IN APRIL, ADITYA BIRLA Group-owned Idea Cellular saw a change of guard when managing director Sanjeev Aga handed the baton to Himanshu Kapania. Kapania is faced with the challenge of delivering profitability at a time when revenue per user and minutes of usage are falling with each passing quarter.

Idea, which adopted a mass market strategy, completed its pan-India network rollout in December 2009.
Though it has invested $1.8 billion (Rs 8,271 crore) in 3G and plans to increase its data revenues substantially, it has not come out with schemes for the iPhone or any other smartphone.

Idea also finds itself in a difficult situation because its acquisition of Spice Telecom is caught in a legal tangle and there are talks of the foreign partner, Malaysia’s Axiata Group, looking to exit.

In an exclusive interview with Fortune India, Kapania explained how Idea has managed to increase its revenue market share amid fierce competition, and its strategy for future growth. Edited excerpts:

What were your priorities when you took over in April?
Most of my 12 years with Idea Cellular were in operations. But the challenges that hit me were quite different from what I expected. You have to do work you’re not familiar with. So the first three months after taking over were a trial by fire. A typical day is spent meeting with analysts or managing the outside world. The industry is in a state of flux. The media, courts, and the politicians are playing a bigger role than managers in shaping this sector. A traditional CEO would be expected to focus on employees, customers, and suppliers but managing the external environment has become a new skill [to have].

How is the Idea of 2011 different from that of 2005?
Between 2005 and 2007, the company’s focus was building infrastructure and being a pan-India operator. Today, everyone is talking about data, but I believe there’s a lot of juice in voice. India has about 350 million people who have still not gone mobile. In the voice sector, this will push the market to at least $35 billion (Rs 1.61 lakh crore). Idea has to reach 100,000 to 150,000 villages to capture new subscribers. But there is also a new market, which will become bigger than voice: wireless broadband. This will be the vehicle for future growth. We have aggressively entered this market. As CEO, my challenge is to build the organisation and make it ready for the next phase of growth.

How do you differentiate Idea Cellular from others in this highly competitive market?
You have to step back and see how we have done it in the last five years. In 2006, when the Aditya Birla Group took charge, Idea was a regional player. Since then, it has turned around and become India’s fastest growing operator. We are a pan-India operator, but we have focussed on markets where we have competitive strength. Out of the 22 circles in which we operate in the voice business, 13 contribute 90% of our revenue and constitute 70% of the market. If we are positioned strongly in these circles, we will be a force to reckon with. In new circles, we will operate in a calibrated manner to get the benefits of nationwide brand presence, expenditure, roaming benefits, or enterprise sales. We have to stop seeing India as a homogenous market.

Does your model indicate that regional players with a focussed approach can survive in this environment? Is it no longer necessary to be a pan-India operator?
We strongly believe that telecom is a circle-led business rather than an aggregation of nationwide circles. The evolution of the market is not yet complete. There will be opportunities for operators like us to grow in the markets where we are in the launch phase. In Mumbai and Bihar, where we launched two years ago, we have been able to make a significant impact on the market share of established players. In revenue market share (RMS) terms, we are No. 1 in Maharashtra, Madhya Pradesh, and Chhattisgarh, and No. 2 in Gujarat. We are seeing the synergistic impact of this on Mumbai too. It is important to be present in all the markets so that we can make the best of consolidation opportunities. It also helps in case a tariff war breaks out. However, it might not be a good strategy for growth.

Is telecom a first-mover game or is there enough space for more than 10 players in a circle?
It isn’t just a question of timing [the entry]. Resource allocation also matters. If an operator concentrates its resources rather than spreading itself thin, it has a better chance to succeed. I am referring not only to network launches but also to brand spending, distribution networks, and customer surveys. The strategy should aim at deep penetration. Customers expect their geographies to be well covered. If you handle too many customers, you can’t satisfy all of them. This is the world’s largest market and has the most competitive operators. To win against the established players, you must have a differentiated strategy.

Does the increase in tariff mean that the era of tariff wars is over?
It is premature to say that tariff wars have ended. The tariff increase will check if the market can have a bit of sanity. There are favourable signals but it remains to be seen whether we are reading these signals right. The negative factor is that there is over-capacity in the industry, with 10 to 12 operators in some of the circles. The positive factors are that even in this highly competitive phase over the last two years, the top three operators, including Idea, have increased their market shares. Cash-strapped operators have gone slow on investment. [But] there is an urgent need, even for large operators, for incremental investment in rural markets, additional infrastructure for 3G, and wireless broadband. After operators spent almost $22 billion on the 3G and broadband wireless spectrum auctions, the industry’s leverage has gone up. Attempts are being made to balance the rise in costs. Having said this, the driving force for the next phase of growth would be in the ability of the remaining 350 million of the population to join the mobility space at the current prices. The operators are focussed on the growth model rather than short-term gains.

Will this force a consolidation in the sector? And when everyone is short of cash, who will buy whom?
We cannot predict the future of telecom M&As. Consolidation has already started in the minds of consumers and operators. We call it virtual consolidation. If the top three operators have increased their RMS in a competitive phase, it shows that consumers prefer brands that they perceive will survive. Mobile number portability (MNP) gave subscribers an opportunity to choose any operator, some of whom had taken a low-price stance. But with Idea emerging as the leader in MNP additions, it shows that consumers are choosing operators who have the network strength, customer care, and brand strength to last. The virtual consolidation for operators happened during 3G auctions. The way forward for operators is to upgrade to 3G. By choosing not to participate in the auctions, some of them have indicated they don’t want to go further.

What stops these operators from participating in future auctions?
No established operator has a nationwide 3G coverage and there is an urgent need for such a presence. New operators will have to compete with existing 3G operators. The pricing will be determined accordingly. Idea has a spectrum in all 22 circles and our need for additional spectrum will be based on capacity constraints. But we need our own 3G spectrum in all our circles.

Did Idea overspend on 3G?
Yes, but a more important question would be: Did we have a choice? In an environment where 2G spectrum availability had been almost cut off and the number of slots for 3G was limited, this was the only solution. If we have decided to stay in the telecom sector and the raw material available is scarce, there is no other way but to bid irrationally.

What will the impact of the high cost of running the business be on social and economic development?
This is for the policy makers to decide. As the cost of running a business rises, the possibility of providing services to the masses falls. The government needs to decide on whether it sees spectrum as a cash cow in the short term or as a vehicle of GDP growth. Wireless broadband is expected to bring about a revolution in education, health, banking, and logistics. If this is the case, 3G has to be affordably priced. 2G took off when call rates dropped and handsets became easily available.

Why have data revenues not gone up despite 3G being introduced?
It is premature to give a verdict on 3G. We are in the investment phase. It took eight to nine years for 2G services to take off. Infrastructure is still being rolled out for 3G and customer needs are being assessed. We are moving from an era of 3G for the digitally savvy consumer to 3G for the mass market. This is going to take time. We have to make customers aware of the role of digital and also the importance of wireless in it. Digital has changed the way of life in developed countries. We have to take that as a benchmark. We have to judge where India will be three years from now vis-à-vis the U.S. or China, who are ahead of us in telecom.

But the 3G spectrum in India is being used for voice services. When will 3G data services be rolled out?
Operators are just one of the players. We are talking about transforming a society and a change in working habits. For the success of 3G, devices have to be available. A few years down the line, there will be a significant number of 3G phone users. People won’t have to be stuck with a PC or a laptop. They can use an affordably priced handheld device instead. The system should be ready for this change. The focus now is on providing a good consumer experience. We are bringing the lessons learnt in other markets to India. The question now is: How long this will take?

In 2003-04, Idea was seen as an innovative operator in terms of tariffs and services. But of late the company seems to be going slow. Why?
During the period you are referring to, there was a lack of clarity on where we were headed as an organisation. By 2006, it had become clear that the Aditya Birla Group was driving Idea. The company was here to stay and telecom became an important portfolio of the group. In 2003, we only had a short-term survival strategy till clarity emerged. We were the last to launch 3G services because we were making a transition as a company. But now look at where we stand. We are the first operator to touch 1,000 towns with 3G services, we are now available in 19 circles, and have 2.5 million 3G subscribers.

But with no iPhone service, and BlackBerry being a soft launch, Idea appears to be following rather than leading the market.
On the iPhone, I keep repeating our strategy. We are the leader in 13 circles and these markets are predominantly semi-urban and rural. The consumer’s ability to pay Rs 35,000 to Rs 40,000 for a device is low. So rather than portraying 3G as elite, we are trying to make it a mass service by offering devices priced between Rs 4,600 and Rs 6,900 rather than entering a category of over Rs 18,400.

How is Idea keeping its revenue per employee up without cutting jobs unlike other operators who have restructured their businesses?
Idea has chosen to be a pure play mobile operator. Our expansion in terms of employees and related costs is linked with demand. We do not see a need to increase the number of employees. We would rather use support from partners to increase efficiency and productivity.

What is driving up the realisation per minute for Idea?
Traditional indicators, such as the number of subscribers or rate per minute and minutes of usage (MoU) per subscriber, have changed. We are now measuring our health in terms of absolute gross revenue, cash profits or Ebitda, active subscribers, absolute MoU growth, and MNP. We have built a low-cost business model. If you look at European or American operators, they generate an Ebitda margin similar to ours but their price points are 10 times that of ours. We have managed to have a cost structure that is one-tenth theirs even after paying for an infrastructure that’s similar to any U.S. operator.
With operations demanding high investments, how do you protect the company from the vagaries of interest rates?
We tied up our loans before the interest rates went up and there is no need to change our portfolio. We always look for opportunities to bring down our interest costs. We have tied up funds up to Rs 10,000 crore. But we would like to carry out expansion mostly from our internal accruals.

How are you planning to do this?
Infrastructure companies need to have cash. Given that banks have stopped lending, this becomes even more important to be ready for future competition. In an environment where the telecom sector is so leveraged, the question is where should we focus? On net profits or on Ebitda and cash profits that will give us the ability to invest in the future?
Our numbers for the last four years position us as the fastest growing company across sectors, not just telecom. This is growth in absolute revenues. On Ebitda, I keep repeating that if this is a game of survival, the discussion will not be on what’s going to happen to the operator ranked 10th or 11th but on the top three or five. We do business on asset utilisation and our cost of operation has to counter the decline in tariffs.

How is Idea balancing new subscribers, those joining through the MNP route, and the deficiency of spectrum on its networks?
While incremental spectrum is the need of the hour, its cost is going to be a driver for us. Within the realities of policy framework, our focus will be to offer consumers best value. Operators have been managing it for several years now and they will be able to do so in the current circumstances too. While we are nowhere near global standards, we have learnt to live in a hostile environment. We have over a million subscribers coming from MNP. This is a testimony to the power of our network and proves that consumers have accepted Idea as a brand. Spectrum and MNP are not linked and MNP is not a game changer. We continue to acquire far more new customers. On an overall basis, we have to manage spectrum through incremental investments on 2G or encourage large numbers of customers to move to 3G. We are working hard to deliver a good experience to our 3G customers.

Is Idea planning to sell its stake?
In the opinion of our shareholders in the last five years, Idea has done exceedingly well and improved our market rankings as well as profitability. There is a huge untapped potential on the wireless broadband side. We are delivering good value for the future and questions [on selling stakes] should be addressed to the shareholders rather than the management. The speculation about talks with African, European, and American operators are baseless.

After the legal tangle around Idea’s Spice buyout, will you still be open to acquire operators?
Idea is present in 22 circles and doing fine. I do not see any reason for us becoming an acquirer. But we will wait and watch the market dynamics.

Why has Idea not shown signs of going global when the Aditya Birla Group is highly globalised?
We have seen large global operators entering the Indian market and have improved our leadership position even in the face of serious MNC competition. This shows that there is no business model in the telecom space that calls for multinational operations. These are pure investment decisions and the current management is concentrating on expanding its voice business as well as make the best of the new revenue opportunities in India.

Is Idea over-emphasising voice and ignoring the role of data in contributing a higher share in the revenue?
We follow the chartist route that non-voice revenue will grow only after the usage pattern of subscribers stabilises. In the long run, non-voice revenue will quadruple and become a significant chunk of the telecom business. Idea is focussed on non-voice revenue, which includes not just data but text too. We are working on product and distribution strategies to improve revenue from both these categories.

What is your wish list for the 2011 National Telecom Policy?
We are waiting for many policy changes. One of them is an M&A policy that not only helps in consolidating the industry but allows spectrum trading and transfers. Another issue, which is less talked about but is extremely important,are changes in the interconnect regime; we want the cost-based mechanism to be the basis of a forward-looking policy. It is important that the health of the industry is retained. Telecom is the most taxed business, paying between 30% and 35% in taxes, excluding indirect taxes. The industry should be given respite from universal service obligations, which have become a huge drain on operators. This will help the industry to recoup and improve balance sheets in the future.

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