idea cellular q3fy13 earnings conference callidea cellular ltd. january 30, 2013 page 2 of 26 ......

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IDEA Cellular Q3FY13 Earnings Conference Call

January 30, 2013

Idea Cellular Ltd. January 30, 2013

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Moderator: Good afternoon ladies and gentlemen, this is Marina, the moderator for your conference call.

Welcome to the Idea Cellular Conference. For the duration of this presentation, all participant

lines will be in the listen only mode. After the presentation, a question and answer session

will be conducted.

We have with us today Mr. Himanshu Kapania, Managing Director of Idea Cellular, and Mr.

Akshaya Moondra, Chief Financial Officer of Idea Cellular along with other key members of

the senior management team.

I want to thank the management team on behalf of all the participants for taking valuable

time to be with us. Given that the senior management team is on this conference call,

participants are requested to focus on the key strategic and important questions to make

sure that we make good use of the senior management’s time.

I must remind you that the discussion on today’s conference call may include certain forward-

looking statements and must be viewed therefore in conjunction with the risks that the

company faces. With this I hand the conference over to Mr. Himanshu Kapania, thank you and

over to you sir.

Himanshu Kapania Thank you Marina. On behalf of Idea, I welcome all participants to this earnings call.

Yesterday our Board of Directors adopted the un-audited results for third Quarter of the

financial year 2012-13. The Press Release, Quarterly Report and Results have been uploaded

on our website and I assume you had the chance to go through the same.

Idea is happy to report that in the recent November 2012 1800 MHz spectrum auction, the

company won back spectrum in all its 7 circles for which licenses had been quashed by the

Supreme Court and retained its Pan India status. We are among the only four operators with

Pan India presence. The bid price for the spectrum was Rs. 20,313 million and the allocated

spectrum is the liberalized spectrum contracted for a period of 20 years ensuring continuity of

services for more than 8 million Idea customers in these service areas. The significant

outcome of this recently concluded auction is that the contours of competitive landscape are

becoming clearer with Etisalat, STel, and Loop deciding to exit Indian telecom market and

Telenor, Videocon and Tata Teleservices deciding to shrink their circles of operations. The

number of operators in the market in 2013 has fallen from 16 to 6 in most markets and 8 in

remaining markets. This augurs well for long term health of the sector. Further with the

demand of 1800 MHz spectrum in the auction being far lower than supply, we remain hopeful

that the government may review, in the long term, the reserve price for the future auctions.


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In this auction, the government managed to sell only 127.5 MHz of spectrum against an offer

of 305 MHz with 4 service areas of Delhi, Mumbai, Karnataka and Rajasthan attracting no bid.

In a recent surprise decision, DoT sent us a demand of Rs. 2,114 crores for one time spectrum

fees. As per the notice, the demand is in two parts – retrospect demand of Rs. 369 crores for

spectrum held above 6.2 MHz from 01st July 2008 till 31st December 2012 and the prospective

demand of Rs. 1,745 crores till the expiry of the individual licenses for spectrum held beyond

4.4 MHz.

The company maintains that all (additional) spectrum allocation by the government has been

as per prevailing policy at the time of allocation and one time fees has no basis under the

license. The license condition clearly stipulates that the chargeable basis for additional

spectrum is by the way of escalating percentage of revenue charge as spectrum usage

charges. Until 31st December, 2012, Idea Cellular has already paid over Rs. 4,048 crores only

as spectrum usage charges from the time of the introduction of onetime charges. Accordingly,

the company has filed a writ petition with the divisional branch of Bombay High Court under

Article 226 of the Constitution challenging the government’s decision of 26th December on

one time spectrum fees and specific demand note on Idea Cellular. Our petition has been

admitted by the Bombay High Court divisional bench, notice has been served on the

government to respond by 20th February 2013 and the Honorable court has directed ‘no

coercive’ action to be taken by the licensor on Idea till 1st March 2013. We will keep you

updated on the progress of the case.

Separately, in another development during the quarter, Department of Telecommunication

issued demand notice in respect of special audit conducted by DoT appointed auditors on

various telecom companies for the year ending March 31st 2007 and 2008. The DoT has

alleged on Idea shortfall in revenue share of Rs. 135 crores and interest thereupon as

applicable. Idea has contested the same before the honorable High Court of Kerala and

presently the above demand has been stayed. We will keep you updated on the progress of

the same as well.

Besides above developments and related legal actions by the company, we continue to

pursue early transfer of Spice operating licenses of Punjab and Karnataka to Idea subsequent

to the honorable Delhi High Court Divisional Bench reaffirming amalgamation of erstwhile

Spice Communication Limited with Idea Cellular Limited. Linked to the Spice license transfer,

is a pending authorization for commercial use of 3G spectrum in Punjab service area, where

Idea has paid Rs. 322 crores in 2010 as a part of 3G auction bid winning price. We are very

hopeful for an early resolution of the same.


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As all these matters are in the courts and sub-judice, as a matter of abundant caution, Idea

Management team will not be able to take any further questions beyond the disclosure given

at this stage.

Moving on to business, the performance of the company on five critical parameters for

October to December 2012 quarter is as follows:

Point #1 Gross Revenue – In spite of regulatory interventions impacting subscriber acquisition

and value added services business model, Idea is pleased to report a sequential quarterly

revenue growth of 5%. The standalone revenue of Rs. 56,135 million has improved by Rs.

2,654 million when compared with the previous quarter. The growth of revenue is primarily

led by expansion of voice minutes, in the seasonal quarter with the rural customers returning

and improving their usage from Diwali onwards. Contrary to expectation, the average realized

rate per minute fell this quarter to 41.1 paisa per minute against 41.3 paisa per minute in

Quarter2 FY13. While the voice ARPM has been flat over the last two quarters, the drop in

realized rate is on account of fall in the non-voice revenue contribution from 15.6% in

quarter2 FY13 to 14.6% this quarter. The non-data VAS component has been driven down by

1.3% from 10.1% to 8.9% this quarter, post implementation of new TRAI VAS regulation

effective 1st September 2012.

Point #2 - Cash profit and EBITDA – The standalone EBITDA at Rs. 13,173 million has grown

by 9.9% when compared with performance in quarter3 FY12. The increased network

operating cost led by impact of higher diesel prices for the full quarter and larger outlay for

the advertising and business promotion expenses has resulted in EBITDA margin to be slightly

lower at 26.4% for Idea consolidated business against quarter2 FY13 of 26.8%. Further to

meet the new stiff subscriber acquisition guidelines, the cost of acquiring a customer has also

significantly increased, offsetting the benefit of lower gross additions during the quarter and

the positives fall of subscriber churn rate to 6.9% against 10.1% in quarter2 FY13. Idea

continued building long term value by ensuring steady investments in the network. During the

quarter, company launched 2,961 new sites including 1,883 new GSM sites and 1,078 3G sites

taking our overall network site count to 1,03,207 (combined 2G and 3G sites). This quarter,

Idea has generated cash profit of Rs. 11,085 million, an improvement of Rs. 1,633 million, i.e.

17.3%, over the same quarter last year when cash profit was just only Rs. 9,452 million.

Due to November 2012 auction commitment; the net debt of the company has increased to

Rs. 1,16,822 million including deferred payment for spectrum offered by the Government of

India. Thus net debt to EBITDA now stands at 2.22, we believe by far the lowest when


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compared with most Indian Telecom operators, providing the company enough headroom to

support future strategic intents and meet any other regulatory and legally tenable demands.

Point #3- Active subscribers – Despite complying with stiffer verification norms, the company

clocked 2.9 million VLR subscriber additions in quarter3 FY13 against 0.6 million VLR additions

in quarter2 FY13. The VLR additions for the industry during the first 8 months in the year

2012, from April to November, as per TRAI release, has been sharply depressed at only 24.2

million, an average monthly industry addition rate of 3 million against last year same period

of April to November 2011, industry VLR adds of 64.4 million, an average monthly industry

VLR addition of 8.05 million. We believe the new subscriber acquisition and verification

guidelines and the lower trade pay outs have resulted in significant drop in multiple SIM users

in the market.

When we study the latest TRAI release of November 2012, India has only 709 million VLR

users with a general expectation of 15% to 20% customers owning dual SIM devices. Hence

the actual number of mobile users is likely to be in the range of 575 to 600 million. The

company is confident and maintains an incremental 200 to 250 million first time users will

enter the mobile category in the next two and a half to three years. Idea Cellular is well

poised to attract a reasonably large share. Our first eight months incremental VLR market

share for the period April to November was 27.2% far ahead of our overall VLR EoP market

share of 15.8%. This gives us confidence to improve our overall VLR market share and

consequently our RMS beyond 14.3%, as Indian mobile Telecom industry attracts the next

round of rural and small town customers.

Another significant development during this quarter is the dramatic fall in the subscriber

churn to 6.9%. The fall in churn is primarily led by drop in overall gross additions. In the past,

high churn was primarily observed by customers replacing their recharge voucher purchase

with an attractive new SIM purchase. As the industry corrects it folly and verification norms

for new SIM acquisition become stricter, we are observing the percentage of stable base

represented by more than 90 days of usage subscribers with the company steadily increasing.

This augurs well for the future with the expectation of lower subscriber churn increasing MOU

per subscriber and fall in multi SIM users. The ARPU of the 114 million reported customer

base increased this quarter to Rs. 158, an improvement of Rs. 10 over the previous quarter.

Similarly the MoU per subscriber increased to 384 minutes against 359 minutes in the

previous quarter. This improvement was due to return of season and increasing percentage of

90 day plus subscriber on the overall base, the consumer who delivers higher usage and

ARPU.


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Point #4 - Minutes of usage – The quarterly revenue growth is primarily led by expansion of

voice minutes at the rate of 5.2% to 132.2 billion compared to 125.6 billion minutes in

quarter2 FY13. Over the last one year, the minutes have grown by 16% indicating the

consumer demand for mobile voice telephony remains robust. We remain bullish on intrinsic

consumer unmet demand and therefore Idea continues a steady growth of network coverage

expansion, now covering over 4,633 census towns and nearly 300,000 rural villages with

87,662 GSM sites, an expansion of 1,883 GSM sites over the last quarter.

Idea continues the journey to strengthen backhaul with over 71,600 km of fiber cable

transmission. Network investment continues to support the company’s ambition for growth

in local NLD, ILD and wireless broadband need from EDGE and HSPA services. The recently

launched ILD services are slowly improving its market share of bringing international incoming

minutes to the country. During this quarter, the ILD minutes have grown sequentially by

41.2% to 1,294 million minutes against 914 million minutes in the the previous quarter.

Similarly, Idea captive ISP capacity has been expanded by 41.9% during the quarter to 17.6

gigabits per second against 12.4 gigabits per second in quarter2 FY13. The recently launched

Idea ISP services now handle 76% of its captive requirement and company is gearing itself to

tap ISP bandwidth requirement of media, technology and IT companies in the near future.

Point #5 - Mobile Number Portability – The number portability remains an important

parameter for the company to exhibit its growing strength in network, customer service,

brand power, retail aggression and employee resilience. Idea Cellular has maintained

leadership position attracting maximum number of net MNP subscriber for the trailing 15

months except a brief period of 2 months between October to December 2012. As on 23rd

January 2013, Idea MNP net gains of customers is 5.75 million from other existing telecom

operators. The company is delighted to share that nearly one out of every four mobile

customers who choose to exit its existing telecom service providers through an MNP route

prefers Idea Cellular services.

Moving on to 3G business – The Company has had a very healthy growth of 2.836 million data

subscribers during this quarter. The total data users for Idea in quarter3 FY13 stands at 21.75

million an improved penetration of 19.1% on subscriber EoP base of 113.9 million. The

company is observing a trend of upswing of demand for data services from mid sized and

small towns for the EDGE based GSM services. Surprisingly, the rural customers have also

started to adapt to social networking sites, online commerce services and search based

applications etc. The data volume for the quarter was 10.04 billion MegaBytes, a robust

growth of 14.8% against quarter2 FY13 data volume of 8.74 billion MegaBytes. The data

revenue growth on a quarter on quarter basis was 10.8%. Contrary to media reports, data


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realized rate, represented by ARMB, continued to slide. This quarter, the blended EDGE and

3G data ARMB was 30.5 paisa per MB, a decline of 3.8% over the previous quarter. Within the

last two quarters, the data realized rates has fallen by over 7% a bonanza for Indian

consumer and hope for telecom companies for elasticity of demand. The data ARPU for these

21.75 million customers now stand at Rs. 52 an improvement of Rs. 2 over the previous

quarter.

As regard the 3G services, we continue our steady journey. Company launched 1078 new 3G

sites during the quarter taking our overall 3G EoP to 15,545 in Idea’s ten 3G service areas. On

an overall basis, as Idea remains focused on ‘Broadband Dark’ towns, the Idea 3G services are

now available over 4,000 census and non-census towns across 20 service areas including the

3G ICR arrangement. The 3G voice and data subscriber growth has been slower than

company’s expectation and has now reached 4.1 million as of 31st December 2012, a growth

of 2.1 million during the calendar year of 2012. The data ARPU of pure 3G customers stands

at Rs. 97 against the previous quarter data ARPU of Rs. 87 indicating the 3G customer usage is

maturing.

The overall mobile data as a percentage of service revenue has been steadily improving and in

this quarter was 5.7% an improvement of 0.3% to the previous quarter of 5.4%. Recently the

company launched its fifth Idea branded 3G handset, ‘Ivory’, with the launch of the smart

phone, the company offers superior value to its customers introducing latest Android Ice

Cream Sandwich processor handset with a high speed 1 GHz processor, 512 MB RAM and 4

GB of ROM within our defined smart phone price segment of Rs. 5,000 to 7,500. The

combination of high speed processor and increased memory makes the customer experience

rich internet sites and enjoy multiplayer gaming. Based on market feedback, the pace of 3G

smart phone adoption in the country is fast increasing as the percentage of existing

customers are replacing their GSM feature phone for superior multiproduct integrated

feature rich, value for money, mass market price smart phones especially in our key circle

markets. On an overall basis, the 3G smart phone penetration in Idea network in quarter3

FY13 increased to 7% with over 5 of Idea’s key service areas reached 3G phone penetrations

of double digits. The 3G phone penetration has improved by 2.5% among the overall 114

million subscriber base in the last 6 months indicating early signs that 3G business should

improve from FY14 onwards. While the overall mobile data business is growing, the growth of

non voice contribution to service revenue has halted by the fall in non data VAS contribution.

The demand for P2P SMS services has a lot of potential as only 40% of the existing Idea users

avail of messaging benefit. We also remain long term optimistic on growth of non-data VAS


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services offered by hundreds of our partners as the industry learns to live with the new stiff

guidelines of TRAI for value added services sales to the customers.

To summarize, the continuation of Pan India mobile presence, the 5% sequential quarterly

revenue growth brings back cheers to the company, investors, consumers and employees. In

spite of slower subscriber acquisition in the last 6 months, the consumer traction for GSM

voice telephony remains strong; ILD and wireless broadband business are showing promising

growth opportunities while we adjust to new non-data VAS environment. Idea remains

committed to its stated strategy of dig deep into 13 established service areas now yielding

high EBITDA margin of 30.4% while steadily reinvesting the cash profit into new circles and 3G

business. The growing brand power, ever improving customer affinity and satisfaction with

our services, stable cash profit and lower net debt to EBITDA ratio, gives us confidence to

overcome paradoxical regulatory head winds, consolidate our position both in the mobile

voice and wireless broadband markets while remaining committed to maximizing shareholder

returns in the long run.

I now request Akshaya to give more details on the financials.

Akshaya Moondra Thanks very much, Himanshu. A very good afternoon to participants from India and a good

morning or evening as applicable to overseas participants.

Let me first cover the recently concluded 1800 MHz spectrum auction and its accounting

implications. Idea won spectrum in the seven operating service areas for which its licenses

were earlier cancelled. We also acquired 1.25 MHz spectrum in Bihar. The total winning price

for the company was Rs. 20.31 billion. There was a set off of Rs. 6.85 billion for the entry fee

paid by Idea for the nine licenses acquired in 2008. An upfront payment of Rs. 0.15 billion was

made for Bihar service area. We have opted for the deferred payment option for the balance

amount of Rs. 13.31 billion which is included in long term borrowing. The value for the start

up spectrum in seven service areas and additional spectrum for Bihar, net of the entry fee of

Rs. 3.26 billion paid for the 7 licenses in 2008 is presently reflected as capital work in

progress. This will be amortized once the new licenses are issued and amendment in the

existing license is done as applicable.

Moving on to the quarterly performance, the standalone revenue of Rs. 56.13 billion was up

5% compared to last quarter. The total minutes on network expanded to 132.2 billion

minutes, a growth of 5.2%. However, the ARPM during the quarter marginally moved down to

41.1 paise compared to 41.3 paise in last quarter due to decline in non-data VAS revenue. The


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standalone EBITDA margin for the quarter stands at 23.5% marginally down compared to

23.6% in Q2FY13.

Let me now explain the quarter on quarter changes in some of the cost items. In the network

cost, this quarter had the full impact of increased diesel price implemented in September’12

compared to half month impact in the previous quarter. The electricity prices have also gone

up in some states and that has also contributed to the network cost increase. The cost to

acquire a customer has increased due to change in subscriber verification process partly

offsetting the positive impact of lower gross additions during the quarter. Advertising and

business promotion expense which was lower in Q2 has also increased, as planned, during the

quarter. The manpower cost was lower mainly due to lower provision for leave encashment,

which is typical of the last quarter of calendar year.

The Interest & Finance charges were higher compared to last quarter primarily due to a forex

loss of Rs. 133 million against a forex gain of Rs. 180 million in Q2FY13. The net interest cost

itself is lower by Rs. 82 million compared to the last quarter despite the pay out for spectrum

in the beginning of December.

The net profit for the quarter of Rs. 1.91 billion on a standalone basis is low compared to Rs.

3.52 billion in the last quarter mainly on account of dividend income of Rs. 1.54 billion in

Q2FY13. The consolidated net profit stands at Rs. 2.28 billion after accounting for Rs. 375

million as contribution from Indus. The cash profit for the quarter stands at Rs. 11.09 billion

and the company remains free cash flow positive after considering the quarterly capex of Rs.

6.54 billion, which does not include the payment for spectrum.

During the quarter, the rupee has depreciated against the US dollar from Rs. 52.70 to 54.78

resulting in a mark to market loss of Rs. 1.94 billion on long-term foreign currency loans which

has impacted both loan funds and fixed assets.

With the incremental debt arising from spectrum pay out, the the ratio of net debt to

annualize quarterly EBITDA, which had declined consistently for last four quarters has

increased marginally to 2.22 in this quarter.

Our capex guidance for the year stands revised to Rs. 30 billion. With this I will hand over the

call back to Marina and open the floor for questions.

Moderator Thank you very much sir. Ladies and gentlemen we will now begin the question and answer

session. The first question is from Sachin Salgaonkar from Goldman Sachs. Please go ahead.


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Sachin Salgaonkar I have 3 questions. First, is full impact of non-data VAS led by TRAI regulation behind us or

could we see some pressure from those regulations going forward? Second, what led to the

sharp jump in the number of employees in 3Q and how should we look at the employee

numbers and manpower cost going forward? And lastly, Idea showed a strong minutes

growth this quarter, can you help us dissect how much of the growth is organic and how

much could be due to the minute shift coming from smaller telcos who are shutting

operations?

Himanshu Kapania Your first question, is the full impact of non-data VAS fully accounted for this quarter? The

answer is yes. Your second question is, what is the reason for sharp increase in employees,

that is primarily on account of the new subscriber acquisition norm, which requires our

employees to verify the form before the forms are entered into the system and as it a

decentralized system across a number of hubs, across the country, we were forced to employ

so many additional manpower.

As regard third, yes, the minutes growth has been robust and it is very difficult to be able to

give a split between growth on account of return of season or growth on account of small

time operators deciding to reduce their operations. But at this point of time, I would state

that by and large this growth has come from return of our rural customers. As we have said in

the past, Idea has a predominantly higher percentage of rural subscribers and as the

customers go away in quarter2 we see them returning back in quarter3. To add further, you

may notice that our VLR subscribers, while it was a very slow growth in quarter 2 at just about

0.6 million, in this quarter we were able to add 2.9 million VLR, so this is primarily the normal

seasonal growth.

Sachin Salgaonkar Just one follow up question with respect to your employee numbers and manpower cost, is

the hiring largely done or could we see some more hiring going forward and the employee

cost, as Akshaya had mentioned, had not moved up that much this quarter, but because of

this new hiring should we see the employee cost also move up going forward?

Akshaya Moondra One is that as far as this quarter is concerned this has impacted only somewhere between

one and a half to two months in this quarter. In Q4 we will have the full quarter cost impact.

In terms of the number of people required, there is a new process in place which is getting

streamlined. As the people who are coming initially take longer time and gradually get used to

the process, so I do not know whether the number will increase or it may stabilize or it may

also improve from this level. I would say, broadly as we see things today, the number should

stay at wherever it is. Also these are employees where the cost levels are not so high so the

impact in the coming quarters will not be significant.


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Himanshu Kapania These are low skilled employees, so accordingly their costs are going to be very low

proportion on overall manpower cost.

Sachin Salgaonkar So, on a big picture basis, in the longer term while employee cost might increase a bit and the

subscriber acquisition cost goes down, overall it should be positive on your opex right?

Himanshu Kapania Positive in what way, is it in manpower cost or referring something else?

Sachin Salgaonkar I am referring to the overall cost associated with acquiring new subscribers?

Himanshu Kapania Most of the cost is factored in during this quarter, in whatever increase you have seen in the

cost per new gross add. We are expecting it will stabilize, in fact fall, in the coming quarters as

the volume of gross adds should improve when the overall process will stabilize.

Sachin Salgaonkar Got it this is very helpful.

Moderator Thank you. The next question is from Shobhit Khare from Motilal Oswal Securities. Please go

ahead.

Shobhit Khare Two follow up questions on the cost side. One is the network cost inflation, I think we have

seen YoY increase of almost of 250 basis points so just wanted to understand a little more

color, how much of it is because of inflation and how much is because of the cell site

increases? Is 3G ramp up also contributing to this? And on the per subscriber acquisition cost,

if you could give some color on how much it has gone up as I can see your gross adds

probably declined by maybe 30% to 40%. Lastly I wanted to get what is the status on the 3G

ICR?

Himanshu Kapania I will cover the 3G ICR and will request Akshaya to cover your first two questions. On the 3G

ICR status, as you are aware, it is appearing in media reports that notices being sent to all

companies who have entered into 3G ICR arrangement. As per the direction of Delhi High

Court the Department of Telecommunication has been directed, not to take any coercive

action. Idea has also received the show cause notice and we have been given 60 days to

respond against the notice. The Department of Telecommunications, as per the guidance of

the High Court, required to setup a committee to study our responses and we expect the

decision of the Department of Telecommunication will be communicated to us after we

respond to these notices. We will keep you informed. Having said that as this is procedural on

an overall basis, with right to appeal if DoT response to our reply is negative. We still maintain

that when we entered into 3G ICR arrangement, we were completely clear that it is as per the

contract and as per the terms of the auction. We still maintain the same and remain


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optimistic that 3G services based on ICR will continue to be available to the customers in

India.

Akshaya Moondra Shobhit, on your question of network cost, if you are comparing year on year, I do not have a

complete detailed analysis, but I think it is a mixture of all the three points that you

mentioned. The incremental cost of deploying the 3G equipment on an existing site is not

very high and practically almost all new 3G deployments continue to be on existing 2G sites.

Of course there has been an impact of diesel price increase, but what is not very obvious

probably is that different states have also been increasing their electricity prices from time to

time, so electricity price increase is also playing an equally big role there.

On your question of per subscriber acquisition cost, if we exclude the last 2 quarters, the

subscribers’ acquisitions were at a fairly high level and within a narrow range relatively. Now

this is the first time that the subscriber gross adds have come down by such a significant level

because of the new acquisition process. Now this quarter actually the customer acquisition

cost has gone down in absolute terms. However, the customer acquisition cost has an

element of fixed cost which is not dependent on the number of gross adds and there is a semi

variable cost and a variable cost. I think for a given range of subscriber additions this is

representative, but everything will not increase or decrease in the ratio of the gross adds

increase or decrease. Roughly you can take a ballpark figure of 50% is fixed and 50% is

variable in line with the number of gross adds, but that is a very broad thumb rule one can

take.

Shobhit Khare On this network cost, given that there has been significant increase in diesel cost for bulk

customers, does it affect us?

Akshaya Moondra Okay, I think as far as that part is concerned we are also looking for clarity. There is no clarity

as of now as to how that two tier pricing will be implemented, so we will have to see how

things evolve.

Moderator Thank you. The next question is from Sunil Tirumalai from Credit Suisse. Please go ahead.

Sunil Tirumalai Two questions, firstly you gave the drivers behind the various costs from last quarter to this

quarter that was very helpful but if you could also comment on the roaming and access

charges as that cost items has got missed out and has grown faster than the volume growth. I

was wondering what grew that.

Akshaya Moondra On the roaming and access charges, we have done some analysis and one is that Idea has

been relatively a late entrant to the ILD business. The ILD, both on the revenue side and on


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the cost side, is increasing relatively faster compared to the rest of the revenue and the cost.

Since the cost per minute of this segment is higher, so at present the weightage of the higher

cost minutes is increasing. That is why this increase is there.

Sunil Tirumalai Secondly from a broad sector perspective, what is your outlook on tariffs. We come across a

lot of news flow about promotions being reduced in some places, headline increase etc., but

then as management of the company, how is that you are seeing it?

Himanshu Kapania As far as tariff is concerned, management view has been consistent quarter on quarter basis.

One view is on the long run and the second view is on the short run. On the long run, I think it

is very clear to us that there is a cost pressure, there is a pressure on network cost and other

related costs that we have to adjust, but besides the cost pressures there is also a need for us

to do increased investments. It is not only for Idea Cellular, but even for the whole industry.

The need for us to expand our coverage into deep interiors, larger rural investments and

specifically for Idea in the new license areas we have to expand our coverage.

Besides voice expansion, there is also need to be able to increase coverage for a wireless

broadband on the 3G side along with a long term strategy of acquiring more spectrum for

wireless broadband. Now this will require (cash) surplus, most of these investments has to be

funded from the business operations itself and to do that the only source is going to be

through improvement of tariff in the long run. We have to balance improvement in tariffs to

the ability of consumers, to take the incremental costs. At an ARPU level of Rs. 158, the

customer is currently giving us 385 minutes of usage, our expectation is by around 4% to 5%

increase in pricing, the total minutes may drop by 10 to 15 minutes only, so the impact on the

consumer will be very slight, but impact on the business will be extremely good to take a long

term view of increased investments.

As regards, short term, the industry prices are average of the overall price of multiple

operators. We are among the top end, in terms of overall price realisation. There also are

operators operating anyway between 20p to 40p and at times 40-60% discount to our tariffs.

We are seeing early signals of these low priced operators increasing their overall realized

rates and as they adjust either by reducing their overall coverage or by adjusting the prices in

the ICR areas or by overall increasing their tariffs or reducing the promotions, so would other

companies like ours will adjust. That is the way we see how the tariffs would move in the

country.

Sunil Tirumalai Just a quick point on the tariff changes that have happened so far any view on elasticity that

you would have?


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Himanshu Kapania I think first and foremost the current change primarily is happening on account of revised

consumer acquisition norms. Earlier the SIM was available at a deep discount to a recharge

voucher and because earlier SIM was available on instant activation as was a voucher.

However the new acquisition norms requires the SIM card will typically take three to four

days for activation, so the deep discounted promotions that were there in acquisition are

slowly reducing. We do not see it will have much impact on the elasticity.

Moderator Thank you. The next question is from Tien Doe from GIC. Please go ahead.

Tien Doe I have got a couple of questions. First is going back to the question on your SACs and I realize

you talked about the fixed element and the variable element and we should not expect those

SACs to come down in line with the declining gross adds, but I am wondering how stubborn

that fixed element is and whether at some point in the next few quarters will we actually see

that SAC reduce as a percentage of revenue, how much of a margin uplift could we expect if

you manage to reduce that fixed element of the SAC. The second question is just using the

figures that you disclose on your operating profit and your capital employed over the last

couple of quarters, ROCE has declined a little bit is now down at about 6.2%, I am just

wondering whether you think that is bottomed now and whether in subsequent quarters that

will rise or whether that level of return on capital employed will continue for a while?

Akshaya Moondra I think your first question is on the customer acquisition cost. Is my understanding right?

Tien Doe Yeah, at the moment I think your overall SACs and other costs you sum up there like the

servicing expenditure that is running at about 10% of revenues. And that was about the same

as the previous quarter. So, as yet, we have not seen that benefit of the fall in gross adds. I

can understand that, as you say, there is a fixed element as well as a semi-variable and a

variable element. I am just wondering whether that will actually come through at some point

or whether because of the new KYC norms structurally, that is just a higher expense and we

should not expect any decline in that SAC figure.

Akshaya Moondra As we have said that the advertising expense was significantly lower in Q2 because of being a

low season but if you will look at the combined cost from Q1 to Q3 which are fairly

comparable, you would see a roughly 2% decline as a percentage of revenue in that cost and

that is fairly representative of the initiatives which have been taken on the distribution side,

in terms of trying to bring better discipline into the promotions given in the market for

acquisition of customers. So I think it is already having an impact. I would suggest the best

comparison is Q1 and Q3.


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Tien Doe If I am being greedy then, should we expect any further decline in that 10% figure?

Akshaya Moondra Let us say at this point of time advertisement and promotion, our spend in Q1, Q3 and Q4 are

somewhat similar. Q2 because of being a low season our spend was less. So what is there in

Q3, Q4 is likely to be similar. As far as the customer acquisition costs are concerned, as I said

this quarter was a bit of an aberration because the number of gross adds came down from a

long-term trend and that was an impact of the new process implemented. As the number of

gross ads starts increasing again, to some extent that costs in absolute terms will go up but

per gross add it will come down. So that is the direction I can give you. Now, what would be

the increase in the number of gross addition and how will it impact, that is a bit difficult to

predict. I think the thumb rule which I had given was that roughly you can take 50% of what

was there in Q2 or Q1 as variable cost and 50% is fixed cost which will not change even if the

number of gross adds is increasing or decreasing. I hope that helps.

Your second question was on the return on capital employed. Since this quarter we made

investment for spectrum the capital employed goes up so the return on capital employed is

bound to come down. Now, frankly speaking, over the last few quarters or the last couple of

years we have seen an improvement and if we continue to do business as usual it should

improve. The only issue is that these interventions like the one-time spectrum fee, if that

becomes a reality, then that would further add to the capital employed. Operationally, the

performance is improving, the return on capital employed is improving but if there are

additional regulatory costs which are not within our control, it is difficult to predict that.

Moderator Thank you. The next question is from Suresh Mahadevan from UBS. Please go ahead.

Suresh Mahadevan Two or three questions from me. First one is related to the upcoming auctions. I just wanted

to hear your thinking in terms of how Idea will approach the auctions, and more importantly,

how the industry will approach the auction. If it is 900 MHz auction it does get a little bit

tricky in terms of whether you can say ‘no’, is the Government actually forcing you to bid, are

there any legal options, etc.? I just wanted to see whatever you can share on that. The second

is I wanted to follow up on an earlier question on pricing. There has been a fair amount of

reports in the press, some of them misleading around how much Idea and some of the other

leading players have hiked prices, etc. Certainly one thing is clear, in the medium term tariffs

are going up, but for the benefit of everyone in the call, it may be worthwhile to see what

Idea has done so far. What are some of the moves you have done on the tariff front? The

third question is with respect to your new circles. When I look at the EBITDA losses there, it

does not seem to be coming down. Over the last few quarters we have not seen a big amount

of improvement. So just wanted to hear your views on what is happening here?


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Himanshu Kapania Let me address your question one-by-one. As far as upcoming auction is concerned, it is very

difficult to predict how the operators will behave. So the only way I can answer the question

is based on the experience of November 2012. While there is no doubt that in 2010 when the

3G auction took place there was a lot of exuberance and irrationality in the market but

November 2012, as I mentioned in my opening remark, has been very different and I think it

is giving signals of how the future is. Government offered an auction and if you look at the

history of Indian Telecom from 1996 every time any spectrum has been offered it has always

fetched more price than the reserve price. There has been no case ever in the past where the

improvement has not been more than the reserve price. In only November 2012 that against

an offer of 305 MHz of spectrum only 127 MHz of spectrum could be sold. That is trend No. 1.

No. 2, in spite of India being the second largest mobile telecom market, still India did not

attract any international operators to come to India and make specific investment in the

spectrum that was available. Let me remind for the benefit of everybody that this spectrum

which was auctioned, was a liberalized spectrum, it was for 20 years, and there is possibility

of using the spectrum for newer technologies. In spite of all of these factors, there was no bid

received from anybody who was outside the Indian Telecom business and in fact a number of

serious telecom operators around the globe chose to say good bye to India or shrink their

overall investments. These are very important signals and I think this is what is going to be the

guiding factor as far as March is concerned.

There is no doubt; there is some coercive action the government is attempting to do for the

March auctions. It is very difficult to state on this call, what are the alternatives available with

the operators but we continue to appeal and we continue to believe that for the long-term

health of economy of this country and for the long-term growth of Telecom sector, there has

to be certainty of regulatory and certainty of contract. We continue to hold our opinion that

extension of licenses, which is why the government is doing March 2013 or 900MHz auction ,

have been committed in the contract and existing 900MHz licensee whose 20 years license

come up for next 10 years of extension, should get the extension. Our views are a little

emotional and we still believe that what we observed in November 2012 auction hopefully a

similar outcome can be seen in March 2013. Beyond that we have to wait and see what

exactly happens.

If that is fine, then I move to your second question. As regards pricing, let me clarify. There is

no headline tariff change as far as Idea is concerned. Number two, our changes have been

mostly promotional and there is no nationwide change. Most of the changes are circle-

specific and adjustment is based on what we are observing in multiple circles. The basis of the

change is more driven by what change the lowest tariff operator in that market is making. If


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he is making a move of reducing the number of promotions in that market, we are also

adjusting our promotions accordingly. This is exactly the principle on which adjustments are

happening. It is very difficult to be able to give a single figure because there are multiple plans

and each of it is circle-specific depending on what our competitive strength is in individual

circle.

Coming to the question no. 3, as regards the new circles, you are right, I will just repeat what

we have said in earlier quarters. Our EBITDA losses in the new circles have been almost at a

similar level. We have been operating between Rs. 170 to 180 crores in the last three quarters

if you notice an absolute number. I am not taking percentage because percentage is not

important. We have always stated that surplus that we generate in established circles we

have to, in a calibrated manner; invest into these new circles, so that our overall competitive

position can improve. Some of the surplus we invest in these new circles and some of the

surplus we invest in the 3G circles, so that overall competitive position of Idea Cellular

continues to improve. While we remain focused on long-term maximizing returns of the

shareholder we believe that a long-term maximizing return for shareholder will primarily

happen if the overall RMS and VLR share of the company continues to improve. For this we

need to invest into new circles and we have said that before we do not expect the EBITDA

losses to fall in the short run. Obviously, our effort is to control it so that it does not

dramatically increase.

Suresh Mahadevan Given that you are seeing some of the operators pulling out of the circles, plus you are seeing

the lowest price guys reducing promotions, is it fair to see in the medium term let us say over

the next couple of years or so, that pricing could decisively move up, because less

competition would mean better pricing? And also I would assume given the input cost, diesel,

etc. going up, is that a fair assumption to go with is what I am trying to get at?

Himanshu Kapania These are two topics. One is competitive structure issue which we have to make our own

assessments. And second is for overall growth of the Telecom business and need to attract

larger investments. From both these perspectives there is a need for the overall realization

not only on minutes but also on data to go up. I think that is a prime need for the sector. For

the health of the sector, for the need to make larger investments and to attract more

investments into the sector, both by Indian banks as well as foreign direct investments, the

minutes and data realisation should improve.

Moderator Thank you. The next question is from Srinivas Rao from Deutsche Bank. Please go ahead.


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Srinivas Rao My first question is you have emphasized this pan-India presence for Idea as a goal. Even if

assume pan-India is not a very large proportion of your costs, your scale already is fairly large.

So why do you want the pan-India presence? That is my first question. If you can comment on

both factors which is subscriber verification norms and more importantly, fall in non-data

VAS. Would it be fair to say that there is some amount of mis-selling happening in the past?

That is my second question. And third is, do you see the current 3G uptake as being slow

given that the data growth is only 10% quarter-on-quarter, which is probably less for the

current stage of the lifecycle of 3G?

Himanshu Kapania Let me address these questions one-by-one. I think it is no more relevant for having this

discussion on why Idea wants to have pan-India operation. We have chosen this strategy and

now we will remain focused on being present pan-India. Having said that there is no change in

long-term approach, we will continue to dig deep in the established circles and we will have a

calibrated approach in the new circles. We want to have sufficient presence wherever

markets are of a large size and where we believe that we can get reasonable returns we will

continue to invest into those parts of the markets. But the question that why a pan-India

presence now, I think it is too late, that call we have already taken.

Moving on to the second question, fall in non-data VAS, what are the reasons for it. As I had

mentioned in the last quarter there has been a multiple technological changes which have

taken place. Earlier, non-data VAS specifically, the VAS that used to get from hundreds of

content companies and small sized companies, selling was directly done by these companies

to the consumers. With the intervention of TRAI the whole process of provisioning, selling and

customer care, by what we call investment in service delivery platform, has been taken over

by the company. That activity started somewhere in Q1, it got completed by 1st of September

of 2012 and from that period onwards there is a lot of ease for the customer. Now a customer

at click of an SMS or a USSD can start new value-added services or stop value-added services.

Both activation and deactivation which was earlier in the hands of the mobile VAS providers

has now moved into the hands of the consumers. We have to empower the customer with

the content and with the application that he believes that he would like to use. Having said

that, for the long-term growth of data, content partner growth is essential. The content

industries including the small application provider companies need to thrive, it is important

that they continue to make investments and create applications and content which the

consumers can consume.

We are optimistic that while this change has happened just like the change which has taken

place in subscriber acquisition the business will streamline and we have already seen trends

of streamlining, similarly it is going to happen on non-data VAS which is also what we believe


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is more or less streamlined and it is only going to go up. Around the world, Non-data VAS

service plays a very significant role and has a larger percentage. For us in Idea, it has fallen

down to 8.9%, we believe it has bottomed out and hopefully in the following quarters it will

improve.

As regards 3G uptake is concerned, you are absolutely right. I have said it in my opening

remarks that the growth has been slow. Idea Cellular, about one year back had 2.1 million

subscribers and over the one year the 3G customer growth has been only 2 million

subscribers. Obviously in our internal plans we were hoping that the volume would be higher.

Having said that, the current signals, which are emerging from the market, are extremely

positive. The important thing to note as far as 3G customers are concerned is that

penetration of smartphones in an overall network. It was extremely low when we started our

business of 3G. As on 30th of June this year it was around 4.5% and it has moved to 7% on 31st

of December, an improvement of 2.5%. As I stated, there are five circles which are critical

circles for us, which has double-digit smartphone penetration. Even in Europe the

smartphone penetration is anywhere between 30 to 40%. With the smartphone prices going

down and now breaking below 5,000 price barrier and the overall quality of smartphones

going up, we are hoping that the volume of smartphone sale will dramatically improve.

Our sources suggest that in the month of December in India the smartphones sales have

almost been 2.5 to 3 million and this augurs well for the future. We are extremely hopeful in

this calendar year and especially in the next calendar year, the 3G growth will be a far higher

than what we have seen in the past.

Srinivas Rao Just two more small questions. Are you a bulk user of diesel or not seen as a bulk user of

diesel? And can you give any percentage of sites you have fiberized in your network?

Akshaya Moondra On the question of bulk user, nobody has a clear answer today. The government has to come

out with clearer policy. We cannot answer that question as of today.

Himanshu Kapania As regards percentage of sites which are fiberized for most of our 3G sites our focus has been

to get them fiberized and we are reaching almost an end of that and hopefully in the next two

quarters we would have completed that task.

Moderator Thank you. The next question is from the line of Rajiv Sharma from HSBC. Please go ahead.

Rajiv Sharma Just a few questions. First is on the capex guidance, why it has been cut and should we plot a

similar trend for the next fiscal? Second is you mentioned that you are aligning the discounts

in line with the smallest operator in that circle, but now that the acquisition norms are


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stringent, you have a room to do much more. So, are you considering this? Was this a strategy

in the first leg, the second leg would be different and much more accelerated? Third is that do

you see a change in heart of the new marginal operators or do you think that the

improvement in discounting will be linked to the input costs only and it may not flow through

EBITDA? The other question is on the new circles. With the acquisition norms becoming

stringent, what is your strategy going forward because your market share is still lower there?

So will you be still discounting there? Will that increase? If you can help us with some color.

And lastly, now that you have a good mix of NLD/ILD investments, are you catering to some

kind of enterprise segment? And if that is the case, can we have some numbers on that side

as to what is the contribution from that?

Himanshu Kapania Rajiv, you have a mouthful of questions, I am not sure I can answer all of them, let me see

how many I can answer and ask Akshay to address a few of them. As regards your last

question, are we going to address enterprise customers, at this point of time, answer is no.

We will remain focused on the retail side of the market.

As regards new circles, our focus has been to continuously improve our operations in the new

circles. We do not want to be positioned as low priced operator in those markets. We are

slowly increasing our investment in these markets and offer a great experience to the

customers by the quality of our network and the quality of our service. Our processes are

standard across the nation and we believe that we do not need to offer substantially different

promotions than what will be available in the marketplace. There is a general brand pull that

we are seeing in most of the markets and we are seeing our brand track index not only go up

in our established markets but even in the new circles. We are seeing our customer

satisfaction index going up in most markets across the country. Our network has been

strengthening over a period of time and we do not need to discount our services to be able to

sell. We need to make sure that we are able to meet the expectation of the customer in

whichever area we are available. Obviously, our overall coverage offering will be smaller in

these markets than some of the other operators.

Your other question primarily goes on capex guidance and I will ask Akshay to be able to

respond to that.

Akshaya Moondra Rajiv, on the capex, I think the reasons for reduction are primarily two. One is that when we

had started in the beginning of the year the auctions for the new circles were expected to

happen sometime in June and then it got extended to August, finally it got concluded in

November. So our investment in these new circles has actually got deferred by a quarter or

so. So that is one reason. Secondly, we had projected a certain volume growth of minutes this


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year. The actual growth has been marginally lower than that. So to that extent we are also

looking at our investments more carefully. These would be the largest factors which have

resulted in this revision of guidance.

Rajiv Sharma So there was one question on aligning discounts in overall circles where you are also stronger.

You said you are trying to match it with the smallest operator, but now with the stringent

norms in my understanding, I could be wrong, the room is larger. So will the second leg (of

price increase) be more accelerated on that side?

Himanshu Kapania Our view is that the market prices adjust it in individual circles and the circle level teams will

take their appropriate decision. If they see an opportunity to be able to improve the

realizations, they will make every effort to do that. It is very complex and our ability to be

able to give you a nationwide single answer will be extremely difficult. Markets adjust itself to

the flow and let the potential differences decide in itself. Beyond that it will be very difficult

to comment.

Rajiv Sharma Do you see a change in heart of these new operators or they will only go and raise tariffs to

the extent of rising input cost?

Himanshu Kapania I think this is very speculative. It will be unfair for me to be able to speculate on behalf of

other operators.

Moderator Thank you. The next question is from the line of Vinay Jaising from Morgan Stanley. Please go

ahead.

Vinay Jaising I have three questions, actually just sub-questions if I may put it. Firstly, on the traffic growth,

which has been so good, is it possible for you to tell us where the growth was better? Was it

just all over or was it in circles where the incremental players have moved out of operations?

Second, again a very small dip in the passive EBITDA; 1% EBITDA margin decline and a very

small amount of EBITDA reduction, but you do not have this normally in the passive business.

Can you throw some light if this was an extraordinary quarter on the passive business? And

finally just a hypothetical question on diesel. Let us assume the diesel prices hike by 26%.

How much would that be as a percentage of sales for the company?

Himanshu Kapania I will address the Question #1 and ask Akshaya to address the Question #2 and 3. As regards

traffic, as we stated in our press release, stated in the first question that was asked, it has

been a return of season and the traffic has come from across the country, especially from the

rural markets. We do not see any specific circle which has had exponential growth, it is almost

secular across India..


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Akshaya Moondra Vinay, on the question of passive EBITDA, there was some write-back of provisions in the last

quarter. The EBITDA trend which is seen is that last quarter there was a growth of 10% and

this quarter there is a decline of 3%. If we take away that one-off aberration then I think it is

5% growth quarter-on-quarter in last quarter and it is little over 2% growth in this quarter.

That is the more realistic trend. Sometimes when the growth is not so large, quarter-on-

quarter some adjustment here or there may actually show you the trend which is not the real

trend.

As far as diesel price is concerned, I think when the last time price increased we had given

some kind of guidance that Rs. 5 increase in price for us has a very roughly 10 crores per

month of financial impact. I guess that is what you are looking for.

Moderator Thank you. The next question is from the line of Rahul Singh from Standard Chartered. Please

go ahead.

Rahul Singh Yeah, I had just one question on the 3G ARPU. You mentioned some figures, 87 going to 97.

Just want to check, after the recent rationalization in the data tariff, both 3G and 2G, are you

seeing any usage impact or elasticity impact on data?

Himanshu Kapania No. The data usage growth last quarter was 14.8%. It is early time, we do not get to see our

results unless it is a month-on-month basis but there is nothing alarming to show any change

of trends, so the growth are of a very similar nature that we have seen in the last quarter.

Having said that, if you notice overall there has been a fall in the realized rate per MB and the

growth has been faster than the realized rate and obviously, the subscriber who is using 3G

are maturing. The reason why ARPU improvement is happening because the customers who

are coming in on 3G are serious customers and who want to enjoy the benefit of higher

speeds.

Rahul Singh And going forward in the data ARMBs should stabilize after the recent intervention at least?

Himanshu Kapania I do not think so. I think it will take a little more efforts for the industry for the data tariffs to

stabilize.

Moderator Thank you. The next question is from the line of Sanjay Chawla from JM Financial. Please go

ahead.

Sanjay Chawla I have three questions. First is on the issue of VAS. I was just wondering, should one assume

further decline in VAS revenues once the double confirmation kicks in from February because

that has been something which has not yet been implemented by the industry? what are your


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thoughts on that? And also a related question is what are your thoughts on the bulk SMS

business, how significant that is and any tariff increase which has happened recently? How

much of your VAS revenue pressure can be offset by bulk SMS? Second is staying on the non-

voice business, you indicated an ARPU of 97 in the data business. Can you give some rates for

the average usage in MB which you are seeing now in the 3G data business? And also you

gave some percentage smartphone penetration. Is it in the market that you are or among

your customer base? And lastly, the license costs were also incurred by Spice back in 2008 for

four circles. Are you expecting any refund on that count as well?

Himanshu Kapania Let me address your questions in reverse order. As far as Idea Spice is concerned, I had in my

opening remark mentioned on Idea-Spice status and we are waiting for the final outcome on

transfers of licenses. It is currently subjudice and beyond that we do not want to say anything.

As regards your next question on smartphones penetration, it is 4.5% of our total EOP base

which was as on 1st of July and it has gone up to 7% of the Dec’12 EOP base. There is a 2.5%

improvement on the total 114 million customers. As regards our data ARPU, total number of

data subscribers combined for EDGE and HSPA is 21.75 million and their ARPU in this quarter

is Rs. 52 versus last quarter of Rs. 50. As far as 3G is concerned 3G has total users at end of

period 4.1 million against 3.7 million of last quarter and its ARPU has improved from Rs.87 to

Rs. 97. Beyond that we are not giving any other metrics on this.

As regards bulk SMS, I am not sure what specifically you have in mind. If you are saying will

the bulk SMS business in this country will go down on account of IUC on SMS that is now

applicable to all operators, then we also hold a similar opinion. The 10 paisa per SMS which is

the norm with most operators will slow down the bulk SMS business across the country,

which is good for the country on an overall basis.

As regards non-data VAS business, a lot of work has already been carried out and as I

mentioned even in the previous quarter and in this quarter also, a very significant

technological intervention has taken place with the introduction of SDP giving the power to

the consumers. Already for all OBDs, USSDs and SMS which are the means to be able to sell

value-added services double confirmation has been implemented. You are absolutely right

that there is also a further discussion with TRAI on double confirmation of taking from a

customer in writing, either in a form of a fax or in terms of written note, confirming the value-

added services he has taken. Discussions are still on and until the discussion concludes it will

be very difficult to make a statement. However, non-data VAS, just to remind, has two

components. In the 8.9% one component is P2P SMS which is not at all impacted by TRAI

regulation which continues to grow in the country and we maintain that only 40% of Idea


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consumers today send a SMS and a lot of new customers who never in the life have ever sent

a SMS are entering the category. As is true for a number of customers who are entering the

category of data customers for the first time. Now 19% of the total Idea customers entering

the category and accessing internet. Both of these are newer trends and India has been in

dark in both of these technologies and they are slowly expanding. We should not compare

our growth with what is happening in Southeast Asia or in other developed countries but we

have to compare how our education system and social and cultural issues affect us. And SMS

and internet will continue to be growth areas for mobile industry so would voice.

Sanjay Chawla Himanshu, on the VAS issue are you suggesting that there would not be any incremental

impact once this dreaded double confirmation rule kicks in, in February?

Himanshu Kapania I am repeating that the only unfinished task at this point of time where negotiations and

discussions are on with TRAI is regarding taking post double confirmation, a follow-up written

confirmation in form of a fax or an SMS confirming it which is post double confirmation. So

the discussions are on and we can talk it offline separately on this topic.

Sanjay Chawla Just one clarification, you mentioned that with the increase in tariff you could see maximum

10 to 15 minutes decline in MoU per customer. Can you indicate what range of tariff increase

would potentially cause this sort of MoU decline?

Himanshu Kapania I think you mistook what I said. I said at current ARPU of Rs. 158 if there is a 4 to 5% increase

in rate for the same customers, whose expenditure is of Rs. 158 and current usage being 385

minutes may go down by 10 to 15 minutes only. That is the point I was trying to make. I was

not making an assessment of how much the tariff growth will be.

Moderator Ladies and gentlemen, due to time constraints, we will take one last question from Reena

Verma from Merrill Lynch. Please go ahead.

Reena Verma I have just a few questions. One is I just want to stand back from your quarterly result and

look ahead into the next 12 months. Would it be possible, Himanshu, for you to share what

are the cost pressures that you think might have to be tackled over the next 12 months or

should we assume a better linkage between tariffs and margins on a 12-month view? That is

my first question. My second question is on 3G. I may be splitting hair here a bit, but your net

adds have decelerated quarter-on-quarter, your volume and revenue growth has also

decelerated a bit quarter-on-quarter from 20% growth to maybe 15% and your capex on optic

network and OFC POPs have also slowed. Is there something special to 3Q that explains this

or are we just seeing a bigger picture, change in the way you are approaching 3G


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investments? And my final question is on the auctions coming up in March, 2013. In your

earlier comments you alluded to coercive action by the government. However, we have seen

the industry litigate steps like the one-time fee. Between now and March 2013, do you see

room for the industry to explore legal options to prevent 900 MHz auction? That is it from

me.

Himanshu Kapania It is very difficult to be able to predict into the future, but let me attempt to do that. Over the

next 12 months there is no doubt standard inflationary pressure will also affect telecom

companies. The only difference as far as the telecom companies is concerned and especially

Idea’s view is that the voice market in India continues to be robust and there is still a lot of

room for growth. We believe that our networks have the ability to take far higher utilization

and with a far higher utilization there can be a margin improvement. This is Point #1.

Secondly, we completely agree that while there may be inflationary pressure on one

component which is in our network cost and to some degree on administrative and

manpower cost, other cost elements are not so prone to inflation. So linkage of tariff to

margin is very direct. In fact will improve margin at a faster rate than at the rate at which

tariff is increased.

The question that you asked with a lot of subparts was on 3G. First and foremost, our long

term view on 3G remains constant. We still hold opinion that there is a lot of potential of

wireless broadband in the country. We also hold opinion that there are large pockets of dark

broadband areas and these pockets of dark broadband areas in the long run will become

broadband active only through technologies like 3G. Wireless is the way to go in these

markets. We remain focused on mid-sized towns and towns away from the metros, these

remain our focus areas. Specifically, as far as capex is concerned we have not made any

attempt to change our capex expenditure. However, fiber is a long-term investment and it

takes a longer time to execute.

You must be seeing something in the numbers which probably I have missed out which is

there but separately we will assess if there is any slow down on that. But we remain focused

on making sure that all the sites that we make 3G ready over a period of time it has its own

fiber and enough capacity available for data volume growth. You are absolutely right. Our

own internal expectation on subscriber growth for 3G was far higher than what we have seen

over the last one year. Over the last one year 3G subscribers have grown by 2 million from 2.1

million to 4.1 million. The data volume, however, has been growing and if you notice our

ARPU has gone up from Rs. 87 to Rs. 97 for 3G, which only indicates that the customers who

come on 3G services remain on 3G services and have started increasing their usage on 3G

services. However, the total quantum of customers is coming up is not sufficient and that is


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the reason why we continuously look at what is the volume of customers who are buying

smartphones. The fact that the volume of smartphones have actually grown significantly from

Diwali onwards is only giving us a lot of hope into the future. We remain committed on 3G

and we have a lot of hope on 3G which is what we see in the trends around Southeast Asia if

we have to add our neighboring countries, we do not need to go beyond that and we believe

in the long run this investment which is going to yield good results.

The last question is an even tougher question on March 2013 auctions. I had given a lot of

statements to Suresh but as far as Idea’s position is concerned this March 2013 auction, none

of our licenses are coming up for renewal. It is very difficult for me to be able to make a

statement pertaining to any operator which has to take a call. Having said that, our view is

consistent, we believe that we have a contract as far as extension is concerned, after a period

of 20 years get expired, the incremental 10 years should be available on our licenses because

that is as per the existing contract and we are still very hopeful that government will honor its

contract.

Reena Verma And just on the last point, I wanted to just check with you that, does participation in the

auction imply that the extension clause is accepted by both parties? In other words, do you

have to stand back from the auction in order to take a stance on where you are on the

extension clause?

Himanshu Kapania I think we will have to wait to see the final guidelines that come in so it is premature to be

able to respond on that.

Moderator Thank you. Ladies and gentlemen, that was the last question. I now hand the conference back

to Mr. Himanshu Kapania for closing comments.

Himanshu Kapania: Thank you so much. It is a grueling and a grilling session that we had today. Obviously, there is

a lot of interest from the analysts and media and it is always a great learning for us of the

interest that they have, not only on our company but also on the sector, and we hope to be

able to meet up to all our commitments. Thank you so much and have a great year ahead.

Moderator Thank you. On behalf of Idea Cellular that concludes this conference call. Thank you for

joining us and you may now disconnect your lines.

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