12 to 15 of its leadership telecom circles post -
merger to improve indoor 4G and VoLTE consumer experience.
Separately during the last quarter, Indian Govt. through the Central Government Cabinet
approved the following telecom benefits based on ‘Inter Ministerial Group’ recommendation
to partially address financial stress in the sector including -
o Restructure of spectrum deferred payment liability - The existing mobile operators
can now avail the option to increase the deferred spectrum payment installment
period from earlier 10 to 16 years providing interim cash flow relief. Idea has opted
for longer credit period.
o Revision of spectrum cap - Overall spectrum cap quantum holding for operator has
been revised from 25% to 35% and intra-band cap restriction has been removed, and
instead a new cap of 50% applicable only for the entire range of sub-1GHz band across
full spectrum bands of 700, 800 and 900 MHz introduced. As a result, merged entity
of Idea and Vodafone India will not have to surrender any spectrum as was required
earlier under the M&A clause.
Both these regulatory changes are positive developments for the combined Idea and
Vodafone India entity.
Lastly: Update on fund raising to strengthen Idea’s balance sheet
In Q4FY18, Idea successfully completed equity raising of Rs. 67.5 billion which includes
preferential allotment to promoters Aditya Birla Group for a consideration of Rs. 32.5 billion
and qualified institutional placement (QIP) of Rs. 35 billion.
The equity raise of Rs. 67.5 billion will reduce Idea’s net debt and as a result, Vodafone net
debt contribution to merged entity will also be lower by the same amount.
The sale of Idea’s nearly 10,000 standalone towers was announced on 13th November 2017,
to ATC Telecom Infrastructure Private Ltd (American Tower) for an enterprise value of Rs. 40
billion. The merger of Idea’s tower company ICISL with American Tower is in last leg of
Government FDI approval and we expect to receive the committed tower company sale funds
in H1CY18.
On 25th April 2018, Idea along with its wholly owned subsidiary, ABTL has entered into a
financial transaction for its 11.15% stake in Indus towers, with Bharti Infratel (BIL) and other
Indus shareholders including Vodafone and Bharti Airtel, for the merger of Indus with BIL to
Page 10 of 28Idea Cellular Limited
April 30, 2018
create the largest tower infrastructure company in the world (excluding China), offering
163,000 tower pan India to Indian mobile operators. This transaction gives an option to Idea
to either: (a) sell its 11.15% stake to BIL before the merger for cash based on valuation formula
linked to the VWAP for Bharti Infratel’s shares during the 60 trading days at the end of Idea’s
election period, which triggers post completion of all regulatory approvals required for the
merger. This currently equals to cash consideration of Rs. 65 billion; or alternatively (b) receive
new shares of the enlarged merged entity at an agreed share ratio of 1,565 shares of Bharti
Infratel for every share of Indus towers amounting to nearly 7.1% stake in the new merged
listed entity.
Even in the case Idea decides to exercise full cash option, Idea will have certain rights in the
merged tower company either in perpetuity or for a period of 5 years, which will help us
significantly protect the interest of our mobility business including the most favored partner
status (MFN), for Idea mobility business until perpetuity.
Vodafone, the joint venture promoter of the listed mobile business entity post completion of
Idea-Vodafone India merger will continue to remain in the joint control along with Bharti Airtel
of the new enlarged tower entity post Bharti Infratel-Indus merger.
To summarize, the merger of Idea and Vodafone India and various fund raising programs are
on track or completed. We expect the new Idea-Vodafone India entity, India’s largest mobile
operator with more than 400 million customers to operate as one unit from the second half
of CY18 and emerge as a strong Indian mobile service provider for both voice and broadband
services across 2G, 3G and 4G platforms.
I now hand over to Mr. Akshaya Moondra – Idea's CFO, for details on the financial performance for
the quarter.
Akshaya Moondra: Thanks, Himanshu. A very good afternoon to participants from India and a good
morning or evening as applicable to overseas participants.
We have seen a 5.7% decline in revenue over the previous quarter, out of which 0.8% decline is on
account of the change in international incoming call termination rate from 53 paisa to 30 paisa and
2.2% is on account of fewer days in the quarter. During the quarter we continued to see ARPU dilution
which contributed to the balance 2.7% revenue decline.
Page 11 of 28Idea Cellular Limited
April 30, 2018
On the Opex side, we have few one-offs in this quarter being reversals of approximately Rs. 2 billion
in network expenses and Rs. 1.4 billion in employee expenses on account of provisions made in the
previous quarters in this financial year. There is also Rs. 1 billion one-off in license fee and SUC charges
on account of actualization of certain provisions made in the earlier periods. The EBITDA margin for
this quarter stands at 23.6% against 18.8% in Q3FY18.
The ‘Depreciation & Amortization’ charge and ‘Interest & Financing cost (Net)’ for the quarter are Rs.
20.9 billion and Rs. 9.7 billion respectively. The depreciation is lower by Rs. 560 million in this quarter
mainly due to lesser number of days in the fourth quarter. The increase on account of new addition
has been largely offset by assets which have completed their useful life. The interest income is higher
during this quarter mainly due to higher cash balance post equity infusion and interest on certain
income tax refunds.
The standalone PAT loss is Rs. 10.2 billion in Q4FY18 compared to a PAT loss of Rs. 13.5 billion in
Q3FY18. Capex for Q4FY18 stands at Rs. 21.1 billion, taking the overall FY18 capex to Rs. 70 billion in
line with the capex guidance.
For the full financial year, Revenue and EBITDA for Idea stands at Rs. 282.8 billion and Rs. 60.5 billion,
a YoY decline of 20.5% and 41% respectively on account of continuing price pressure and regulatory
changes related to reduction in domestic and international terminal rates. This quarter, Idea
successfully completed equity raise of Rs. 67.5 billion. Resultantly, net debt as of March’18 is lower at
Rs. 523.3 billion as against Rs. 557.8 billion in December’17.
As regards to sale of ICISL stake , the asset and liability values of ICISL continue to be shown as separate
line items as ‘Assets or Liabilities Held For Sale’ respectively on either side of the consolidated balance
sheet. The gain from the ICISL stake sale will be reflected when the transaction is finally consummated
which is expected to be in this quarter.
Lastly pursuant to the merger of IMCSL with ABIPBL, i.e. the payments bank, which has been effective
in this quarter, the company now holds 49% stake in the payments bank.
With this, I hand over the call back to Margreth and open the floor for questions.
Moderator: Thank you very much. We will now begin with the question-and-answer session. The first
question is from the line of Sachin Salgaonkar from Bank of America. Please go ahead.
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April 30, 2018
Sachin Salgaonkar: Himanshu, it was indeed a pleasure interacting with you for so many years. Wish
you all the best for future, and Akshaya congrats for your role as CFO of the combined entity. I have
three questions. Number one, I just wanted the merger update. Few days back, there was an ET article
talking about US$3 billion of DoT dues related to pending license fees, spectrum usage charge and one
time spectrum charges. Wanted to understand have you got any notice from DoT on that. Point two,
in the Reliance Industries analyst meet last Friday, Jio mentioned that they may not be the first one to
take the tariff hike, but if any other operator takes, they are happy to follow. Wanted to understand
your thoughts on the same. And lastly, about 6 months back, we discussed about potential SIM
consolidation happening in the market. By the looks of it, it is not happening. Just wanted to
understand how should we look at it?
Himanshu Kapania: Thank you Sachin for your good wishes. I will take the questions in the same order
that you asked. As far as the merger update is concerned, the company does not react to speculative
news reporting, but I am going to give you a broad update of various demands from DoT. As you are
aware, these demands are part of contingent liability for all the incumbent telecom operators. The
current disagreement between DoT and telecom operators are in the area of ‘Adjusted Gross Revenue’
(AGR) as well as in the area of one time spectrum charges. The definition of adjusted gross revenue
has been under discussion for quite some time and the recommendation given by TDSAT is currently
under review by the Supreme Court.
As far as AGR matter is concerned, we primarily have a stay on most of these demands and there is
Supreme Court order of no coercive action on any demand until it hears the case. To repeat, there is
a clear court stay for us on the AGR matter and similarly, there is protection from High Court on the
one time spectrum charge demand. All these items will continue to appear as contingent liability in
our balance sheet. If you refer the M&A guidelines, which is a public document, you can see that
broadly any such demand which has a court protection does not require any cash payout. We would
not be able to comment on the specific calculation.
Sachin Salgaonkar: I completely understand your stand, but is there a risk of the merger timeline
getting pushed forward? I saw in your press release that the merger is expected to close in first half
which is couple of months from now.
Himanshu Kapania: We have been consistently communicating that the merger is on track. We have
received approvals from SEBI, from National Stock Exchange as well as from Bombay Stock Exchange.
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April 30, 2018
We have also received approval from CCI and NCLT, both for Vodafone India in Bombay, and for Idea
in Ahmedabad. We are now in the last leg of approvals, security clearances of FDI approvals are already
received and only administrative work is left out, which we expect will hopefully sort out in the next
month or two. After that, the licenses of Vodafone India will merge into Idea. We are regularly in touch
with government and we see no reasons for delay in merger. You are aware that government has
already approved Bharti-Telenor merger and there were only minor disputes.
Government is moving reasonably fast. Given the complexities in merger of large companies, the
approvals have been obtained at record pace, comparable to global standards and part of the ‘ease of
doing business’ philosophy of the current government. We are fairly confident to retain our original
guidance on timeline.
As regards your specific comment on new operator, I will repeat what I had mentioned in the last
quarterly call that Idea is not a price warrior. We continue to give lot of indications that we are happy
to raise prices. Even in my opening speech, while I mentioned that ARPU of our customers continue
to fall, we would be happy to correct below cost prices. Currently, realization is falling as the unlimited
plans which were sold last year at about Rs. 300 (net of taxes as of April 2017) have now fallen to levels
of Rs. 160-165, while the data volumes have gone up. However, we are not price warriors - Our tariffs
are presently at least 15% to 20% higher than new operator’s tariffs, and we continuously give
indications, both in the marketplace and within the legal framework, that we will be happy to raise
the prices of below cost products whenever the number one operator in the country or the new
operator corrects below cost rates.
Sachin Salgaonkar: What I could deduce is that Jio is waiting for an indication, you guys are waiting
for an indication. So, by the looks of it, the ball is in Bharti's court?
Himanshu Kapania: That is for you to interpret. As far as SIM consolidation is concerned, I mentioned
in my opening remarks that SIM consolidation process has already kicked in. In the last calendar year,
only 40 million is the total additions of SIM, as per TRAI reported subscriber net adds, which is amongst
the lowest annual subscriber addition. Of these 40 million, 88 million was additions by Jio while overall
industry has lost 48 million. The non-Top 3 operators, have lost over 100 million SIMs indicating that
SIM consolidation is well in progress.
However, what is continuously ignored by analysts is that there are 300 to 400 million Indians who
still do not own mobile services. Thus, while SIM consolidation is happening, new customers are also
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April 30, 2018
entering. In our assessment anywhere around 75 to 80 million customers who were first time mobile
users have entered the category. If we study the trailing 12 months data, there has been at least 30
to 40 million SIMs consolidation. It is a slow process, but the ball has started rolling and SIM
consolidation has happened especially for operators who have exited. Also, if you look at the number
of subscribers smaller operators have lost, based on TRAI reported subscriber net adds, only 30-40%
of the subscribers reported earlier by these operators have ported to the top 4 operators, while rest
of the SIMs have consolidated reducing multiple SIMs.
Moderator: Thank you. The next question is from the line of Manish Adukia from Goldman Sachs.
Please go ahead.
Manish Adukia: I have three questions. First question is on the balance sheet. With your near-term
capex requirement and your obligation to service spectrum debt and interest, how are you thinking
about future fund requirements for the business and what in your view would be the path to lower
leverage over time? Second, on your SG&A costs, your absolute number continued to trend down.
What is the possible run rate and if industry tariffs remain constant for the foreseeable future, do you
think there is room to expand margins in the near term and what is the potential there? And my third
question is what has been the impact in the recent few months at the lower end of your customer
segment, where Jio has been pushing the JioPhone quite aggressively in the last couple of months.
Have you seen any impact on ARPU or subscriber addition? Thank you very much.
Himanshu Kapania: Thank you, Manish. While I am going to ask Akshaya to respond on first two
questions and I will subsequently cover the third part. I just want to give you a broad-brush answer on
your first question. I do not know if you have done the calculations. The total amount that the merged
entity combined has raised, is in the order of US$4-4.5 billion. It includes – (1) Rs. 67.5 billion of equity
raise completed by Idea, through preferential allotment and QIP; (2) Rs. 78.5 billion raised through
sale of standalone towers; (3) Recently announced 11.15% Indus stake monetization; and (4)
Vodafone’s contribution following the equity infusion done by Idea.
The challenge we are facing is EBITDA decline. As summarized in opening remarks by Akshaya, we had
41% decline in EBITDA in FY18. The reason why leverage ratio does not look healthy is the decline in
EBITDA, and the net debt absolute quantum has not increased significantly. Going forward, there are
two big sources of cash benefits. First, our spectrum debt repayment is getting pushed to future years
and the reason for that is changes as per IMG recommendations, now approved by the cabinet, on
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April 30, 2018
increasing the spectrum installment period from 10 years to 16 years. Our deferred spectrum
installments are now being pushed in future, giving us lot of relief. Secondly, additional cash source is
synergy, we are gearing for a significant amount of synergy post-merger. We see the potential of
delivering far more synergy then what we have guided for and even if you go by the guidance, there
is US$2 billion synergy which we are targeting. Thus we are not under cash deficit threat, albeit the
ratios do not look very good. As far as cash requirement of the company is concerned, we are mostly
funded for our immediate needs. And we look forward to market repair.
I am going to hand over to Akshaya to give you more specifics and additional points.
Akshaya Moondra: Manish, Himanshu has already covered most of the points on the balance sheet. I
would just add that in the current context, our focus is on managing funding for our investments and
we believe we are adequately covered for the medium term. In terms of the ratios getting corrected,
that will happen only as EBITDA improves, and as Himanshu said, will happen through 2 routes – (1)
Through synergies which is more within our control, and should start happening as soon as the merger
is completed, and (2) On account of market repair which all of us are expecting should start happening
soon.
Himanshu Kapania: Do you have any questions Manish?
Manish Adukia: Yes, one follow up. I know that you are not giving any capex guidance but if you can
give us a broad sense, if going forward, capex for the combined entity would be higher or lower than
the capex that today Idea and Vodafone are spending on their own?
Himanshu Kapania: It is not a straight forward answer. You have to remember that we have spent Rs.
70 billion and Vodafone India, while it does not give guidance, our broad understanding is that it is of
similar order as that of Idea. Once the merger takes place, besides opex synergy, there will be
significant capex synergy. We have 300,000 broadband sites combined at this point of time, but lot of
these sites are currently deployed in the same place for both the operators, which will be redeployed
into areas with no coverage. Our coverage will then be far deeper than the current market leader.
Secondly each of us are currently deploying around 600 MHz for broadband spectrum and combined
we are going to deploy re-farmed far higher 1,450+ MHz spectrum quantum, i.e. around 170
broadband carriers and this is going to give us significant exponential growth in network capacity.
Thirdly, there is fiber. We have independent fiber and we will be able to combine a large portion of
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our fiber with a very small additional cost. Fourth, which is not yet talked about but is extremely
important, we have 270,000 2G sites. Everybody ignores the presence of 270,000 sites. As per our
current estimate, a significant number of these 2G sites are upgradable to 4G sites, and the same
applies for 3G. This will bring in significant capex synergy. You thus cannot compare our capex
guidance with others who do not have old reusable equipment for benefit of expanding coverage and
capacities.
Akshaya Moondra: In other words, even if our capex cash spend remains same as what we collectively
did in the last year, we would be creating capacity which is more in line with the market leaders capex
guidance.
On the SG&A, your question is whether there is further scope for reducing SG&A and improving
margins within a flat tariff structure. There is definitely scope to improve further, especially in the
context of the merged entity. There are synergies largely in networks, but there are synergies in other
cost line items as well. As two large organizations or businesses come together, there will be
elimination of duplication which will result in synergies. These synergies have been quantified and
guidance has been given from our side. Besides that, we are also seeing that business models are
evolving, such as more and more of online recharging and e-KYC has started. Customer verification
costs have thus reduced. Consolidation is happening in the industry, so we believe that churn levels
will continue to go down. All these are also factors which will contribute to margin improvement
besides the combination of two businesses itself. Both within SG&A and other heads of expenses, you
will find these benefits coming in. It is possible to thus expand margins in a flat tariff environment but
if one looks at an industry perspective, probably that is not enough for industry to get decent returns
and an improvement in tariffs and pricing is also essential.
Himanshu Kapania: I move to the third part of your question which is impact on lower end of the
customer base. Rather than looking at external impact, the primary impact on customer base is that
we had high ARPU customers earlier, who have downgraded themselves first in the month of April
2017 when we introduced unlimited plan, then the average tariff was Rs. 300 for 28 days plan, and
now in the second round of correction which took place in the month of January of 2018, the ARPU is
down to Rs. 165. This has obviously resulted in much higher volume throughput, as over 25% of our
subscriber base has upgraded to unlimited plans and we continue to get very good traction on these
unlimited plans.
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April 30, 2018
While there has been downtrading of customers who were on higher end, there is also uptrading of
customers from the lower end. And because uptrading of customers on the lower end takes time, the
remaining customers' ARPU has been on the decline curve. What we are also now noticing is earlier
multi SIM customers are making a choice - on handset as well as network. The customers who were
earlier using two networks, one network for incoming and other network for availing tariffs from the
low priced operators are on the consolidation mode. The industry is currently in disruptive state as
SIM consolidation process is underway.
While SIM consolidation is happening as we speak, presently only about 350 million Indians are
currently using broadband services out of 1.1 billion, and 750 million Indians are still pure voice users.
These users continue to be mostly on the 2G network, and to some extent on the 3G network and
continue to be with us while majority of the consolidation is happening with the exit of 5 operators.
These customers who are entering or present in the market using 2G services, as and when they decide
to upgrade to voice plus broadband services, they look for options either with us or with the remaining
3 operators in the market place and thereby potential for ARPU upgrade.
Moderator: Thank you. The next question is from the line of Kunal Vora from BNP Paribas. Please go
ahead.
Kunal Vora: Couple of questions. First is your operating metrics as well as financial metrics this quarter
were slightly weaker compared to competition. Any reason for that and how are you looking to correct
that? Second, how is your data capacity currently compared to the other 2 operators and how do you
see this number changing over the next 2 years, and what investment would be required for you to
get there?
Himanshu Kapania: Kunal, you are right to some extent about the financial metrics. I believe what you
are mentioning is that revenue and broadband addition for Idea is lower. One of the reasons is the
market leader is aggressively investing, while we as a company are focusing most of our effort to
operate as a merged entity. Our challenge at this point of time is to make sure that there is less of
duplication of capital investment and wait for the merger to take place.
As a combined entity, we continue to closely monitor our performance metrics, be it overall data
capacity or broadband subscribers. Our overall VLR growth in FY18 continues to be much ahead of the
current market leader as a combined entity. You will find that post-merger, once we report all the
metrics, you will find how much better off we are in comparison to market leader, which market is not
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able to relate to. I believe in the first 6 months we had weak subscriber growth and some of these
factors also affected revenue related metrics for us. But in the second half, we have been able to
recover smartly with addition of over 12 million subscribers.
We are also trying to be a little more cautious as far as price is concerned. Rather than go overboard
on discounted subscribers, we are trying to maintain a right judicious mix of prices, and not trying to
be a price warrior. Some of it is reflected in the results. But we believe that the gap is small and we
are comfortable at this point of time because we have to make sure that as a combined entity, we
meet all the M&A guidelines. If you are fine with this answer, then I will move to data capacity.
Kunal Vora: I just have one follow up question. As a merged company, how many quarters do you
think it will take to stabilize because it looks like your competition is seeing your merger as an
opportunity to gain some market share. By when do you think the merged co will be ready to take on
the competition?
Himanshu Kapania: These are all “figures of speech”. At this point of time, we have not lost
subscribers. If you look at exiting subscribers, the MNP gain for the merge co has been far better than
the existing top operator. If you look at the additions of unlimited plan on combined basis, we are far
better compared to individual operations. If you look at one simple metric, which is calendar year 2017
AGR performance, you will realize that Idea has done significantly better among the top 3 incumbents.
You have to understand that there are different reporting methodology being used by different
operators on the basis of which performance of others operators may look better.
We do not expect any subscriber loss once the merger completes. We continue to have our eyes on
the market. That said, we are not going to operate as a discount warrior, and we will not chase
subscriber addition at any cost. That is not our company philosophy. That is not our focus metric. We
are not losing any AGR market share, we are not going to lose our high-end subscriber base and we
will continue to offer world class service across 2G and 4G platform to the customers. You can look at
any benchmark report of TRAI, we continue to remain extremely competitive.
As far as data capacity is concerned for the merged co, as we mentioned, we have a radio capacity of
around 23 Petabytes per day. We are building as much capacity as we require till the merger happens,
and post-merger, there is going to be spectrum consolidation which will give us one big jump in terms
of capacity.
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Kunal Vora: How does it compare with the competition? And how long do you think it will take you to
converge the capacity?
Himanshu Kapania: There are 2 key pointers. We have 400 million subscriber base on a combined
basis, out of which only around 25% of subscribers use broadband services. In terms of voice capacity,
we have sufficient capacity to address the demand and we are getting very robust QoQ growth. Both
as individual companies as well as merged entities, we will be able to handle the voice demand. We
are also introducing Voice over LTE (VoLTE) services which will significantly add to overall voice
capacity. As far as broadband data capacity is concerned, our focus will be to expand coverage by
redeploying overlapping equipment into uncovered area and consolidate our spectrum. This will help
us provide broadband access to our existing base with broadband devices. We believe, within a period
of 2-3 quarters, we would have made significant progress on spectrum consolidation and
redeployment of overlapping broadband equipment.
Akshaya Moondra: Kunal, just wanted to add one thing, historically we always used gross revenue
(GR) to measure market shares. However, the practice of booking captive revenue between circles has
gotten different between different operators over a period of time. Thus, in the current scenario, the
best way to look at market shares would be to look at Adjusted Gross Revenue (AGR), not GR.
Himanshu Kapania: And in AGR, you will notice that Idea's drop is the lowest among the top 3
operators.
Moderator: Thank you. The next question is from the line of Srinivas Rao from Deutsche Bank. Please
go ahead.
Srinivas Rao: Himanshu, thank you very much for leading the company for a long time. I think there
have been both highs and lows during your tenure and it has been a truly transformational period. I
wanted to start with one question on the penetration of the bundled or the broadband subscribers.
Currently, you have 40 million broadband subscribers vs 111 million smartphones on your network.
How quickly can that gap be bridged? Right now, are the balance 60 million odd subscribers using
competitors 4G network?
My second question is whether the company is constrained for capital, which I think lot of investors
have raised, but I think you have adjusted partly as the operating outcomes do not reflect an
immediate need. Is that the fair way to think about it? Do you believe your EBITDA will more than
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cover your capex cash requirements in the mid-term which is primarily capex and the spectrum
payments for the DoT? And thirdly, my question is on the sales structure of the company. Any thoughts
on how the sales structure of merged co will be? If you can throw any light at this stage, that will be
helpful? Thanks.
Himanshu Kapania: You are right. We have broadband subscribers of 40 million and smartphone
device owners at 111 million. There is a gap, which can be explained is due to two reasons. One, as we
mentioned we currently have 650 million broadband population coverage, while our 2G coverage is
nearly one billion. Nearly 350 million population which gets 2G coverage, does not get 4G coverage.
In these areas, there is a possibility that the customer prefers to use our voice network and use
competition’s broadband network. Secondly, just because customer owns a smartphone does not
mean that he is ready to use mobile broadband. Currently, there are only 350 million mobile
broadband users out of 1.1 billion SIM cards, and the remaining 750 million are pure voice users.
Based on our internal analysis, while there are 1.1 billion SIMs in India, there are only 800-850 million
devices and around 250-300 million are multi SIM users. Of the 850 million devices, we believe
smartphone owners are in the range of 350 to 400 million and 2G phones are in the range of 450 to
500 million. We thus estimate that nearly 25% of devices have multiple SIMs, irrespective of whether
the device is smartphone or a feature phone.
To summarize – (1) The device owners are much lower than SIM users on account of multi SIM
phenomenon, but the consolidation process has already started (2) Post-merger we will aggressively
expand 4G coverage redeploying overlapping equipment, reducing the gap between our 2G and 4G
broadband coverage, and enabling the customers who currently use only voice, to use Idea broadband
services as well; (3) Large number of customers, even though they own smartphones, only use voice
services. While the broadband customer base is rapidly expanding, there is still a big gap between
broadband customers and total customer base, which will gradually reduce over the next 2 to 3 years.
Akshaya Moondra: I think your next question is whether the operating flows are adequate to take
care of capex and debt servicing. In the context of merged entity, there is a certain EBITDA and
synergies are going to come in. And if you combine these synergies along with the EBITDA, that would
be adequate to meet the capex requirement which needs to be incurred.
In terms of debt servicing, we have restructured our debt, also there is additional relief from the
government side in terms of restructuring the spectrum payments from 10 to 16 years. For Idea alone,
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the principal debt servicing for the next 3 years is less than Rs. 35 billion, while rest would be interest
servicing. From capex and debt servicing perspective, we will have adequate funding from operations.
Of course, we also have to fund the interest payments and to that extent, we have raised capital right
now which will provide us sufficient buffer to meet any deficit in the medium term. Ultimately, we do
believe that market will recover which will result in improved EBITDAs from the current levels.
Srinivas Rao: On the sales structure, any thoughts?
Himanshu Kapania: Sales structure, I will assume that you are referring to the fact that both
companies have independent distributors. Primarily, our business is prepaid and we have common
retailers because the business is through multi-brand retailers. My assumption is that your question
is about independent distributors. Distributor consolidation will definitely be a focus area post the
merger. Our teams are working together to assess the best way for consolidating distributors, whether
to select model of shortening their territory or moving to a larger distributor common base. To realize
synergies, our first focus area will be network consolidation and second will be sales consolidation,
primarily distributor & sales team consolidation. And third focus area will be brand consolidation. And
as mentioned repeatedly by us, the opex synergy will not only come from network, which is obviously
very easily accounted, but also from the non-network elements. Consolidation of our sales and service
network as well as consolidation of brands should bring us additional synergy.
Moderator: Thank you. The next question is from the line of Sanjay Chawla from JM Financial. Please
go ahead.
Sanjay Chawla: Himanshu, my first question is, you mentioned the total mobile broadband coverage
for the combined entity as of now is 300,000 BTS. But in terms of unique unduplicated mobile
broadband sites, what is the number currently? And related question is that your mobile broadband
additions are quite low, much lower than peers. Jio has reported 26 million adds, although it includes
JioPhone as well. Bharti has reported 14 million, while your number is 5.2 million. Apart from the
coverage deficit, is capacity also an issue? And the second question is, Akshaya, your leverage ratio is
running quite high at 9 times. Do you anticipate any hurdle in refinancing of the spectrum installment
in FY19 and FY20, at least the principal component? Could refinancing be an issue given your leverage
ratios are already quite high?
Himanshu Kapania: We have shared in our opening remarks that Idea's broadband coverage is 650
million and combined entity coverage is around 750 million, because of overlapping sites. Idea’s
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April 30, 2018
broadband sites is around 155,000 sites while the combined entity has more than 300,000 sites. There
is a large component of overlap, exact number we are not sharing at this point of time, but a lot of
overlapping equipment will be reused to expand in uncovered areas. And post spectrum consolidation,
the same equipment will give us much larger capacity.
Sanjay Chawla: A related part, why mobile broadband additions are lower than peers?
Himanshu Kapania: As mentioned in the earlier response, there are two approaches. There are very
aggressive broadband entry level plans being offered at the lower price levels of Rs. 49 and Rs. 99. We
have chosen not to participate in both these price plans. We currently have mass market bundled
plans at Rs. 199 and Rs. 149. For Rs. 109, we only have segmented offers, primarily to protect our voice
customers. We do not have a plan at ~Rs. 100 price point for our broadband customers, because we
believe that price is unsustainable and it is far below cost. That is the one reason we understand why
our broadband subscribers growth is lower.
There is no shortage of capacity. But we believe Rs. 49 and Rs. 99 is not the right price point to operate
unlimited voice and bundled data plans. That is the view we have taken and we have consistently
maintained that we are not price warriors. The key price plan which is available mass market offering
unlimited voice and bundled data, is Rs.199. Which itself if you take a net of taxes at a level of Rs. 160
against earlier offer of Rs. 300. We do not want to participate in Rs. 60-70 price points with unlimited
voice and broadband data offer of 1-3 GB.
Sanjay Chawla: How difficult or easy it is going to be, to get the customer back once the customer has
started using network of other operators?
Himanshu Kapania: We have taken a conscious call and we have not lost any of our high ARPU
customers. The gap at this point of time in comparison with others is not large. We will keep a close
watch in the market. There is no point in selling significantly below cost. That is not the model that we
want to participate in.
Sanjay Chawla: Himanshu, just wanted to clarify if I picked up these data points correctly, you said
merged co has 23 petabytes of radio capacity, is that the number right now?
Himanshu Kapania: That is right.
Sanjay Chawla: And you mentioned 175,000 3G BTS on a combined basis?
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April 30, 2018
Himanshu Kapania: The combined broadband sites, which is 3G + 4G is 300,000.
Sanjay Chawla: And Akshaya on the second part?
Akshaya Moondra: Sanjay, I think there is no need for refinancing. As you know, there is cash on our
balance sheet today. We will be concluding the tower transaction which will bring an additional of
Rs.4,000 crores. The Indus stake monetization, as and when it happens, will also bring in additional
cash. When the merger happens, Vodafone will be bringing some cash on its balance sheet. We have
done this evaluation and we do not see any need for refinancing in the foreseeable future. We will be
able to service our debt out of the funds raised and the operational cash.
Himanshu Kapania: I hope you got the summary on cash availability. The total cash once all the fund
raising initiatives are completed, will be in excess of US$4 billion, it includes (1) the equity that we
have raised of Rs. 67.5 billion, (2) standalone tower sale of Rs. 78.5 billion, (3) Indus stake sale of Rs.
65 billion, and (4) Vodafone cash injection against Idea's equity raise. Additionally, our synergy
guidance stands at US$2 billion. You can do your independent analysis. I do not believe there is any
cash need in the immediate future.
Sanjay Chawla: Sir, I thought the assumption was that the cash which has been raised, along with
EBITDA will go towards interest payment and capex. Will the portion of cash be used to repay the
installments as well?
Akshaya Moondra: Sanjay, we are not distinguishing between the source and application. We are
saying that in totality, the source is available, which is enough to meet our requirements in the
immediate future and I do not think there is any challenge. We can have an offline discussion, US$4
billion of funds plus synergies kicking in provides us sufficient cash to meet all our requirements. We
do not need to refinance anything.
Himanshu Kapania: And there is a general belief that over a foreseeable future, the market repair will
happen.
Sanjay Chawla: Just a related question, apart from the capex and interest, how much one should build
in for spectrum liberalization charge and tower related penalties which may come in. Is the spectrum
liberalization charge a must before merger or can it be delayed or avoided given there is so much
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