idea cellular and telecom industry report

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INDIAN INSTITUTE OF MANAGEMENT, AHMEDABAD For requirements of the course Written Analysis and Communication - II (2011-13) IDEA Cellular & the Wireless Telecommunication Services Industry Industry-Company Report Submitted to: Name of instructor: Prof Mathukutty M Monippally Name of Academic Associate: Nameeta Chandra Submitted by: Abhilash S F Yaseen Mubarak S.G.Shrinivas Sagili Shan Mohan Section A Date of Submission: 10th March 2012

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Page 1: IDEA Cellular and Telecom Industry Report

Page | 1

INDIAN INSTITUTE OF MANAGEMENT, AHMEDABAD

For requirements of the course

Written Analysis and Communication - II

(2011-13)

IDEA Cellular & the Wireless

Telecommunication Services Industry

Industry-Company Report

Submitted to:

Name of instructor: Prof Mathukutty M Monippally

Name of Academic Associate: Nameeta Chandra

Submitted by:

Abhilash S

F Yaseen Mubarak

S.G.Shrinivas

Sagili Shan Mohan

Section A

Date of Submission: 10th March 2012

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\

IDEA CELLULAR & THE WIRELESS TELECOM SERVICES INDUSTRY

\

To Head, Corporate

Training and HRD,

IDEA Cellular

Limited

10th March 2012

By:

Abhilash S

F Yaseen Mubarak

S.G.Shrinivas

Sagili Shan Mohan

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Letter of Transmittal

To:

Head, Corporate Training & HRD

IDEA Cellular Limited

From:

Abhilash S, F Yaseen Mubarak, S G Shrinivas, Sagili Shan Mohan

IDEA Cellular Limited

March 10, 2012

Sir,

Subject: Report for use in the In-house training programme

Please find attached a report which analyses the standing of IDEA Cellular in the wireless

telecommunication services industry. It also analyses how IDEA compares against the market

leader, Bharti Airtel. With an emphasis on the current developments and expected future

trends, the report concludes with a few recommendations for IDEA Cellular for the next few

years.

We hope that the in-house training program can be aligned with this strategy to build the

necessary capabilities in our middle/senior level employees and also make them aware of the

possible path of the company in the near future.

Yours sincerely,

Abhilash S, F Yaseen Mubarak, S G Shrinivas, Sagili Shan Mohan

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Executive Summary

The extremely competitive Indian Telecommunications industry is a major driving force of

the Indian economy contributing about 1.5% of the GDP. IDEA Cellular is the fastest

growing operator with a market-share of 12% while Airtel with a 20% market-share is the

market-leader.

The industry that was earlier growing at 45%-CAGR has stagnated over the last few years

due to increased competition. While ARPU and ARPM have been falling; the Minutes of

Usage, Number of Active Customers have been increasing; leading to an unfavourable

scenario for operators with a customer-base that is paying lesser day-by-day.

Factors that have had a major impact on the industry include Mobile Number Portability,

cancellation of 122 licences due to the 2G scam and tariff wars due to increased competition.

Future growth will be shaped by the Draft NTP-2011 which is expected to hasten

consolidation, increase rural penetration and proliferation of 3G and VAS.

IDEA is in a position to make the most out of these trends due to its strong distribution-

channels and a high-quality network-structure. But a major threat stems from the uncertainty

on IDEA‟s presence as a pan-India operator due to the retraction of 9 licenses.

When compared to Airtel, it can be seen that Airtel‟s operational efficiency and size have

given it stability on the financial front. But, IDEA has the highest percentage of active

subscribers and is the maximum gainer from MNP. On the downside, churn rates are high

and customer satisfaction levels are low.

While Airtel has followed a global outlook towards expansion and promotions; IDEA has

focussed its energies on India which is reflected from their tie-ups with Filmfare-Awards,

KBC and IPL teams.

The way forward for IDEA is to recapture the revoked-licenses as Pan-India presence is

critical for future growth. It should work on improving Brand Equity via partnerships with

global entities. To improve ARPU, it may focus on targeted VAS for rural and semi-urban

areas.

IDEA should take steps to improve customer satisfaction as it is of paramount importance.

Given the low customer-satisfaction and high churn-rates, it may look at the possibility of

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outsourcing customer-care and IT management to specialised firms with skilled labour-force,

even at the cost of short term profits.

It should increase the focus on 3G and data services as they are likely to be future growth-

drivers. In the long-term, IDEA can consider geographical expansion in untapped markets

like Africa, Middle East through acquisitions.

No of Words: 399

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Contents

Letter of Transmittal ................................................................................................................... i

Executive Summary ................................................................................................................... ii

Industry profile........................................................................................................................... 1

Stake holders .............................................................................................................................. 8

Customers ............................................................................................................................... 9

Employees .............................................................................................................................. 9

Government ............................................................................................................................ 9

Industry Trends .......................................................................................................................... 9

Impact of mobile number portability ..................................................................................... 9

Cancellation of 122 licenses ................................................................................................. 10

Draft-National Telecom Policy 2011 ................................................................................... 10

Foreign Expansion & FDI .................................................................................................... 10

Rural Expansion ................................................................................................................... 11

Tariff Wars ........................................................................................................................... 12

3G and Value added Services............................................................................................... 13

Bundled offerings ................................................................................................................. 14

Company Profile: IDEA Cellular Ltd. ..................................................................................... 15

History .................................................................................................................................. 15

Mission ................................................................................................................................. 15

SWOT Analysis.................................................................................................................... 16

Company Profile: Bharti Airtel Limited .................................................................................. 17

History .................................................................................................................................. 17

Mission & Vision: ................................................................................................................ 17

SWOT Analysis.................................................................................................................... 18

Comparison: Lag Indicators ..................................................................................................... 19

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Financial Parameters ............................................................................................................ 19

Telecom-Sector Performance Indicators .............................................................................. 20

Comparison: Lead Indicators ................................................................................................... 21

Recommendations .................................................................................................................... 25

End Notes ................................................................................................................................. 27

Exhibits .................................................................................................................................... 29

Exhibit-1: License Fees and Spectrum Charges ................................................................... 29

Exhibit-2: MNP-Status ......................................................................................................... 30

Exhibit-3: Cancelled Licences ............................................................................................. 31

Exhibit-4: Foreign Expansion .............................................................................................. 32

Exhibit-5: Circle-wise Subscriber Addition Mix ................................................................. 33

Exhibit-6: Classification & Expected growth from VAS..................................................... 34

Exhibit-7: IDEA‟s Growth ................................................................................................... 35

Exhibit-8: IDEA Organisational Structure ........................................................................... 35

Exhibit-9: IDEA Market Share ............................................................................................ 36

Exhibit-10: Debt Equity Ratios ............................................................................................ 36

Exhibit-11: Profit comparison – IDEA vs. Telecom Industry ............................................. 36

Exhibit-12: SWOT Analysis of IDEA ................................................................................. 37

Exhibit-13: Airtel Growth .................................................................................................... 38

Exhibit-14: Trends in Current Ratios – IDEA vs. Airtel...................................................... 38

Exhibit-15: Trends in Debt-to-Equity (D/E) ratio – IDEA vs. Airtel .................................. 39

Exhibit-16: Trends in ROCE ratio – IDEA vs. Airtel .......................................................... 39

Exhibit-17: Trends in EPS ratio – IDEA vs. Airtel .............................................................. 40

Exhibit-18: Trends in PBITM ratio – IDEA vs. Airtel ........................................................ 40

Exhibit-19: Trends in ARPU – IDEA vs. Airtel .................................................................. 41

Exhibit-20: Trends in AMoU – IDEA vs. Airtel .................................................................. 41

Exhibit-21: Trends in Customer Base Growth – IDEA vs. Airtel ....................................... 42

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Exhibit-22: Trends in Churn rate – IDEA vs. Airtel ............................................................ 42

Exhibit-23: Trends in Active Mobile Users – IDEA vs. Airtel ............................................ 43

Exhibit-24: Customer satisfaction parameters and benchmark levels ................................. 43

Exhibit-25: Customer Satisfaction levels among existing players ....................................... 44

List of Figures .......................................................................................................................... 45

References ................................................................................................................................ 46

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Industry profile

Effective, Reliable and Robust communication infrastructure is of paramount importance to

any country‟s socio-economic progress. To that end, the Indian Telecommunications industry

has been one of the key sectors and a driving force of the Indian economy contributing more

than 1.5% of the GDP (TRAI Annual-Report, 2011). From just 5.07 million connections in

1991 to 903.73 million connections in 2011, the telecom industry has come a long way.

Figure-1: Growth of Telecom-Subscribers (TRAI-Annual-Report, 2010)

It is the second largest network in the world and has grown at a rate of 44.56% compounded

annually.

By January 2012, the mobile subscriber base shot up to 903.73 million, with a corresponding

tele-density of around 75 percent.

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Figure-2: Distribution of Wireless Subscribers (TRAI-Subscription Data, 2012)

Mobile subscribers are classified into prepaid and post-paid subscribers. Prepaid is the

dominant model with more than 97% market share (Figure-3).

Figure-3: Distribution of Prepaid & Post-paid (Telecom Sector-Report, 2011)

The mobile customer base can also be divided into Circles based on the geographical

divisions. Over the last few years, the share of Metros has been steadily declining, while the

Circles C&B are growing exponentially (Figure-4).

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Figure-4: Circle -Wise Distribution (Telecom Sector-Report, 2011)

On the basis of technology in use, the industry can be divided into Global System for Mobile

Communications (GSM)1 and Code Division Multiple Access (CDMA)

2. GSM is the

dominant technology with a market share of over 85% (Figure-5).

Figure-5: Technology-wise Distribution (Telecom Sector-Report, 2011)

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The industry is characterized by extremely high competition among the players. Airtel with a

20% market-share is the market leader whereas IDEA Cellular is one of the fastest growing

operators with a share of 12% (Figure-6).

Figure-6: Market-share (TRAI-Subscription Data, 2012)

Most of the operators have a healthy proportion of their customers doubling as broadband

customers who use High-Speed Internet services. BSNL is the dominant player in this

segment (Figure-7).

Figure-7: Broadband-Market-share (TRAI-Subscription Data, 2012)

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On the whole, the key drivers of the telecom industry can be summarized under four verticals

as shown in Figure-8.

Figure-8: Industry Verticals (Telecom Sector-Outlook, 2011)

The parameters that are specific to this industry to rate the performances of various players

are as follows:

Average revenue per user (ARPU)3

ARPUs have fallen considerably over the past few years owing to high competition and

increased penetration in lower strata of the society. Predatory pricing strategies initiated by

the new operators are also a major cause for the decline (Figure-9).

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Figure-9: ARPU-trends (TRAI-Subscription Data, 2012)

Subscriber growth

Due to a slight increase in rural tele-density, the overall subscribers increased from 893

Million in Dec 2011 to 903 Million by January 2012. Focus on new additions in rural markets

by private players is the key driver for growth (Figure-10).

Figure-10: % Net additions during January 2012 (TRAI-Subscription Data, 2012)

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Minutes of Usage (MoU)4 per subscriber

MoUs have been falling for the last 4 years and stood at 349 Minutes by 2011, which is one

of the lowest in the world. The decrease implies that the usage of incremental connections is

quite low. Also, with increasing addition of rural customers with lower usage, there has been

a steady decline in the MoU levels (Figure-11).

Figure-11: MoU-Trends (TRAI-Subscription Data, 2012)

Average Revenue per Minute (ARPM)5

After the entry of new operators from the year 2000 onwards, the resulting price war has

caused ARPM (Average Revenue per Minute) to decline phenomenally from INR ~15.5 per

minute in 1999 to INR ~0.4 per minute in 2011 (Figure-12).

0

50

100

150

200

250

300

350

400

450

500

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Min

ute

s o

f U

sage

Year

MoU (2002-2011)

MoU

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Figure-12: ARPM & Subscriber Trends (TRAI-Subscription Data, 2012)

Stake holders

There are three key stake holders identified for any operator in this industry.

Telecom Service

Providers

Customers

Government Employees

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Customers

Availability of many national level players has provided multiple choices to the customer.

Also, new policies like Mobile Number Portability (MNP)6 have significantly reduced

switching costs. Hence, customer satisfaction is of primary concern to network providers.

The advent of mobile communications has changed the way customers communicate and has

become part and parcel of their lives. Hence the customers are equally dependent on the

services provided by the operators.

Employees

Being a highly competitive industry, providing superior services is crucial. This superiority

can be achieved either through superior products or better customer relationship management

and often, both. Hence availability of highly motivated and skilled employees is critical for

the network provider. In turn, the industry offers high growth potential and thus attractive

careers to the employees.

Government

Government plays a key role in policy formulation and their implementation. Issuing

licenses, spectrum allocation, monitoring price tariffs, ensuring protection of consumer rights

are crucial aspects of government intervention. In return, spectrum sales and licensing

contribute heavily to the exchequer (Exhibit-1).

Industry Trends

Impact of mobile number portability

Post the launch of Mobile number portability, there has been an increased churn rate of

customers. Considering the fact that the mobile subscriber base in India is about 903.73

million with an addition of about 10 million customers every month, (Exhibit-2) the 32.79

million MNP requests till date forms only a miniscule 3.5% (TRAI-Subscription Data, 2012).

Incumbent operators like Airtel, IDEA and Vodafone have gained the most from MNP which

is contrary to the initial belief that new entrants would be the major beneficiaries (MNP

Accelerator Effect, 2011).

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Cancellation of 122 licenses

The verdict of the Supreme Court to cancel 122 licences including 9 of IDEA Cellular will hit

the telecom industry hard in the short term (Exhibit-3). FDI flow in the sector may be

affected as players whose licenses were cancelled may not participate in the re-auction. New

entrants who have invested in infrastructure and employees will lose out on existing

customers and brand equity.

The incumbents are set to gain due to the shift of the subscribers through MNP. Also, the

drop in competition will help consolidation in the sector. The customer may face moderately

increased tariffs due to the lessened competition leading to higher ARPUs. In the long run,

the verdict will help create a clean image for the industry and attract ethical players to invest.

Draft-National Telecom Policy 2011

The Draft NTP-20117 changes the ground rules for mergers and acquisitions which will help

the industry take baby-steps towards consolidation. With an emphasis on promotion of high-

speed broadband and rural penetration, the NTP also focuses on indigenous development of

equipment and content. The path-breaking proposal to the replace „many-circle many-

licenses‟ framework with „one-nation one-license‟ and remove roaming charges, could hit the

revenues of service-providers in the short term. But increased revenues from Broadband and

3G could more than make up for the same. NTP-2011, if properly implemented, could have a

far-reaching impact on the telecom industry (Draft-NTP, 2011).

Foreign Expansion & FDI

With reducing ARPUs and increasing competition in the domestic sector, Indian Telecom

Firms, led by Bharti Airtel, have started looking for greener pastures abroad (Exhibit-4).

Bharti Airtel, in particular has expanded tremendously in Bangladesh, Africa where it is

among the leading operators. Reliance, BSNL, Tata Teleservices have all attempted to gain a

foothold through acquisitions in Africa.

On the FDI front, investments have come forth from NTT DoCoMo in Tata Teleservices and

Vodafone. On the downside, Telenor and Etisalat wrote off their investments in Uninor and

Etisalat DB respectively (Etisalat writes off, 2012, February 9). The 2G spectrum scam has

had far-reaching impact and has made foreign investors think twice before investing in the

telecom sector.

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Rural Expansion

Figure-13: Overall Tele-density (TRAI-Subscription Data, 2012)

With saturated urban tele-density8 levels of more than 160%, (Figure-13) Telecom operators

are looking to the B and C Circle areas for expansion and revenue. New subscriber additions

were highest in these segments in absolute numbers for January 2012 (COAI-Data, 2012)

Figure-14: Subscriber Additions in January (COAI-Data, 2012)

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With about 55% of new subscribers coming from Semi-urban and rural areas, (Exhibit-5) and

a current tele-density level of less than 40%, the rural markets present a lucrative opportunity

for operators. The NTP-2011 target of achieving 100% rural telephony by 2020 will hasten

the rush of operators towards rural markets to drive growth.

Tariff Wars

The advent of the per-second tariffs led to price wars. This was further accerbated by the

introduction of MNP where operators fought to gain a larger pie of the switching customers.

Figure-15: Comparison of ARPU-Q1 & Q2-2011 (COAI-data, 2012)

Telecom Operators cut each other, which led to a drastic fall in ARPU levels of most players

and a 3.91% decrease in the average ARPU of the industry between Q1 and Q2-2011.

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Figure-16: Trend in key operating metrics (Telecom Sector-Report, 2011)

The decline in revenue levels was stemmed finally when the incumbents started increasing

tariffs by 20% in June 2011 (Airtel hikes charges, 2011, 22 July). Post the Supreme court

verdict that cancelled 122 licenses, reduction in competition is expected to lead to a further

increase, thus putting an end to the tariff wars.

3G and Value added Services

Growth in the telecom sector has considerably slowed down due to intense competition due

to new operator launches. According to CRISIL, the highly commoditised voice segment has

matured. Currently, data services account for roughly 13% of total revenues, which is quite

less as compared to the global average of around 23%. Thus, further expansion in operator

revenues is likely to come from data services (Data-services, 2011).

Figure-17: 3G-Rollout (Data-services, 2011)

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To retain premium subscribers with high ARPUs, operators will be forced to roll-out 3G

services in order to differentiate themselves from other players. Operators have started

offering bundled data plans to attract a larger customer base. Value added services that

require high bandwidth (Exhibit-6) are forecast to grow from Rs.13.8bn in 2010-11 to

Rs.259.90bn in 2015-16 (Data-services, 2011).

This growth is expected to be met by a simultaneous growth in Smartphone and 3G dongle9

penetration which is expected to grow from 2.3mn in 2010-11 to 9.1mn in 2015-16 (Figure-

18).

Figure-18: 3G-dongles growth (Data-services, 2011)

Bundled offerings

With the emergence of 3G services, a new market was opened up in India. To promote the

penetration of smartphones and thus 3G, service providers are tying up with handset

manufacturers to provide a bundled offering.

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Figure-19: Advertisements of various bundling offers (India gearing up, 2011)

With an attached data plan and a tie-in period of one year, this is a win-win situation for both

the operator and the manufacturer. Unique cash back schemes have been launched by service-

providers by bundling phones with data plans. IDEA has gone one step ahead; by launching

its own low-cost smartphone based on its insi8ght that price was the major hurdle for

penetration of smartphones and 3G.

Company Profile: IDEA Cellular Ltd.

History

In 1995, IDEA Cellular limited, a GSM mobile services provider was established as Birla

communications. It entered into a joint venture with AT&T Corporation and Grasim

Industries, forming Birla AT&T Communications Limited in 1996. The brand IDEA was

created in 2002, after a second merger with Tata Cellular Limited. In 2006 Aditya Birla

Group (ABG) acquired all the shares from TATA group to become the largest shareholder

and went public in March 2007. It became a pan-India operator in 2009 and reached the

milestone of 100 million subscribers on September 2011 (Exhibit-7). The organisational

structure of IDEA can be seen in Exhibit-8.

Mission

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IDEA‟s Mission is: “We will delight our customers while meeting their individual

communication needs anytime anywhere”. It shows the commitment of the company in

serving an individual‟s needs without compromising on the quality of service.

SWOT Analysis

Strengths

With a 13.9% of market share (Exhibit-9) in Q1-FY-2012, IDEA is the 3rd largest mobile

services operator in India. IDEA is the only operator in the country to have ISO 9001:2008

certifications across all 22 centres, showing the uniformity and quality in service across

length and breadth of the country.

Strong distribution channels and the high quality network structure strengthen its brand

equity. IDEA, a subsidiary of ABG – the US $35billion Corporation, operating in over 33

countries, has strong support to implement its initiatives.

Weaknesses

IDEA has a Debt-Equity10

ratio higher than the Industry and peers, which reduces the fund

raising capacity of the firm inhibiting expansion and quality enhancement (Exhibit-10). It

makes the company accountable to creditors before taking strategic decisions. IDEA incurred

losses till 2010 despite the industry making profits (Exhibit-11). This loss prevented IDEA

from issuing dividends to the shareholders making it an unattractive investment. Complete

dependence on mobile services makes it vulnerable to risks.

Opportunities

IDEA with 66.67% of its subscribers from rural areas (IDEA-Cellular, 2012) is the market

leader in the semi-urban and rural market. With a suitable strategy, IDEA can pose a threat to

its competitors in urban market and increase the subscriber base.

The increase in affordability of telephone services and mobiles along with the increase in

disposable income and low tele-density also supports future growth. The Indian IT industry is

poised to be a US $225billion industry by 2020, with a threefold increase in internet users.

Telecom Regulatory Authority of India (TRAI) expects the broadband subscribers to reach

100-million by 2014, provides an immense opportunity to operators like IDEA to fill the gap.

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The launch of Mobile Number Portability (MNP) has been an added advantage as IDEA has

been the biggest gainer with a net increase of 2.2 million subscribers (TRAI-Subscription

Data, 2012). The volatility in the industry is reducing with the improvised regulatory

environment making it easy for operators to raise funds and improve network quality.

Threats

The intense competition in the telecom industry has led to price wars and reduction in tariffs

and impacting the Average revenue per user (ARPU). IDEA faces significant competition

from companies like Bharti Airtel, Tata Teleservices, and BSNL. With industries like

hospitality, IT, Business process outsourcing (BPO) replacing broadband with Wi-Fi

technology the demand for Wi-Fi is peaking. India is expected to have 350-million Wi-Fi

users by 2013. Hence this alternative technology along with Wi-Max poses a severe threat.

The summary of the SWOT Analysis can be seen in Exhibit-12.

Company Profile: Bharti Airtel Limited

History

Bharti Airtel, the largest telecom operator in India, is a fully integrated player offering end to

end telecom solutions. Started as Bharti Tele-Ventures in 1995 in Delhi, Bharti Airtel today

operates in all the 22 circles in India and has the largest customer base with 19.58% market

share (TRAI-Subscription Data, 2012).

The growth of Airtel is primarily characterized by acquisitions – JT Holdings, Skycell, Spice

Cell - and expansions into new geographical markets – Africa, Sri-Lanka, Bangladesh

(Exhibit-13).

Mission & Vision:

Bharti Airtel‟s mission is stated as to meet their customer‟s needs based on their deep

understanding of customer‟s ambitions, wherever they are. It aims at addressing the latent

needs of existing mobile users and use innovative means to satisfy them.

The company envisions being the most loved brand, enriching the lives of millions by 2015.

To consolidate and increase its existing market share, Airtel, being the industry leader,

intends to diversify into integrated services.

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SWOT Analysis

Strengths

• Largest telecom operator in India

•High new additions

•3G service launch: Bagged 3G spectrum in 13 out of 22 reaching 65-70% of its customer base.

•Large passive infrastructure

•Rise in total MoU

•Highest active customer base: Airtel has ~92% active customers, one of the highest in the industry.

•Has one-fourth of the rural market and is focused on increasing it further.

Weaknesses

•Decline in customer market share: Fell to 20.0% in March 2011 from 21.8% in March 2010 due to the new greenfield operators offering rock bottom prices

•Decline in ARPU's: ARPU's have declined from Rs 220 in Q4FY10 to Rs 194 in Q4FY11. Focus on rural markets is one of the reasons.

Opportunities

•New customer additions through MNP

•Future potential of telemedia services: The government proposal in NTP 2011 for broadband on demand services offers a huge potential.

•Opportunities in Africa: large untapped market still exists in Africa

•Possibilty of acquistions: Less performing greenfield operators are potential targets.

Threats

•MNP can be a double edged sword: Rock-Bottom prices by new competitors can affect Airtel.

•Temperory setback to telecom tower growth due to the uncertainty over license conditions

•TRAI recommendation to charge Rs. 4000 Cr. extra from telecom companies that hold more 2G spectrum than 6.2 Mhz

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Comparison: Lag Indicators

Financial Parameters

Current Ratio11

: The ratio measures the liquidity position of a firm i.e. the ability to pay off

current obligations.

The trends show a fluctuating ratio for IDEA whereas Airtel has a relatively stable ratio at

0.7. This indicates the vulnerability of IDEA to external market factors including the

economic crisis of 2007-08 (Exhibit-14).

Debt/Equity Ratio: This is a measure of financial leverage of a firm. A Lower D/E ratio

represents low risk to the equity holders.

Given that the market is highly competitive, in order to reduce their cost of debt both the

companies steadily reduced their debts and raised capital through equity. IDEA issued IPO in

2007 and stabilised its D/E ratio. However, Airtel continues to maintain a lower ratio

(Exhibit-15).

Return on Capital Employment (ROCE) Ratio12

: This ratio indicates the efficiency and

profitability of a company's capital investments.

Airtel has a considerably higher ROCE ratio when compared to IDEA (Exhibit-16). Efficient

handling of operations and economies of scale due to huge size are the key differentiating

factors for Airtel.

Earnings per Share (EPS)13

: EPS is a measure of profitability and is used to compare

performance of similar companies.

Though IDEA‟s EPS is relatively stable at around 2.7, it is significantly lower than that of

Airtel (Exhibit-17). Lower expenditures and efficient management of resources led to higher

profits for Airtel which is reflected in its high EPS ratio.

PBITM/Income Ratio14

: The ratio signifies the profitability of a company.

The efficiency of operations plays a key role in cutting down costs and thus withstanding the

tariff war. Hence effective resource management combined with superior capital structure is

the key driver behind Airtel higher profitability (Exhibit-18).

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Telecom-Sector Performance Indicators

Average Revenue per User for both Airtel and IDEA is decreasing over the years following

the industry trend as shown (Exhibit-19). The intense competition among players lead to a

price war and eventually huge tariff reduction.

Average Minutes of Usage per subscriber (AMoU): As shown, the industry AMoU has

been constantly decreasing owing to the availability of other modes of communication like

Short Message Service (SMS), chatting over internet, usage of Wi-Fi etc. However, for

market-leaders, AMoU has stabilized over time, due to the quality of service and promotional

schemes (Exhibit-20).

Customer Base: There has been a robust growth in the customer base post-2002 when the

prices became affordable. Airtel and IDEA initially grew at the rate of 91.74% and 129.55%

respectively till 2008 owing to the initial lower customer base.

From 2009, the growth stagnated at 12.87% and 27.35% for Airtel and IDEA respectively

because of saturated urban market and intense competition (Exhibit-21).

Churn Rate15

: IDEA‟s churn rate is on the higher side because of proliferation of new

service providers. Due to difficulty in gaining the loyalty of customers, IDEA stepped up

with free VAS and full talk time packages (Exhibit-22).

Active Mobile Users: Airtel and IDEA had the highest Active Mobile Users, greater than

industry average of 70% (Exhibit-23). Eventually IDEA‟s active mobile users surpassed that

of Airtel which can be proliferation of multiple SIM usage in urban areas and greater

penetration in rural areas where people do not switch operators easily.

Customer Satisfaction: Despite being the highest gainer from MNP, IDEA‟s customer

satisfaction level measured based on the parameters like billing accuracy, customer service,

supplementary services is among the least in some parts of the country (Exhibit-24).

Airtel has the highest satisfaction level rightly making it a market leader (Exhibit-25).

Page 29: IDEA Cellular and Telecom Industry Report

Page | 21

Comparison: Lead Indicators

Growth Drivers

While the telecom sector has been growing over the last 5 years, the rate of growth has been

slowing down over the last couple of years. While Airtel has looked the Global way for

growth through mergers and acquisitions, and has expanded to Africa, Bangladesh and Sri

Lanka; IDEA has focussed on the rural areas for growth.

Airtel has also focussed on shifting from a pure mobile services operator to an integrated

telecom service provider across Telecom, Television and Computers. IDEA, on the other

hand has expanded its array of Value-added Services with greater focus on rural applications

with strategic tie-ups.

On the whole, the main growth drivers for the industry are expected to be from 3G and Data-

services driven through Broadband.

Strategic Tie Ups

Airtel was the pioneer in entering into strategic tie-ups, with its outsourcing of IT to IBM.

Till today, Airtel has pioneered similar tie-ups with companies for its forays. IDEA Cellular

has also struck similar deals for hastening growth.

Bharti Airtel Strategic Tie-ups

Rural Focus

IFFCO

Software

Microsoft, Google

IT

Aegis, Firstsource,

Hinduja TMT, IBM,

Mphasis & Teleperform

ance

Handsets

iPhone

Mobile Banking

State Bank of India

Page 30: IDEA Cellular and Telecom Industry Report

Page | 22

For Rural Areas, while Airtel has a tie-up with IFFCO; IDEA has similar tie-ups with Reuters

Market Light which provides information to farmers about weather and other such

information. With the saturating market, rural circles have become the areas of focus for

operators and such tie-ups help in penetration by providing relevant information for the target

audience.

With the proliferation of mobile phones, mobile banking has become an important

application. Both IDEA and Airtel have tie ups with banks for the same.

Another innovative strategic tie-up is the formation of Indus Towers by Airtel, Vodafone and

IDEA for tower infrastructure by pooling in their entire prior infrastructure, for the benefit of

each other. Through this, all three operators have been able to reduce fixed costs that are

incurred in the construction of infrastructure and have achieved better network coverage

simultaneously.

Such tie-ups are the way for the future as it helps reduce costs and increase efficiency by

focussing only on the areas of expertise while outsourcing the other aspects of the business to

the area specialists.

IDEA Cellular Strategic Tie-ups

Rural Focus

Reuters Market Light, Indian

Railways

Software

IndiaTimes, Opera,

handygo

IT

SPANCO BPO, Aditya

Birla Minacs

Handsets

Huawei

Mobile Banking

Axis Bank

Page 31: IDEA Cellular and Telecom Industry Report

Page | 23

Marketing and Promotion

With increased competition, and about 12-13 active players in the industry, it has become a

challenge for the service providers to grab eyeballs and garner customer attention.

It has become an industry trend to be associated with high TRP properties to ensure visibility.

Added to this, most telecom players have resorted to celebrity endorsement for the same.

Figure-20: Telecom-Sector Advertising

While Airtel has focussed on conveying its brand image and improving brand equity through

its advertising, IDEA focuses mainly on its targets its ads towards the various plans that it

offers with its „What an IDEA‟ campaigns.

IDEA has focussed on increasing awareness among the Indian consumers. It has associated

itself with popular Indian TV properties like KBC and Filmfare Awards. It has also

sponsored three IPL teams – Mumbai Indians, Deccan Chargers and Delhi Daredevils. With

the resounding success of the IPL, this has given IDEA, pan-India recognition.

Page 32: IDEA Cellular and Telecom Industry Report

Page | 24

On the other hand, Airtel has concentrated on establishing itself in the global arena. It was the

title sponsor for the T20 Champions League and the Indian Formula-1 Grand Prix. Added to

this is its partnership with Manchester United FC, the world‟s most popular Football Club to

give it global visibility. These strategies are coherent with Airtel‟s motive to have a global

presence.

The comparison between IDEA, Airtel and the industry is summarized in Figure-21.

IDEA vs AIRTEL vs INDUSTRY

Financial Indicators [2011 Data]

Current Ratio 0.7

0.27

PBITM/Income

0.7

0.72

6.2

3.9

8.35

Debt-to-Equity Ratio

ROCE

EPS

0.88

0.35

10

N.A.

19.13

91.17% 70%

15.97

20

24.12

152.3 NA

Churn Rate 8.2 5.8 NA

Customer Base

Customer Satisfaction

Levels92% 97.00% 95%

Telecom sector -Performance Indicators [2011 Data]

Average Revenue per User 168 194 84

Average Minutes of Usage

per user401 468 368

Active Mobile Users 93.18%

105

Page 33: IDEA Cellular and Telecom Industry Report

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Figure-21: Summary of the Comparison between IDEA and Airtel

Recommendations

Immediate:

In the immediate future, IDEA Cellular should ensure that it recaptures the 9 circles that were

lost due to the Supreme Court Decision through the re-auction as Pan-India presence is

critical for all future growth prospects.

Short Term:

IDEA Cellular should work on improving Brand Equity and recall through brand building

measures. It can possibly associate with global entities for tie-ups like Chelsea FC – as brand

ambassador Abhishek Bachchan is already associated with the same, Indian Hockey Team

Strategic Tie-Ups

1. Outsourcing IT

2. Cooperatives -

IFFCO & banks

3. Handset

Manufacturers

1. Rural Consulting

Firms

2. Banks

3.Outsourcing IT

1. Outsourcing IT

2. Rural

Cooperatives

Marketing & Promotion

1. Brand

Advertising

2. Focus on Global

expansion hence

tie-ups with global

entities

1. Advertising

targeted schemes

2.Focus on Indian

market -

Bollywood, cricket

etc

N.A.

Growth Drivers

1. Mergers &

Acquisitions

2. Offering

Integrated Services

- TV, Data Services

1. Targeted VAS

2. Focus on rural

market

3G & Broadband

services are major

drivers

IDEA vs AIRTEL vs INDUSTRY

Page 34: IDEA Cellular and Telecom Industry Report

Page | 26

and other CSR Initiatives. For tapping the rural segments and non-Hindi speaking states,

IDEA can focus on having regional film stars as brand ambassadors and tie-up with their

movies for in-film placement.

To increase the consistently decreasing ARPU and MoU, IDEA should improve network

coverage and variety of plans offered for long distance calling. To improve ARPU, it may

focus on targeted VAS for rural and semi-urban areas. For increasing customer base in urban

markets, IDEA could possibly develop focussed plans like Closed User Groups (CUG) for

corporates, college students and improve 3G connectivity.

Medium Term:

IDEA should focus on Customer Relationship Management and take steps to improve

customer satisfaction as it is of paramount importance. Given the low customer satisfaction

levels and resultant high churn rates, it may look at the possibility of outsourcing customer

care and IT management to specialised firms with skilled labour force and expertise, even at

the cost of short term profits.

It should increase the focus on 3G and data services, and develop supporting infrastructure

for the same, as they are likely to be the future growth drivers. IDEA must focus on tapping

the low-cost smartphone market targeted at youth and the middle class, through the IDEA

Smartphones, in turn boosting 3G proliferation.

Long Term:

In the long term, IDEA can consider expanding into untapped geographical markets like

African countries, Middle East through acquisitions. It could possibly target FDI to increase

working capital for rural and data services expansion. Overall, it should look to maintain the

current focus on reducing the debt-equity ratio, thus increasing investor confidence in the

company.

Word Count: 3958 Words

Page 35: IDEA Cellular and Telecom Industry Report

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End Notes

1. GSM : Global System for Mobile communications

GSM is one of the most popular mobile communication technologies.

2. CDMA : Code Division Multiple Access

CDMA is one of the most popular mobile communication

technologies.

3. ARPU : Average Revenue per User

ARPU is one of the key performance indicators used in telecom

industry.

4. MOU : Minutes of Usage

MOU is one of the key performance indicators used in telecom

industry.

5. ARPM : Average Revenue per Minute

ARPU is one of the key performance indicators used in telecom

industry.

6. MNP : Mobile Number Portability

The MNP enables the customers to switch between operators with

minimal switching costs.

7. NTP : National Telecom Policy

The objective of NTP is to bring changes in the current policies and

make the telecom services a public good that is affordable and

available to larger masses.

8. Tele-Density : Number of telephones for every 100 individuals in an area

9. 3G Dongle : A portable USB device that connects PC to 3G device

Page 36: IDEA Cellular and Telecom Industry Report

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10. Debt-to-Equity Ratio :

Debt-to-Equity Ratio is one of the key financial performance indicators.

11. Current Ratio :

Current Ratio is one of the key financial performance indicators.

12. ROCE : Return on Capital Employed

ROCE is one of the key financial performance indicators.

13. EPS : Earnings per share

EPS is one of the key financial performance indicators.

14. PBITM : Profit before Interest and Tax Margin

PBITM is one of the key financial performance indicators.

15. Churn Rate : Measure of number of individuals leaving a service

Churn Rate is one of the key performance indicators.

Page 37: IDEA Cellular and Telecom Industry Report

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Exhibits

Exhibit-1: License Fees and Spectrum Charges

(Indian Mobile-Sector, 2011)

Page 38: IDEA Cellular and Telecom Industry Report

Page | 30

Exhibit-2: MNP-Status

(TRAI-Subscription Data, 2012)

Page 39: IDEA Cellular and Telecom Industry Report

Page | 31

Exhibit-3: Cancelled Licences

(Cancelled-122, 2012, Feb 2)

Page 40: IDEA Cellular and Telecom Industry Report

Page | 32

Exhibit-4: Foreign Expansion

(International-ride, 2011)

Page 41: IDEA Cellular and Telecom Industry Report

Page | 33

Exhibit-5: Circle-wise Subscriber Addition Mix

(COAI-Data, 2012)

Page 42: IDEA Cellular and Telecom Industry Report

Page | 34

Exhibit-6: Classification & Expected growth from VAS

(Data-services, 2011)

Page 43: IDEA Cellular and Telecom Industry Report

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Exhibit-7: IDEA’s Growth

(IDEA-Cellular, 2012)

Exhibit-8: IDEA Organisational Structure

(IDEA Cellular-Organisational Chart, 2012)

Page 44: IDEA Cellular and Telecom Industry Report

Page | 36

Exhibit-9: IDEA Market Share

(TRAI-Subscription-Data, 2012)

Exhibit-10: Debt Equity Ratios

Company Year Debt-Equity Raito

IDEA Cellular Limited March 2011 0.72

Airtel March 2011 0.21

Vodafone March 2011 0.84

Tata Teleservices March 2011 2.13

Reliance Communications March 2011 0.57

Industry March 2011 0.5

(Capitaline-Telecom, 2012)

Exhibit-11: Profit comparison – IDEA vs. Telecom Industry

Year IDEA Cellular Limited(Crores) Telecom Industry (Crores)

2009 Loss of 405 Profit of 40149

2010 Loss of 396.37 Profit of 43985

(Capitaline-Telecom, 2012)

10

10.5

11

11.5

12

12.5

13

13.5

FY09 FY10 FY11

IDEA

Mar

ket

Shar

e

Page 45: IDEA Cellular and Telecom Industry Report

Page | 37

Exhibit-12: SWOT Analysis of IDEA

Page 46: IDEA Cellular and Telecom Industry Report

Page | 38

Exhibit-13: Airtel Growth

(Airtel-Investor Presentation, 2011)

Exhibit-14: Trends in Current Ratios – IDEA vs. Airtel

(Capitaline-Telecom, 2012)

0

0.2

0.4

0.6

0.8

1

1.2

2006 2007 2008 2009 2010 2011 2012

Current Ratios

Airtel

Idea

Industry Average, 2011: 0.88

Page 47: IDEA Cellular and Telecom Industry Report

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Exhibit-15: Trends in Debt-to-Equity (D/E) ratio – IDEA vs. Airtel

(Capitaline-Telecom, 2012)

Exhibit-16: Trends in ROCE ratio – IDEA vs. Airtel

(Capitaline-Telecom, 2012)

0

0.5

1

1.5

2

2.5

2006 2007 2008 2009 2010 2011 2012

Debt - to- Equity Ratio

Airtel

Idea

0

5

10

15

20

25

30

35

2006 2007 2008 2009 2010 2011 2012

ROCE

Airtel

Idea

Industry Average, 2011: 0.35

Industry Average, 2011: 10

Page 48: IDEA Cellular and Telecom Industry Report

Page | 40

Exhibit-17: Trends in EPS ratio – IDEA vs. Airtel

(Capitaline-Telecom, 2012)

Exhibit-18: Trends in PBITM ratio – IDEA vs. Airtel

(Capitaline-Telecom, 2012)

0

5

10

15

20

25

30

35

40

45

2006 2007 2008 2009 2010 2011 2012

Earnings Per Share

Airtel

Idea

0

5

10

15

20

25

30

35

2006 2007 2008 2009 2010 2011 2012

PBITM Ratios

Airtel

Idea

Industry Average, 2011: 19.3

Page 49: IDEA Cellular and Telecom Industry Report

Page | 41

Exhibit-19: Trends in ARPU – IDEA vs. Airtel

(Telecom-Sector Report, 2011)

Exhibit-20: Trends in AMoU – IDEA vs. Airtel

(Telecom-Sector Report, 2011)

0

50

100

150

200

250

300

350

2007 2008 2009 2010 2011 2012

ARPU

Airtel

Idea

Industry

0

100

200

300

400

500

600

2008 2009 2010 2011 2012

AMoU

Airtel

Idea

Industry

Page 50: IDEA Cellular and Telecom Industry Report

Page | 42

Exhibit-21: Trends in Customer Base Growth – IDEA vs. Airtel

(Telecom-Sector Report, 2011)

Exhibit-22: Trends in Churn rate – IDEA vs. Airtel

(Telecom-Sector Report, 2011)

0

20

40

60

80

100

120

140

160

180

2004 2005 2006 2007 2008 2009 2010 2011 2012

Customer Base

Airtel

Idea

0

1

2

3

4

5

6

7

8

9

2008 2009 2010 2011

Churn Rate

Airtel

Idea

Page 51: IDEA Cellular and Telecom Industry Report

Page | 43

Exhibit-23: Trends in Active Mobile Users – IDEA vs. Airtel

(Telecom-Sector Report, 2011)

Exhibit-24: Customer satisfaction parameters and benchmark levels

(TRAI-Customer Satisfaction Survey, 2010)

90

90.5

91

91.5

92

92.5

93

93.5

2009 2010 2011 2012 2013

Active Mobile Users

Airtel

Idea

Page 52: IDEA Cellular and Telecom Industry Report

Page | 44

Exhibit-25: Customer Satisfaction levels among existing players

(TRAI-Customer Satisfaction Survey, 2010)

84

86

88

90

92

94

96

98 Customer Satisfaction Level

Satisfaction level

Page 53: IDEA Cellular and Telecom Industry Report

Page | 45

List of Figures

Figure-1: Growth of Telecom-Subscribers

Figure-2: Distribution of Wireless Subscribers

Figure-3: Distribution of Prepaid & Post-paid

Figure-4: Circle -Wise Distribution

Figure-5: Technology-wise Distribution

Figure-6: Market-share

Figure-7: Broadband-Market-share

Figure-8: Industry Verticals

Figure-9: ARPU-trends

Figure-10: % Net additions during January 2012

Figure-11: MoU-Trends

Figure-12: ARPM & Subscriber Trends

Figure-13: Overall Tele-density

Figure-14: Subscriber Additions in January

Figure-15: Comparison of ARPU-Q1 & Q2-2011

Figure-16: Trend in key operating metrics

Figure-17: 3G-Rollout

Figure-18: 3G-dongles growth

Figure-19: Advertisements of various bundling offers

Figure-20: Telecom-Sector Advertising

Figure-21: Summary of the Comparison between IDEA and Airtel

Page 54: IDEA Cellular and Telecom Industry Report

Page | 46

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