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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10th March 2012

IDEA CELLULAR & THE WIRELESS TELECOM SERVICES INDUSTRY

By: Abhilash S F Yaseen Mubarak S.G.Shrinivas Sagili Shan Mohan
\

To Head, Corporate Training and HRD, IDEA Cellular Limited

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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 distributionchannels and a high-quality network-structure. But a major threat stems from the uncertainty on IDEAs presence as a pan-India operator due to the retraction of 9 licenses. When compared to Airtel, it can be seen that Airtels 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 growthdrivers. 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: IDEAs 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 countrys 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).

MoU (2002-2011)
500 450 400 350 300 250 200 150 100 50 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Year Minutes of Usage

MoU

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).

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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.

Customers

Telecom Service Providers

Employees

Government

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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 highspeed broadband and rural penetration, the NTP also focuses on indigenous development of equipment and content. The path-breaking proposal to the replace many-circle manylicenses 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 (Figure18).

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 serviceproviders 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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IDEAs 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 individuals 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 Airtels mission is stated as to meet their customers needs based on their deep understanding of customers 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 6570% of its customer base. Large passive infrastructure Rise in total MoU

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.

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.

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 IDEAs 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: IDEAs 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 IDEAs 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, IDEAs 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).

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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 Dataservices 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 Software IT Handsets Mobile Banking

IFFCO

Microsoft, Google

Aegis, Firstsource, Hinduja TMT, IBM, Mphasis & Teleperform ance

iPhone

State Bank of India

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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.

IDEA Cellular Strategic Tie-ups

Rural Focus
Software IT Handsets

Mobile Banking

Reuters Market Light, Indian Railways

IndiaTimes, Opera, handygo

SPANCO BPO, Aditya Birla Minacs

Huawei

Axis Bank

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.

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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.

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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 worlds most popular Football Club to give it global visibility. These strategies are coherent with Airtels 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 0.7 0.88

Debt-to-Equity Ratio

0.72

0.27

0.35

ROCE

6.2

15.97

10

EPS

3.9

20

N.A.

PBITM/Income

8.35

24.12

19.13

Telecom sector -Performance Indicators [2011 Data]

Average Revenue per User Average Minutes of Usage per user Customer Base 168 194 84

401

468

368

105

152.3

NA

Churn Rate

8.2

5.8

NA

Active Mobile Users Customer Satisfaction Levels

93.18%

91.17%

70%

92%

97.00%

95%

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IDEA vs AIRTEL vs INDUSTRY

Growth Drivers

1. Mergers & Acquisitions 2. Offering Integrated Services - TV, Data Services 1. Outsourcing IT 2. Cooperatives IFFCO & banks 3. Handset Manufacturers 1. Brand Advertising 2. Focus on Global expansion hence tie-ups with global entities

1. Targeted VAS 2. Focus on rural market

3G & Broadband services are major drivers

Strategic Tie-Ups

1. Rural Consulting Firms 2. Banks 3.Outsourcing IT 1. Advertising targeted schemes 2.Focus on Indian market Bollywood, cricket etc

1. Outsourcing IT 2. Rural Cooperatives

Marketing & Promotion

N.A.

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
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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

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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

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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.

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Exhibits
Exhibit-1: License Fees and Spectrum Charges

(Indian Mobile-Sector, 2011)

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Exhibit-2: MNP-Status

(TRAI-Subscription Data, 2012)

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Exhibit-3: Cancelled Licences

(Cancelled-122, 2012, Feb 2)

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Exhibit-4: Foreign Expansion

(International-ride, 2011)

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Exhibit-5: Circle-wise Subscriber Addition Mix

(COAI-Data, 2012)

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Exhibit-6: Classification & Expected growth from VAS

(Data-services, 2011)

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Exhibit-7: IDEAs Growth

(IDEA-Cellular, 2012)

Exhibit-8: IDEA Organisational Structure

(IDEA Cellular-Organisational Chart, 2012)

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Exhibit-9: IDEA Market Share

13.5 13 IDEA Market Share 12.5 12 11.5 11 10.5 10 FY09 FY10 FY11

(TRAI-Subscription-Data, 2012)

Exhibit-10: Debt Equity Ratios

Company IDEA Cellular Limited Airtel Vodafone Tata Teleservices Reliance Communications Industry Year March 2011 March 2011 March 2011 March 2011 March 2011 March 2011 Debt-Equity Raito 0.72 0.21 0.84 2.13 0.57 0.5

(Capitaline-Telecom, 2012)

Exhibit-11: Profit comparison IDEA vs. Telecom Industry

Year 2009 2010 IDEA Cellular Limited(Crores) Loss of 405 Loss of 396.37 Telecom Industry (Crores) Profit of 40149 Profit of 43985

(Capitaline-Telecom, 2012)

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Exhibit-12: SWOT Analysis of IDEA

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Exhibit-13: Airtel Growth

(Airtel-Investor Presentation, 2011)

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

1.2 1 0.8 0.6 0.4 0.2 0 2006

Current Ratios

Airtel Idea

Industry Average, 2011: 0.88

2007 2008 2009 2010 2011 2012

(Capitaline-Telecom, 2012)

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

2.5

Debt - to- Equity Ratio

1.5 Airtel 1 Idea

0.5

Industry Average, 2011: 0.35

2007 2008 2009 2010 2011 2012

0 2006

(Capitaline-Telecom, 2012)

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

35 30 25 20

ROCE

Airtel 15 10 5 0 2006 Idea

Industry Average, 2011: 10

2007 2008 2009 2010 2011 2012

(Capitaline-Telecom, 2012)

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

45 40 35 30 25 20 15 10 5 0 2006 2007 2008 2009

Earnings Per Share

Airtel Idea

2010

2011

2012

(Capitaline-Telecom, 2012)

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

PBITM Ratios
35 30 25 20 15 10 5 0 2006 2007 2008 2009 2010 2011 2012 Airtel Idea

Industry Average, 2011: 19.3

(Capitaline-Telecom, 2012)

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Exhibit-19: Trends in ARPU IDEA vs. Airtel

350 300 250 200 150 100 50 0 2007

ARPU

Airtel Idea Industry

2008

2009

2010

2011

2012

(Telecom-Sector Report, 2011)

Exhibit-20: Trends in AMoU IDEA vs. Airtel

600 500 400

AMoU

Airtel 300 200 100 0 2008 Idea Industry

2009

2010

2011

2012

(Telecom-Sector Report, 2011)

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

180 160 140 120 100 80 60 40 20 0 2004 2005 2006

Customer Base
Airtel Idea

2007

2008

2009

2010

2011

2012

(Telecom-Sector Report, 2011)

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

9 8 7 6 5 4 3 2 1 0 2008

Churn Rate

Airtel Idea

2009

2010

2011

(Telecom-Sector Report, 2011)

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

93.5 93 92.5 92

Active Mobile Users

Airtel 91.5 91 90.5 90 2009 Idea

2010

2011

2012

2013

(Telecom-Sector Report, 2011)

Exhibit-24: Customer satisfaction parameters and benchmark levels

(TRAI-Customer Satisfaction Survey, 2010)

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Exhibit-25: Customer Satisfaction levels among existing players

98 96 94 92 90 88 86 84

Customer Satisfaction Level

Satisfaction level

(TRAI-Customer Satisfaction Survey, 2010)

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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

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