Idea Cellular, India?s fourth-largest mobile operator with more than 121 million subscribers, has ended FY13 on a strong note with revenues of R22,595 crore, net profits of R1,044 crore and ebitda margins of 24%. However, ebitda losses in some of the new circles remain sticky, and managing director Himanshu Kapania believes it?s consolidation time at the telco. Kapania puts to rest speculation that Idea might be acquiring a VAS player, saying it doesn?t make sense. He tells Vaishnavi Bala and Shobhana Subramanian it?s unfortunate the tax department has sent it a notice asking for capital gains tax on its transfer of a licence from its subsidiary, Aditya Birla Telecom Ltd (ABTL), to Idea.
The I-T department has slapped a notice on Idea asking for capital gains tax on what it says is a slump sale of assets?
We believe the tax demand raised on Idea has broken all past precedents and is completely erroneous. There are several elements to the demand but one big-ticket element is the licence fee that we pay to the government as revenue share. The I-T department has disallowed the licence fee as an expense head for calculations of tax. And we are the only company where this expense has not been allowed. They are having their own internal battle as to whether should the licence fee be treated as a depreciation item or as an operating expense item?we have been part of both the fixed and variable regimes. At this point, the total disallowance for a company like ours is R2,400 crore. And in another two years, it will touch R4,500 crore. Nothing can be more transparent than a straight-forward revenue share; last year, we paid R2,800 crore to government as licence fees and spectrum charges. The tax department is disallowing this, it?s simply amazing.
There is also the issue of capital gains tax?
When Idea was a three-promoter company, it applied for a telecom licence for Bihar in a company called ABTL, a fully-owned subsidiary. Later, we wanted to make ABTL a pure tower company and keep all licences in Idea Cellular. So, we went to court in 2009 and re-arranged our assets and brought the telecom licence from ABTL into Idea. So there is no transfer of any cash, just a re-arrangement of assets. If the department?s logic is that the transaction attracts capital gains tax then we should point out that it?s a highly loss-making entity and we could have offset those losses against the profits of Idea. But we treated it a nil-consideration transfer rather than take any benefits, so there are no capital gains. We also have an investment in Indus through ABTL and this has been revalued; the department has taken this valuation and treated it as equivalent to that of the Bihar licence, which is loss-making. This is not a merger-demerger issue or a capital gains issue, it?s just an uncomplicated rearrangement of assets.
So has Idea provided for this amount?
There is a lacunae in the tax system that doesn?t allow a subsidiary to move its assets upwards into a parent, or from a parent into a subsidiary. Unfortunately, cash gets blocked, and though we have not paid a claim yet, we have provided a contingent liability of R3,900 crore in the balance sheet. We can?t do anything about it though we know it will come back; this is simply the short-term desire of the government to get cash.
If not allowed to increase its stake in Idea, do you think Axiata would want to exit since it has just 20%?
From Axiata?s perspective, it has a subscriber base that?s smaller than ours. But we are valued at around $7-7.5 billion and they are at $20 billion. So, clearly, because of pure tariff differentials, their ebitda margins are twice ours. From their perspective, they have the ability to go into Europe, Africa and the US, and there are opportunities in Bangladesh, Sri Lanka, Malaysia, Burma, the Philippines and India. You can?t be out of India, there is no opportunity to get into China. And they are generating huge amount of cash. Another big wave of investment that everybody believes will happen is in the broadband industry, it?s inevitable.
There is some talk that Idea may be interested in a VAS player like OnMobile?
It does not make sense for us to acquire a VAS player like OnMobile. I think the current focus for us is to make sure that operational efficiency is good. We just became a pan-India operator.
Although Idea has had a good year, some circles continue to make ebitda losses?
The Spice circles have turned around but there are challenges, for us and for others. In 2008-09, there were six companies who became pan-India players, including Reliance Communications, the Tatas, Uninor (which became a 14-circle operator) and also MTS. Then you had Vodafone and Idea who also became pan-India operators, so all of us started out together. In 2008, our company had a revenue of R7,000 crore and a revenue market share of roughly 7.5%; last year, we closed with revenues of R22, 000 crore and our revenue market share has doubled. We were a ebitda losing company; last year, we did an ebitda of about R6,000 crore. And we have controlled our debt; we have never allowed the debt to go beyond R10,000-11,000 crore.
Do you see net debt-to-ebitda coming down?
Since spectrum is expensive, we may need to raise our debt levels when we renew our licences in 2016. We will make sure that the ebitda goes up such that the net debt-to-ebitda stays same level of 1.93 times. Most of our debt is foreign debt and costs us about 7.5% so it?s cheaper. Equipment finance always comes cheaper because vendors have their own bankers who loan us money on good terms.
But capex can be unpredictable?
Only when the technology cycle breaks, that?s the time when capex becomes cyclical. However, there is unpredictability on account of policies and spectrum capex is volatile. If spectrum is very expensive then the number of players in the country is going to shrink. So it may be good for shareholders, it?s a one-time pain, but becomes a permanent solution. If spectrum is correctly priced, the competition increases, the spread of investments in the market increases. This is the difference between India and China or the US.
Do you see the process of tariffs bottoming out sustaining?
There is still over-capacity in the system but tariffs are not falling. For the health of the industry, there needs to be some investment. If there is no money, then you will not see a revolution in broadband that you saw in mobile telephony. In the long run, we believe that is necessary.
How do you see broadband tariffs moving?
There needs to be more investment into broadband. There was a point in time when for 5 MHz one needed R16,000 crore per MHz and the government earned about R55,000 crore. And then there was 2,300 MHz where it earned another R20,000 crore. Look at the 2,300 MHz spectrum, there was a lot of noise and hoopla, but three years have passed, and nobody has launched 2,300 MHz. What is this R20,000 crore that the government has collected? There has been no expansion of broadband services, or whatever is called the 4G. Bankers are not keen to give money and investors are not keen either. In March this year, the best spectrum, that is the 900 MHz spectrum, the most profitable, was auctioned, but not a single player came in. Why isn?t AT&T entering the country if there is spectrum available in the metros?