Kumar Birla's Minutes Factory
Anand Adhikari September 27, 2011In 2006, Idea Cellular Ltd, the telecom arm of the Kumar Mangalam Birla-led Aditya Birla Group, was precariously poised. Even though it had been around for 16 years, it was still a regional player. High-profile equity partners like AT&T and Tatas had decided to depart. Its reach was limited to five million subscribers in eight circles; it had investments of around Rs 5,000 crore, revenues of Rs 3,000 crore, and practically negligible net worth. What was worse, Idea was rapidly losing market share (it was at the sixth position and falling). In effect, it was in clear danger of being gobbled up the larger players.
Kumar Mangalam and his telecom head, Sanjeev Aga, who was brought on board in November that year to put Idea on the growth track, fired from all cylinders to script a dramatic turnaround over the next five years. Idea is now a pan-India player with presence in all the 22 telecom circles in the country and 95 million subscribers. Its investments stand at Rs 35,000 crore, revenues at Rs 16,000 crore, and its net worth has risen to Rs 12,000 crore.
Today, the telecom venture is once again occupying Birla's mind space, especially after the successful turnaround of Novelis, which the group acquired in 2007. It is the largest in the group in terms of market cap at Rs 32,400 crore followed by Ultra Tech at Rs 30,300 crore and Hindalco at Rs 27,800 crore. In terms of revenue, at Rs 15,389 crore it is next only to Hindalco at Rs 23,859 crore in 2010/11. Its high growth is all set to threaten the supremacy of group's traditional commodity businesses. But the journey ahead is not like a bed of roses. There are newer challenges, the first of which was the retirement of Aga in April this year. Birla has promoted Himanshu Kapania, a group veteran with one and a half decades of experience in telecom, to the top post.
Kapania has to begin from where Aga left.
On the performance parameters, Idea Cellular is better off than many other competitors despite tariff falling to 40 paise a minute. The company boasts highest active subscribers with a 90 per cent success rate compared to the 70 per cent figure for the industry. It is also the biggest gainer of number portability -- subscribers shifting to Idea from other operators with the same number. Already a million have shifted to Idea since the portability took effect some eight months ago. Idea is also the country's third largest GSM operator in terms of revenues and the No. 1 in terms of usage per day with 1.2 billion voice minutes.
Barely five months into the corner room, the 49-year-old new managing director is already speaking the Birla lingo. "The focus is on revenues, usage minutes per day, cash profits and active subscribers," he says. Kapania, who earlier worked at Shriram Honda and DCM Toyota, is on a second stint at Idea - he was the chief operating officer. In between, he worked for three years for Anil Ambani's Reliance Communications as its CEO for Northern India.
Ask Kapania about Birla's working style, he says with a smile, "It is his soft nudge sometimes which is far more pensive and incisive than a hard push style." The reference is to Anil Ambani's aggressive style.
Settling down at Idea's headquarters in a Mumbai's suburban Andheri, Kapania's big challenge is to make a success out of the 3G rollout. Idea holds 3G spectrum in 11 circles that generates over 80 per cent of the company's revenues. He has already created a flutter in the market by slashing the 3G tariffs almost by half in just five months of its launch. "Our focus is on larger participation of 3G," he defends himself. He then quickly refers to the sudden cut as an experiment and cites the extremely low 2G tariff rates as one of the reasons for his move. "Today, 3G tariffs are 8-10 times higher than 2G. Both should converge in future," he says.
But what is painful for the company is the large investment that will be required for rolling out wireless broadband services. "The current journey of 3G is an investment cycle," says Kapania. The company's net debt to EBIDITA, or earnings before interest, taxes, depreciation and amortization, ratio is at 2.4 and debt equity ratio at 0.9. There is a room for bringing in more debt, but the question is how long can Birla keep on funding this capital-guzzling business to remain competitive in this sector? This is pertinent in the backdrop of persistent rumours of stake sales by the various stakeholders. Birla owns 46 per cent in Idea Cellular.
There are also stray rumours of US-based private equity player Providence selling its 10 per cent stake in the company. Malaysia-based TMI, which holds close to 15 per cent by virtue of the merger of Spice with Idea in June 2008, could also look for a possible exit.
Consolidation is actually inevitable in the industry where there are a dozen players in some circles. "We will benefit from consolidation," says Kapania. But the market refuses to believe it and puts an 'M&A' premium on the Idea stock price. It trades at a very high price to earning multiple of 38 as against 18 of Bharti Airtel. Idea could swing anyway in future.