Idea Bets on Rural Phone Calls as Bharti Looks Overseas

Idea Cellular Ltd. (IDEA), India’s second- largest mobile-phone company by value, is targeting rural users to sustain a 25 percent growth in revenue as larger rival Bharti Airtel Ltd. (BHARTI) invests in Africa to shore up sales.

Most of the expansion at Idea, India’s fastest growing wireless-phone company last year, will come from adding subscribers in villages and small towns and increased data usage by customers upgrading to smartphones, according to Managing Director Himanshu Kapania.

Billionaire Kumar Mangalam Birla-backed Idea’s strategy to focus on the world’s second-largest mobile-phone market contrasts with that of Bharti, which has been expanding operations in 20 countries across South Asia and Africa as profitability declines at home. With just 40 percent of the nation’s more than 800 million rural residents using mobile phones, Kapania sees ample room for domestic subscriber growth.

“With a population of 1.2 billion, this is one industry which is driven not so much by purchasing power as it is by human population,” Kapania, 51, said in the company’s head office in Mumbai. “In the next three to four years as the voice business continues to reach its peak, that’s the time the data business will be in the real state of take off.”

Idea has been adding 20 million to 25 million new customers annually and expects the pace to extend for at least two years, he said. Sales at the company climbed 26 percent to 195 billion rupees ($3.5 billion) in the year ended March 31.

Operators Fight

Idea rose 1.8 percent to 75.35 rupees at the 3:30 p.m. close of trading in Mumbai. The shares have declined 8.4 percent this year, while Bharti has dropped 24 percent and Reliance Communications Ltd. (RCOM) has lost 20 percent even as the benchmark Sensitive Index has risen 14 percent in the period.

Share prices of Indian mobile phone companies have fallen after the nation’s Supreme Court in February canceled 122 network operating licenses in connection with a graft probe into the manner the permits were given in 2008.

Profits at the companies have dropped as operators fight for customers who pay as little as 100 rupees a month. Idea, which also counts Malaysia’s Axiata Group Bhd. (AXIATA) as an investor, competes for subscribers with billionaire Sunil Mittal’s Bharti, Vodafone Group Plc (VOD)’s local unit and Anil Ambani’s Reliance Communications.

Idea missed analysts’ profit estimates for a third time in four quarters in the three months ended June 30, while net income at Bharti plunged 37 percent to 7.62 billion rupees in the period.

Low-End Customers

Bharti had 60 percent more users at home than Idea, which had 117 million subscribers at the end of June, while Vodafone India had 154 million customers, according to data from the regulator. More than 60 percent of Idea’s subscribers were in rural areas, Kapania said.

Bharti in 2010 paid $9 billion to acquire the African assets of Kuwait’s Zain. Earlier that year the company spent $300 million to buy control of Bangladesh’s fourth-largest wireless operator. Africa accounted for 22 percent of Bharti’s revenue in the year ended March 31. Raza Khan, a spokesman for Bharti, didn’t immediately respond to e-mailed questions.

“Idea never had the size to think about foraying into new geographies,” said Abhishek Anand, an analyst at Centrum Broking Pvt. in Mumbai. “For you to do that, you have to ensure that you are mature in the present market. Which is not the case for Idea.”

The company, endorsed by Bollywood actor Abhishek Bachchan in television advertisements, will have to fight for users with its larger rivals in villages as well, Kapania said.

“We are competing aggressively in the market place,” Kapania said. “Vodafone is as intensely fighting for the low- end customers and the rural customers as we and Bharti are.”

‘Serious Investments’

India may add 176 million phone users, more than double the population of Germany, by 2015 to the 696 million active subscriber base as of June, according to a forecast by researcher Gartner Inc. last year.

Growth in India’s subscriber base, as more rural Indians buy their first feature phones and use voice services, will drive Idea’s growth for at least the next two years, Kapania said. These customers may have lower average revenue per user, which will be offset by increased data use by smartphone owners in urban India, accessing the company’s faster third-generation network, he said.

The company in the past 18 months began offering 3G services to more than 3,000 towns and 10,000 villages, Kapania said. “We are making serious investments on back haul, to be ready for tomorrow’s huge amount of data growth.”

Data Volumes

Idea won licenses to provide 3G services in 11 of the country’s 22 service zones in a 2010 auction, agreeing to pay 57.7 billion rupees for the rights. The company gave up its aim of securing national licenses as bids surged to three times initial estimates and dropped out of bidding for fourth- generation wireless services.

The company, established in 1995, sees capital expenditure decline to 35 billion rupees in the 12 months ending March 31, from 40 billion rupees the previous year.

Idea had 3.1 million 3G subscribers at the end of June, and data contributed 4.8 percent of revenue, Kapania said. “We’re hopeful this will dramatically improve over the years. We believe data is going to be the next growth story.”

Data volumes are growing at a rate of 10 percent month-on- month, he said. Fourth-generation high speed services can only take off in India once 3G gains scale, Kapania said. The company isn’t planning to start fourth-generation services anytime soon, he said.

Net Debt

“It is premature to launch 4G in our country,” he said. “Let Japan make it a big success, let the U.S. make it a big success. Let it get introduced in China.”

Bharti bought 49 percent of Qualcomm Inc. (QCOM)’s 4G wireless venture, which owns licenses to operate in four telecom zones including the nation’s two largest cities. Bharti, based in New Delhi, also participated in the 4G auction in 2010, agreeing to pay 33.1 billion rupees for permits in the states of Maharashtra, Karnataka, Punjab and Kolkata.

Bharti had net debt of 683 billion rupees at the end of June, compared with Idea’s 115 billion rupees in the same period, according to a quarterly report.

“Peak capex spending is behind us,” Kapania said, adding that the company will now focus on “making its balance sheet stronger” by pursuing subscriber additions and average revenue per user growth, rather than taking on more debt to make acquisitions or cutting rates to win market share.

Airwaves Auction

Idea is still evaluating whether it will bid for airwaves in seven telecom zones that were canceled by India’s Supreme Court this year amid the corruption probe. India’s auditor said in 2010 that the sale of the wireless permits two years earlier may have cost the exchequer as much as $31 billion as they were sold at “unbelievably low prices.”

India’s cabinet decided on Aug. 4 that operators will have to pay a minimum of 140 billion rupees to buy wireless spectrum at an auction of the canceled licenses.

At that price, “there is no business case” for Idea to bid, Kapania said. Idea has 6.5 million to 7 million subscribers in areas with the canceled licenses.

To contact the reporter on this story: Ketaki Gokhale in Mumbai at kgokhale@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.