2G Licenses Cancellation - A judgment by the Supreme Court: Idea Cellular’s Strategy options to tackle this
Contents
Introduction 3 Company Overview 3 Mission 3 Issue on hand 3 Competitor Analysis 4 SWOT ANALYSIS 11 Porter's 5 Forces Analysis 14 Business Strategy 17 Final Recommendation: 22

Introduction
Company Overview
IDEA Cellular is a publicly listed company, having listed on BSE & NSE in March 2007. It is the 3rd largest mobile services operator in India with wireless revenue market share at 13.9 % in Q1 FY2012. Idea has join the select global operator’s club servicing over 100 million subscribers, as of September 2011. Idea is a pan-India integrated GSM operator and has its own NLD and ILD operations, and ISP license.
Idea has a network of over 70,000 cell sites covering the entire length and breadth of the country. Idea has over 3,000 Service Centers servicing Idea subscribers across the country, including 450 special Experience Zones for 3G promotion. Idea’s service delivery platform is ISO 9001:2008 certified, making it the only operator in the country to have this standard certification for all 22 service areas and the corporate office. Idea is the winner of ‘The Emerging Company of the Year Award’ at The Economic Times Corporate Excellence Awards 2009. IDEA Cellular also received the prestigious Avaya Global Connect Award for being the ‘Most Customer Responsive Company’ in the Telecom sector in the year 2010. The company has received several other national and international recognitions for its path-breaking innovations in mobile telephony products & services. It won the GSM Association Award for ‘Best Billing and Customer Care Solution’ for 2 consecutive years. It was awarded ‘Mobile Operator of the Year Award – India’ for 2007 and 2008 at the Annual Asian Mobile News Awards. IDEA Cellular is an Aditya Birla Group Company, India’s first truly multinational corporation. The group operates in 33 countries, and is anchored by more than 132,000 employees belonging to 42 nationalities.
Mission
We will delight our customers while meeting their individual communication needs anytime anywhere.
We survive because of our customers.
Issue on hand
The recent Supreme Court judgment in context of the unveiled 2G scam – mandates the cancelling of cancelling 122 licenses for multiple operators across India.
This includes Idea’s 9 licenses and 4 licenses of the erstwhile Spice Communications which stands merged with Idea Cellular. * Operational Impact: Idea Cellular had rolled out telecom services in 7 license areas including Tamil Nadu, Kolkata, West Bengal, Orissa, Assam, NESA and Jammu & Kashmir. * The remaining 2 licenses of Idea Cellular and 4 licenses of the erstwhile Spice Communications are non-operational. * These licenses, as per the then stated Government policy, should have been granted to Idea Cellular much earlier than January, 2008. Hence it is an unfortunate scenario where an incumbent operator like Idea Cellular is got into this turmoil in spite of abiding by all legalities associated with the license procurement.
The question now on hand is: 1. In case the authorities are oblivious to the concerns raised by Idea Cellular Ltd. and there is no option left but to re-bid to sustain operations, should it re-bid at all? 2. Does it make sense to bid for all circles? 3. How would Idea raise funds for these circles?
In order to seek answers to these questions, following are some of the perspectives to be considered to arrive to a strategy that Idea Can undertake.
Competitor Analysis
Airtel
Bharti Airtel Limited is a leading integrated telecommunications company with operations in 20 countries across Asia and Africa. Headquartered in New Delhi, India, the company ranks amongst the top 5 mobile service providers globally in terms of subscribers. In India, the company's product offerings include 2G, 3G and 4G services, fixed line, high speed broadband through DSL, IPTV, DTH, enterprise services including national & international long distance services to carriers. In the rest of the geographies, it offers 2G, 3G mobile services. Bharti Airtel had over 246 million customers across its operations at the end of February 2012.
Vodafone
Vodafone Essar started its operations in India in 1994 and is under the Vodafone Group. The company Vodafone Essar Limited has become one of the leading companies in the telecom sector in India due to its high standard of services that it provides to its customers.

The company Vodafone Essar has its operations in 16 telecom circles of the country, which covers around 86% of the customer mobile base in India. The company offers both postpaid and prepaid GSM cellular mobile coverage all across India.
BSNL
Bharat Sanchar Nigam Limited (abbreviated BSNL) is an Indian state-owned telecommunications company headquartered in New Delhi, India. It is the largest provider of fixed telephony and fourth largest mobile telephony provider in India, and is also a provider of broadband services. However, in recent years the company's revenue and market share plunged into heavy losses due to intense competition in Indian telecommunications sector.
BSNL is India's oldest and largest communication service provider (CSP). It had a customer base of 95 million as of June 2011. It has footprints throughout India except for the metropolitan cities of Mumbai and New Delhi, which are managed by Maha nagar Telephone Nigam (MTNL).
Market Analysis * Total number of GSM Subs as of April 2012 - 670.57 million * Total number of GSM Subs additions in April 2012 - 6.50 million with 0.98% increase from previous month * Maximum GSM Subs addition in the month of April by - Airtel- 2.01 million * Maximum GSM Subs - Airtel - 183.29 Million * Amongst all the circles B group Circles is the fastest growing circle, it has grown at a rate of 0.99% and forms 40.1% of the total additions during April 2012
Group Company wise % market share (Subscribers) as of Apr 2012

Group Company wise % market share (Subscribers) as of March 2012

Subscriber Density As of April 2012

Subscriber Addition As of April 2012

Operator Wise% Growth Over Previous Month

GSM Net Addition Market Share as of April 2012

On Revenue Terms for the top 5 Operators in the country, as per TRAI: * Airtel 28% * Vodafone 21% * Idea 12% * Reliance 9% * Tata Teleservices 8%.

This implies that Idea is a strong company and ranks in the top 3 as far as Overall Market Share in terms of Subscriber Density and Revenue is concerned.
Also, Idea Cellular has shown significant growth and has bettered the top 2 operators (Bharti Airtel and Vodafone) in the last month.
Idea also enjoys a very healthy VLR subscriber base, probably the highest in the industry as compared to any other operator in India which denotes a remarkable quality of subscribers acquired.
(Note: VLR = Visitor Location Register – Technically a subscriber acquired will generate revenue only if he uses the network. Presence of the subscriber indicates his latching on to the network and implies he is a user or a potential user.)
Expectedly where the new entrants may not be able to bid for countrywide licenses, it is expected that some subscribers due to MNP will switch to idea especially in leadership circles like Maharashtra, Gujarat, MP and Kerala.
Similar would be the problem for Idea in Circles where it is taking a operational hit. Let us see a few facts for these specific circles:

Market Share in the 6 circles : (Chennai and TN are combined)

Idea in the impacted circles is contributing to only 5% of the overall market share, which in the current scenario may be a small impact in the worst case scenario.
A glimpse of the ARPU in the impacted areas:
Unlike its leadership circles, Idea is yet to reach a competitively high ARPU in the impacted 7 circles. One of the reasons could be that it would just be breaking even in these circles since all of them are newly launched circles (launched after 2009 onwards). Considering this fact, on relative terms it could be a remarkable achievement for Idea Cellular although, in absolute terms may be a small impact.

| Idea | Circle Highest | Circle Avg | Kolkata | 40.67 | 133.06 | 100 | TN & C | 40.1 | 164.38 | 115.79 | WB | 40.44 | 97.97 | 80.75 | Orissa | 41.63 | 125.1 | 83.1 | Assam | 65.07 | 152 | 125 | NESA | 68.49 | 127.92 | 156.26 |

SWOT ANALYSIS
INTERNAL
Strength * Very strong Customer Service – The only company to have a Service Delivery certification of ISO 9001:8002 * Strong Brand Image supported by a strong brand evangelist who happens to be a top Celebrity * Technology Innovation – Moving with time and realizing the importance of Data in the telco industry * Strategic Alliance with Axiata and interest of Singtel in trying to buy a portion of the stake from Axiata affirming the confidence in the company’s potential * Strong Advertising & Promotional Effectiveness – Idea features in the top 25 brands *

Weakness * PAN India presence achieved relatively late as compared to competitors hence is yet to pick up performance at peak potential in the newly launched circles * No major service level diversification however with 3G rollout, it is expected to widely foray into Data business * Not a big player in Metro cities/Urban Market * DTH services could be another option to be explored with Voice business expected to saturate in the next 4-5 years

EXTERNAL
Opportunities
* Fast expanding cellular market. * Scope for Innovation in Technology – New Line of Business i.e. Data can be explored * VAS (Value Added Services) – Value Added Services is another area which has a lot of revenue potential in the country and is in its initial stages of maturity curve.

Threats * Mobile Number Portability – Ease to the customer to conveniently move out at an extremely low switching cost to join the competition * Cut throat competition with continuous Price wars and hence Service being the only means of long term differentiation * Extremely Price sensitive market * Spectrum Re-Farming – Might be leading to a huge write off of existing assets and desiring a large chunk of investments further * Cancellation of Licenses * Cancelation of National Roaming Charges from subscriber point of view – may bring down the revenues further. Operator may have to bear the cost of using roaming network’s infrastructure, but may not be able to transfer the cost to the subscriber if this rule is passed through. Given this, from Idea’s perspective, if the circle license is not retained, this entire piece of revenue, although not very large may prove to have an impact on the Company’s balance sheet. (since instead of proving to be a revenue for one circle and expense to the other, in case of impacted circles – there would be no revenue realized and all the other circles will continue to show this as an outflow to another operator)

Porter's 5 Forces Analysis
Threat of Rivalry
Today there is a huge competition from between telecom companies to be ahead of each other. There are government companies like BSNL and MTNL , private companies like Relaince, Vodafone, Airtel and Tata. Top threats come from Bharti and Vodafone whereas in the 7 circles – even Reliance could be a potential threat

Threat to New Entrants It comes as no surprise that in the capital-intensive telecom industry the biggest barrier to entry is access to finance. To cover high fixed costs, serious contenders typically require a lot of cash. When capital markets are generous, the threat of competitive entrants escalates. When financing opportunities are less readily available, the pace of entry slows. Meanwhile, ownership of a telecom license can represent a huge barrier to entry. There is also a finite amount of "good" radio spectrum that lends itself to mobile voice and data applications. In addition, it is important to remember that solid operating skills and management experience is fairly scarce, making entry even more difficult.

With License cancellation and the steep license prices, entry for new operators itself has become a challenge. For Eg. Operators like Telenor may not participate in the auctions if the prices quoted are very high.

Power of Suppliers * Idea cellular consumes iron, aluminum, electric wires for tower making. It purchases these raw materials in bulk quantities that every supplier wants to sell their product. Thus the bargaining power of supplier is less. * However, at this point in time Spectrum and License are turning out to be one of the biggest raw materials which are controlled by the ultimate telecom authorities (TRAI and DoT) and the prices commanded by them (indicatively 10-13 times the reserve price in 2008) pose a great challenge to all Telcos including Idea. At this stage it can be well inferred that Power of Suppliers is extremely high. If the costs are significantly high, the price (Tariffs) are expected to go up by 30-100%. * The biggest uncertainty that looms over is that what would be the License and Spectrum prices at? What will be the policy? This is one of the biggest uncertainties for any operator to decide on its way forward specially on the financial aspect. * Circles in concern are having a large rural mass to cover and a difficult terrain, hence Diesel Generator and other operating costs are fairly high in these areas. Specially J&K, Assam and NESA.

Power of Buyers.
With increased choice of telecom products and services, the bargaining power of buyers is rising. Let's face it; telephone and data services do not vary much, regardless of which companies are selling them. For the most part, basic services are treated as a commodity. This translates into customers seeking low prices from companies that offer reliable service. At the same time, buyer power can vary somewhat between market segments. While switching costs are relatively low for residential telecom customers (due to the extremely cheap options for MNP), they can get higher for larger business customers, especially those that rely more on customized products and services.
Customer Service turns out to be the ultimate differentiator for retail customers as price differentiators are easily replicated and do not

Availability of Substitutes.
Products and services from non-traditional telecom industries pose serious substitution threats. Cable TV and satellite operators now compete for buyers. The cable guys, with their own direct lines into homes, offer broadband internet services, and satellite links can substitute for high-speed business networking needs. Railways and energy utility companies are laying miles of high-capacity telecom network alongside their own track and pipeline assets. Just as worrying for telecom operators is the internet: it is becoming a viable vehicle for cut-rate voice calls. Delivered by ISPs - not telecom operators - "internet telephony" could take a big bite out of telecom companies' core voice revenues.
International calling can easily be replicated.

Competitive Rivalry.

* Competition is "cut throat". The wave of industry deregulation together with the receptive capital markets of the late 1990s paved the way for a rush of new entrants. New technology is prompting a raft of substitute services. Nearly everybody already pays for phone services, so all competitors now must lure customers with lower prices and more exciting services. This tends to drive industry profitability down. * In addition to low profits, the telecom industry suffers from high exit barriers, mainly due to its specialized equipment. Networks and billing systems cannot really be used for much else, and their swift obsolescence makes liquidation pretty difficult. * One of the examples of cut throat competition being the slash in 3G data rates by Airtel to the tune of 70%. This was immediately replicated by Idea although knowingly that it is great impact on profit margins considering the huge 3G investments. * The entire ball game is now about dealing in volumes to achieve a respectable profit margin

Business Strategy * Virtual consolidation in the industry is evident from increase in revenue market share of top-three operators from ~55% to ~65% in the last 3-4 years despite hyper-competition. * The share of non-voice services in revenue is set to increase, as most subscribers will upgrade their handsets over the next few years and eco-system for 3G is being developed. * While incremental operating cost for 3G is only a fraction of the current operating costs, amortization and finance costs related to 3G spectrum will negatively impact the bottom line of all operators.
Idea has a strategy of over-investing in its established circles, which drives its leadership in these operations. Idea is focused on deepening its coverage and driving rural growth. 67% of net subscriber additions for Idea come from rural markets.
Focus is on building scale, with 1.2b minutes/day. Idea is the eighth-largest operator globally in terms of traffic. Enhancing revenue market share, driven by (1) focus on quality of subscribers, (2) cash profits to sustain investments, and (3) higher-than-industry traffic growth. Idea is expanding its 3G reach and is rolling-out 3G services in 10 towns/day, as significant growth is expected from wireless broadband on the handsets.
Keeping the above constraints and market scenario in mind we now need to see what could be Idea’s approach to tackle this:
One of the biggest unknown variables at this stage is the outcome of the government’s decision on the 2G License and Spectrum Pricing.
Also, a big threat of the probable cash outflows due to Spectrum Re farming is extremely unclear.
Given the above issues, we will take an analyst’s perspective of the possible requirements of funds in INR for all impacted circles: 1. 1200-1500 Cr 2. 6500-8000 Cr 3. 12000 – 15000 Cr
It is given that this bidding ought to be in the interest of the stakeholders.
Company Financials (Sources B/S, P&L)
B/S Figures: (In Rs Cr) Share Capital: 3308.85 Reserves : 9590.75 Networth : 12934.55 Total Debt: 10138.17 Cr (Comprising of SL=7.7 K + USL=2.34 K) Cr

P&L Figures: Total Income: 19271.29 Total Expenses: 14417.76 Some Key Expense Components: Raw Materials | 0 | Power & Fuel Cost | 1,553.25 | Employee Cost | 848.34 | Other Manufacturing Expenses | 9,564.78 | Selling and Admin Expenses | 2,329.56 | Miscellaneous Expenses | 121.83 |

In order to take appropriate calls for each of the options, it is worthwhile to consider the per circle market share to prioritize the bidding preferences.
Given below are the per circle market share: Note: J&K is also a 3G licensed circle for Idea Data Point Missing for Idea for North East circles: But share expected between 2-3%

Key Ratios: Hence fundamental approach to be followed can be (taking the options as given below), 1. Option 1 : 1200-1500 Cr 2. Option 2: 6500-8000 Cr 3. Option 3: 12000 – 15000 Cr

1. For option 1 (1200 to 1500): It would make sense to go all out and bid for retaining all circle licenses and a continued Pan India Presence. a. Considering that the Companies existing Debt to Equity ratio is 0.79 (std 2:1), it has sufficient margin to raise these funds. Existing Debt = 10138.17 Cr.

2. For option 2 and Option 3: Option 1 looks to be It would make sense to first prioritize the circles as follows considering their market cap and future potential: b. WB and Kol : Being Metros and large potential towns for future revenue streams like VAS and Data need to be bidded for in priority c. Followed by Kol and Chennai. d. In the worst case scenario – NESA and Assam can be let go and J&K operational license if achieved, the 3G spectrum can be utilized for Voice as well given that the sub base is extremely small. 3. It is quite possible that for option 3, 3 circles (Assam, NESA and J&K) might have to be compromised in the interest of the stake holders since arranging for such large funds may not only be a hit on profit margins but the interest components might get the company into negatives.

Although as per Debt to Equity ratio, allows the debt based funds to be raised to the tune of it totalling to 20,000 Cr, given the * cut throat competition and uncertainties looming over the Telecom market due to policies and spectrum refarming possiblilities, * low operating margins (PAT = 576.54 Cr) leading to very little room for Interest payment, * Net Debt should not be allowed to be raised beyond 12000 Cr

Hence the company should look forward to making fund arrangements for around the same i.e. raise additional funds to the tune of 6500 Crores.
Objective should be to retain WB, Kol, TN and CH in the order of priorities as listed above. Rest of the circles would take low priority.
Any additional funds to be arranged beyond 1500 Crores may be sought to using Capital infusion (if permitted) or by allowing Axiata like FDI to raise stake (which at present stands at approx 20%).

Final Recommendation:
Hence is recommended that: 1. Additional Debt: 1500 Crores (Not recommended to raise beyond this through debt) 2. The Promoters and the Strategic Investors should invest more in the firm. They should go in for Right Issue which would arrange for around 3000 to 4000 Cr. 3. Rest 2000 Cr can be arranged through debentures , ADR's, etc.
This might although help keep the Interest liabilities a little lower to ensure sustained growth in PAT as compared to a complete fund being raised through Debt, however the long term liabilities might grow.
It is important to ensure that Company does not spend anything beyond 5000 to max 6500 crores with an objective to retain the circles in the priority listed above.
Specifically for J&K, company can look forward to continue only on 3G if they do not get the 2G license.