fm assignment 2

8/11/2019 FM Assignment 2

1/19

Analysis of idea Cellular

A. Corporate Governance Analysis(1) Is this a company where there is a separation between management and ownership? If so, how

responsive is management to stockholders?

Corporate Governance refers to set of systems and practiceswhich ensures that business andaffairs of an organization areconducted in a manner that promotes sustainable businessmodeland enhances shareholders value in the long term.Corporate Governance is about commitmentto conductbusiness in a fair and transparent manner . The goodGovernance frameworkencourages the efficient use ofresources and creates a mechanism of checks and balancestoensure that business is conducted in the best interests of thestakeholders and society at

large. We believe that soundCorporate Governance practices can deliversustainable,profitablegrowth and create long term value not only for ourshareholders but also for all our stakeholders .

The Aditya Birla Group is committed to the adoption of bestgovernance practices and itsadherence in the true spirit at alltimes. Our governance practices are a product of self-desire,reflecting the culture of trusteeship that is deeply ingrained inour value system and reflected inour strategic thought process.Our governance philosophy rests on five basic tenets:

Board accountability to the Company and shareholders; Strategic guidance and effective monitoring by the Board; Protection of minority interests and rights; Equitable treatment of all shareholders; and Superior transparency and timely disclosure.

In line with this philosophy, Idea Cellular Limited, an Aditya BirlaGroup Company, continuouslystrives for excellence throughadoption of best governance and disclosure practices. CorporateGovernance has always been intrinsic to the management of thebusiness and affairs of ourCompany. The governance frameworkdemonstrates a high levels of accountability,transparencyand integrity in all its transactions. The Company constantlyendeavors to adoptinnovative approaches for leveragingresources and fostering its growth. Idea Cellular therefore


2/19

is a Company which is committedin meeting aspirations of the all the stakeholders bybenchmarkingits corporate governance practices with global standards.

(1) How does this firm interact with financial markets? How do markets get information on thefirm?

The Company discloses quarterly financial results, presentation made to Institutional Investors / Analysts,official news releases and other general information about the Company are uploaded onthe Companyswebsite (www.ideacellular.com) .

The quarterly financial results of the Company are generally published in The Economic Times (alleditions) and Western Times (a regional daily published in Gujarat). At the end of each quarter, theCompany organizes earnings call with the analysts and investors and the transcripts of the same areuploaded on the website thereafter. Thus the financial information, performance results and the futureprojections are made available at various statutory platforms.

(2) How does this firm view its social obligations and manage its image in society?

Idea Cellular Companys advertising has earlier tried to explore mobility based solutions to the challengesfaced by society through campaigns based on World without Caste, Going beyond the LanguageBarrier, Education for All and Use Mobile, Save Paper.

Ideas network covers over 308,000 villages and towns to bring in to its ambit a large share of ruralmobility subscribers. Company has consciously expanded its network coverage and invested in the striferidden Naxalite belts of Chhattisgarh, Jharkhand, Maharashtra and Andhra Pradesh as well as into tribaland economically depressed regions of other states to promote inclusiveness and to make available tothose citizens of our country the advantages of mobile communication.

To promote localization of manufacture, which in turn would generate employment, we encouraged a SIMCard supplier to move his factory setup from outside the country to set it up in Bangalore. Company hasalso worked with global companies and has encouraged them to develop local vendors for importedequipment like antennas.

Employees are making an ongoing contribution of around ` 4 lacs per month through its payroll to GiveIndia foundation which works with over 200 NGOs working for various charitable causes.Through theyear several blood donation camps were organized by its offices across cities in India as well as specificvisits to houses and schools for underprivileged were organized on the occasion of Womens Day, etc.During the Joy of Giving week, employees donated a total of around ` 7.8 lacs in cash and 350 cartons ofclothes and other items for the lesser privileged. The Company is clear that its growth paradigm will bebuilt on Por ters Shared Value model.

Idea operates in all 22 telecom circles in the country, and has a relatively strong presence in non-urban areas in several circles. In this context, the Company has identified economicallydisadvantaged people residing in rural and geographically remote villages as marginalizedand vulnerable stakeholder groups. With regard to the rural, geographically remote and economicallychallenged population in the country, the Company recognizes its responsibility to improve theirdevelopment and well-being through generation of local employment and deployment of variousrural-focused mobile solutions.
http://www.ideacellular.com/http://www.ideacellular.com/http://www.ideacellular.com/


3/19

As part of a corporate group committed to societal growth and development, Idea considerscommunity development and nation-building as key components of its sustainability strategy. Idea isa fully integrated telecom services provider offering its 121.6 million mobile subscribers a choice ofnational, international and internet services. The Companys services are available in 4,634 censustown s and 298,686 villagesacross India. Moreover, the Companys rural penetration was more than50% by the end of fifth year from issuance of its license, which is more than its licensing obligation.

Idea has adopted a Corporate Social Responsibility (CSR) Policy, which aims at inclusive growthand poverty alleviation through focus on education, health care, sustainable livelihood, infrastructuredevelopment and espousing various social causes

Stockholder Analysis

(4) Who is the average investor in this stock? (Individual or mutual fund, taxable or tax-exempt, small orlarge, domestic or foreign)

As On 30 September 2013 share holding pattern is as below

Type of Share Holding Promoter Group Foreign Holdings Indian Others% of Shareholding 45.85% 47.18% 6.97%

PROMOTERS HOLDING 45.84%

1 ADITYA BIRLA NUVO LIMITED 25.25%2 BIRLA TMT HOLDINGS PVT LTD 8.55%3 HINDALCO INDUSTRIES LIMITED 6.88%4 GRASIM INDUSTRIES LTD 5.16%

45.84%

The major public holding in Idea Cellular are

TOP 5 PUBLIC SHAREHOLDERS 47.18%1 TMI MAURITIUS 14.00%

2 AXIATA INVESTMENTS 2 (INDIA) LTD. 5.89%3 P5 ASIA INVESTMENTS (MAURITIUS) 9.95%4 VANGUARD INT GROWTH FUND 1.05%5 NATIONAL WESTMINSTER BANK PLC 1.01%

Total of 1 to 5 31.90%


4/19

Transfer of shares in dematerialized form is done through the depositories without anyinvolvement of the Company. Transfer of shares in physical form is normally processed within aperiod of 12 days from the date of the lodgment, subject to documents being valid and completein all respects. All transfers are first processed by the Registrar and Share Transfer Agent andare submitted to the Company for approval thereafter

The distribution of shareholding of the company as on 31 March 2013 was as follows

Shareholding Pattern of the company as on 31 March 2013 was as follows


5/19

(5) Who is the marginal investor in this stock?

The Marginal Investor in this stock are the following

1. Domestic Bodies Corporate which have 16,063,735 shares (0.48%)

2. Resident Indians & Others having 54,926,947 shares (1.66 % ) of the shareholding.

C. Risk and Return

(6) What is the risk profile of the company? (How much overall risk is there in thisfirm? Where is this risk coming from (market, firm, industry or currency)? How is therisk profile changing?)

The Risk Management frameworkof Idea Cellular ensures compliance with the requirements ofclause 49of the Listing Agreement. The management regularly follows theprocess of riskidentification, risk evaluation, risk prioritization and development of risk mitigation plans. Theframeworkrequires that the Audit Committee be periodically informedabout risk minimization

procedures adopted by your Company.These processes are periodically reviewed. The variousrisks,including the risks associated with the economy, regulation,competition, foreign exchange,interest rate etc.

Idea Cellular is a pan India 2G-GSM service provider. It provide 3G services in 20 serviceareas. Idea is the Third largest operator in India, by Mobility Revenuesand VLR subscribers.The Minutes on network ~ 1.59 billion per day(Q4FY13), placing it among the top 10 operators


6/19

Globally. Idea leads the industry, in terms of active subscribers, asmore than 98% of reportedsubscribers are on VLR. The levers of risks in the telecommunications sector arises from thelevers of competition 1. Spectrum 2. Scale within Service Area in terms of Revenue MarketShare (RMS). The risk is hence largely coming from the market and industry. In terms ofSpectrum, Idea holds 900 MHz spectrum in 9 serviceareas, covering~ 48% of national revenueand ~72% of Ideas revenue~ 58% of nati onal revenue base (excl. metros)Ideas spectrum profile is very attractiveacross all private operators .900 MHz spectrum bandprovides capex/opexadvantage, compared to 1800 MHz900 MHz spectrum also accompaniedby earlymover advantage.

In 900 MHz ( 9 Service Areas ) the following are the key highlights Idea Cover ~48% of nationalrevenuemarketStrong position in these serviceareas. The 900 MHz spectrum accompaniedby early mover advantage900 MHz spectrum providesCapex and opex advantage.

1800 MHz ( 13 Service Areas ) Idea cellular imprints are highlighted by Pan India FootprintLeverage synergies of scale andfootprint, Emerging Stronger in 6 serviceareas of UP(E),Rajasthan, Delhi,Bihar, H.P. and MumbaiFocus on operational & financialgoals, not leaguetables in 7 Newservice areasCalibrated Capex with infra sharing.

In 3G Value Drivers segment, the presence of Idea is marked by Market power to drive newBusiness: Ranked #1 or #2, in 8 outof 11 service areas, where it won 3GspectrumProtecting existing business value:11 service areas cover ~74% ofcompany revenue and ~ 49%ofIndustry revenueroaming arrangements: Ability toprovide 3G service in almost allParts of IndiaOther value: Besides enhanced dataperformance, High 2G spectrumUtilization makes the 3G spectrumalso valuable for voice

The revenue growth for the Indian telecom sector came downto 9.2% in FY 12-13 (over FY 11-12), compared to 15.5% growthachieved last year FY 11-12 (over FY 10-11). The reducedthruston promotional customer acquisition spending coupled with newsubscriber verificationnorms, led to fewer subscriber additionsto the Industry and better management of subscriberacquisitioncost. The reduced thrust on tariff led competition resulting instabilized andrationalized tariffs going forward along with rapiddata growth, provide opportunity for sustainedrevenue growthin future. The launch of 3G services in FY 10-11 has opened upthe market for new opportunity towards data and relatedapplications and resulted in improvedaddition of datasubscribers. As the fixed line broadband market in India is notdeveloped, 3Gshould become the preferred choice for usage ofany broadband based application in future,though lowerpenetration of Smartphone remains a challenge. While, theCompany continues togrow in terms of voice revenues, it isfocused towards increasing subscriber base in 3G spaceandbuilding future ready network for data opportunity. TheCompany believes that data offerssubstantial opportunity incoming years.

The regulatory environment governing telecom sector in Indiais currently uncertain and prone tolitigations. Idea has several ongoing litigations, the adverse determination ofwhich is a risk. Ideabelieves these litigations wouldbe settled in due course to the best interest of allstakeholders.The seven initial licenses of Idea followed by two otherlicenses, all with an initialspectrum allocated in 900 MHz band,are due for extension in December 2015 and April 2016respectively. Apart from these nine licenses, another lot of sixlicenses with spectrum in 1800MHz band are due for extensionbetween FY 2022 to FY 2027. The Company runs a risk of


7/19

extension at unfavorable terms. The Company is hopeful thatthe continuation of services on alevel playing field andprotection of investment will be ensured by the Government inthe interestof all stakeholders like subscribers, employees andshareholders.The Companys business isdependent on key Network and ITequipment suppliers for management and continuity of itsNetwork, IT and business processes.

The telecom sector is characterized by technological changesand competition from newtechnologies is an inherent threat.However, till date, the Indian telecom sector has not facedanydisruptive phase arising out of any technological changes. Idea Cellular , with an assortmentof spectrum in 900/1800/2100MHz has an attractive spectrum footprint to adapt to anyfuturetechnological changes.

7 What is the performance profile of an investment in this company? What returnwould you have earned investing in this company's stock? Would you have underor outperformed the market? How much of the performance can be attributed tomanagement?

Idea Cellular has a strong Balance Sheet to support strategic business intent. The company keyfinancials for the past 4 years look very healthy and growth oriented. The performance profile ofthe company shows an healthy increasing trend with beating the industry benchmarks. TheIndustry CAGR (Compounded Annual Growth Rate ) of Gross revenue is 12.5 % while that ofIdea has been 21%. The Revenue Market Share of Idea has been improving steadily from 13%in Q1 FY 11 to 16.2% in Q1 FY 14. This implies that the Incremental RMS for Idea has been23.6% the highest in the industry. The Idea growth story in the past 5 years may be summed upthrough the following table

Idea Growth Story FY2007 FY2013 Comments

(IPO inQ4FY07)

Company ProfileOperation in11

Pan IndiaStrongPerformance

circles Operations since IPOCustomer Base (mm)(1) 14 121.6 8.7xRevenue (US$ mn) $699 $3,577 5.1xEBITDA (US$ mn) $237 $956 4.0xCash Profit (US$ mn) $187 $793 4.2xGross Block+CWIP $1,548 $7,564 4.9x

The earnings would have been indicative from the table given below.

ValuationRatios

Company Industry

P/E Ratio (TTM) 46.97 44.81

P/E High - Last5 Yrs. 45.31 19.82


8/19

P/E Low - Last 5Yrs. 16.65 11.12

Beta 0.95 0.72

While the PE ratio looks better than the Industry benchmark, the Beta would be indicative of themore volatility. It needs to be considered at the same time that the consolidation phase for IdeaCellular is over now and the next growth phase is awaited for the company. The company wouldhave definitely outperformed the market.The People and the Human Resources processes are reasons for the success of Idea cellular.The human resource philosophy and strategy of Idea Cellular has been designed to attract andretain the best talent, creatingworkplace environment that keeps employees engaged,motivated and encourages innovation. This talent has, throughstrong alignment with Ideasvision, successfully builtand sustained the Companys standing as one of Indias most admired and valuable corporations despite unrelentingcompetitive pressures. Idea has fostereda culturethat rewards continuous learning, collaboration anddevelopment, making it future ready

with respect to thechallenges posed by ever-changing market realities. Employeesare your Companys most valuable assets and Ideaa processes are designed to empoweremployees and supportcreative approaches in order to create enduring value. Ideas unflaggingcommitment to investing in talentdevelopment ensures performance and achievement ofthehighest order.

8 How risky is this company's equity? Why? What is its cost of equity?

During the year FY 13, the paid-up equity share capital of Idea Cellular increased by ` 55 Mn,due to issuance of 5,476,656equity shares to the employees pursuant to exercise of stockoptions granted under Employee Stock Option Scheme, 2006.Its reserves increased from `97,394 Mn to ` 109,890 Mn due tocurrent years profits, p remium amount on issue of sharesunderESOS, 2006, credit to securities premiumand partially offset by dividend anddividend distribution tax. The total shareholders funds stoodat ` 143,034 Mn as at March 31,2013.

Earnings Per Share

Periods 2012 2013June 0.54 0.71

September 0.32 0.72

December 0.61 0.69

March 0.72227 0.92983


9/19

The EPS has been increasing steadily over the period compared to the last financial year. Theriskiness element in the company equity is pulled down due to the fact that the equity shareholders have large holdings in the form of Promoters (45.84%) and the top five public holding inthe Foreign Holdings club up to more than 31 %.

ROCE 8.70% 6.10% 6.70% 7.20%The return on capital employed over the past 4 years has been steady.


10/19

9 How risky is this company's debt? What is its cost of debt?Total loans outstanding as at March 31, 2013 were ` 129,481Mn, an increase by ` 8,525 Mn,mainly due to deferred paymentliability towards the purchase of spectrum under auction.

Deferred Tax liability as at March 31, 2013 stood at ` 10,231 Mn.Other Liabilities andprovisions increased from ` 54,012 Mn to` 64,355 Mn.The Gross Block and Net Block[including Capital Work inProgress (CWIP)] was at ` 420,415 Mn and ` 267,820 Mnrespectively as at March 31, 2013. As on March 31, 2013,investment in subsidiaries andliquid mutual funds was` 16,377 Mn and ` 9,296 Mn respectively . Other Assets increasedby `1,067 Mn and stood at ` 50,774 Mn.The Debt has been incurred to buy Spectrum which will help in Expansion of the market andconsolidation of the share of Idea in the existing market. As such, The debt of the companyis not risky which is also clear from the Net Debt to Net Worth Ratio and Net Debt to

Annualised EBIDTA ratio.

Q4 Q4 Q4 Q4 Q4FY10 FY11 FY12 FY13

Gross Debt 65,264 105,575 120,957 126,688Cash & Equivalent 14,005 13,902 1,406 10,806Net Debt 51,259 91,673 119,550 115,881Net Worth 114,101 122,767 129,077 141,828Gross Block+CWIP 258,371 351,045 392,602 446,007Cash Profit 7,657 9,031 10,135 13,067Financial RatiosNet Debt to Net Worth 0.45 0.75 0.93 0.82Net Debt to Annualised EBITDA 1.54 2.41 2.48 1.93


11/19

10 What is this company's current cost of capital?

Earnings Per Share 1.74 2.56 3.19 3.23 3.96

The EPS for the last 5 years indicate the EPS has been improving over the years

D. Measuring Investment Returns(11) Is there a typical project for this firm? If yes, what would it look like in terms of life (longterm or short term), investment needs and cash flow patterns?Idea Cellular generated ` 57,083 Mn from operating activitieswhich was primarily used forpurchase of fixed assets (` 32,100Mn), net repayment of borrowings (` 8,909 Mn) and paymentofinterest and financing charges (` 8,055 Mn). The Project of the Idea Cellular would depend onthe Auction Details of the Government of India for Refarming of Licenses and Auction of 3G, 4G and the LTE licensees.

(12) How good are the projects that the company has on its books currently?The project that Idea cellular has on its hand is the licensees where it has already taken the 3Glicenses. The Investment has helped the company consolidate its position in these markets.

Own 3G spectrum in all serviceareas where Idea is ranked #1 or #2Focus to improve data consumptionon small screen (handsets)Building OFC capabilities to tap thefuture potential of wirelessBroadbandGrowing ILD and ISP capabilitiesresults in new revenue streamsInitiatives to grow M-Commerce

(13) Are the projects in the future likely to look like the projects in the past? Whyor why not?

The projects in the future are not likely to be like the projects of the past. The reason is that theconsolidation in the Telecommunications Industry has already begun and the industry isawaiting the Merger & Acquisition policy framework of the union government.

New M&A and spectrum trading policy, which is awaited, may hasten the process of marketconsolidation.


12/19

Tariff (ARPM) stabilized after period of hyper competition early signs of pricing powerreturning to operatorsOvercapacity in the system reduced. All these factors will make the new projects for IdeaCellular completely different from the past ones.

E. Capital Structure Choices(14) What are the different kinds or types of financing that this company has used to raisefunds? Where do they fall in the continuum between debt and equity?The company has used largely the equity route to raise funds. These equity have been placedby the Group Companies of the Aditya Birla Group such as

Aditya Birla Nuvo Limited Equity Shares 837,526,221 25.27% Birla TMT Holdings Private Limited Equity Shares 283,565,373 8.56% Grasim Industries Limited Equity Shares 171,013,894 5.16% Hindalco Industries Limited Equity Shares 228,340,226 6.89%

Some of the funds have also come from the strategic equity placement with the ForeignInvestors such as

P5 Asia Investments (Mauritius) Limited Equity Shares 330,000,000 9.96% Axiata Investments 2 (India) Limited Equity Shares 195,427,333 5.90%

TMI Mauritius Limited Equity Shares 464,734,670 14.02%The Debt component of the Idea Cellular comes from

SECURED LOANS626 (Previous year Nil) 9.45% Redeemable Non ConvertibleDebentures (NCD) of ` 10 Mn. Each 6260 (Rs Million)The Company has re-purchased 374 NCDs of ` 10 Mn. each, at par,aggregating to ` 3,740 Mn. with an option to re-issue the same in future)Term Loan Comprises of Foreign Currency Loan

Banks 770Others 48507

As Also Rupee LoanBank 20522Others 266.61

The Only Unsecured Loan Category are at 26417Foreign Currency Loan from Bank 13103Deferred Payment Liabilities towards Spectrum 13313.98

(15) How large, in qualitative or quantitative terms, are the advantages to this company fromusing debt?

The Debt gives low cost option to the company along with the fact that these are long term innature and dont have to be necessarily repaid over the short term horizon. At the same time the


13/19

cost of debt is manageable, gives tax benefit to the company and small proportion of the NetWorth and EBIDTA and hence propels the growth of the company.

Q4 Q4 Q4 Q4 Q4FY10 FY11 FY12 FY13

Gross Debt 65,264 105,575 120,957 126,688Cash & Equivalent 14,005 13,902 1,406 10,806Net Debt 51,259 91,673 119,550 115,881Net Worth 114,101 122,767 129,077 141,828Gross Block+CWIP 258,371 351,045 392,602 446,007Cash Profit 7,657 9,031 10,135 13,067Financial RatiosNet Debt to Net Worth 0.45 0.75 0.93 0.82Net Debt to Annualised EBITDA 1.54 2.41 2.48 1.93

(16) How large, in qualitative or quantitative terms, are the disadvantages to this companyfrom using debt?The disadvantage of the Debt is the fact that it blocks the Revenues into Debt Service paymentand as such arrests the Investment potential that would reflect on the equity and dividendreturns of the organization. The financial branding of the company through EPS/ PE would bemore if the revenue is not leaked through the debt service payments.

(17) From the qualitative trade off, does this firm look like it has too much or toolittle debt?

From the qualitative trade off, Idea Cellular has the Debt Equity Ratio of 0.90 which isconservative aspect of keeping Debt low and using Debt judiciously for the uncertain capitalrequirements as the Industry demands (through Auction of LIcences etc)

EQUITY AND LIABILITIESShare Capital 33,143.20Reserves and Surplus 107,055.79Total Equity 140,199.01

Long-Term Borrowings 105,743.96

Deferred Tax Liabilities (Net) 10,231.17Other Long-Term Liabilities 8,266.48Long-Term Provisions 2,018.86Total Debt 126,260.47

Debt Equity Ratio 0.90


14/19

D. Optimal Capital Structure(18) Based upon the cost of capital approach, what is the optimal debt ratio for your firm?WACC = ke (E/(D+E)) + kd (D/(D+E))

(19) Bringing in reasonable constraints into the decision process, what would yourrecommended debt ratio be for this firm?The recommended debt ratio for the company is

(20) Does your firm have too much or too little debt ?relative to the sector?

relative to the market?

F. Optimal Capital Structure

(18) Based upon the cost of capital approach, what is the optimal debt ratio for your firm?

Idea has very comfortable Net Debt to EBITDA at 1.39 (Q1 FY14) in Indian

telecom industry including only $657 Mn unhedged forex debt

(19) Bringing in reasonable constraints into the decision process, what would your recommended debtratio be for this firm?

The debt ratio compares a company's total debt to its total assets, which is used to gain a general ideaas to the amount of leverage being used by a company. A low percentage means that the company isless dependent on leverage, i.e., money borrowed from and/or owed to others. The lower thepercentage, the less leverage a company is using and the stronger its equity position. In general, thehigher the ratio, the more risk that company is considered to have taken on.

Businesses take on debt even when they have assets that could pay for their expenses when they knowthey can get a better rate of return on the borrowed money than what they are paying out in interest.The leverage the borrowed funds creates allows investors to have a greater amount of return on theirmoney. Therefore, not all debt is necessarily bad debt. However, too much debt can be a sign ofinstability. In some cases, a debt ratio of less than 1 means greater stability. Whenever the ratio exceedsthis figure, it indicates a heavily reliance upon debt for continued operations. Wise investors often


15/19

compare the debt ratio of one company to another in the same industry to determine whether the debtratio should be judged as either good or bad.

(20) Does your firm have too much or too little debt ?relative to the sector? relative to the market?

Aditya Birla Group company Idea Cellular is sitting on un-hedged debt of about $1 billion and this couldimpact its earnings from 2016-17 if the rupee falls to 70/dollar, warn analysts.

As of March this year, the companys total loans stood at about Rs 14,000 crore. Of this, about $1 billion(at Rs 62/dollar) was in foreign currency. Half the principal repayments of this foreign debt werehedged; the interest payments were un-hedged. All the loan repayments due in the next 36 months arefully hedged. The $657-million un-hedged portion represents loan repayments due from 2016-17 to2023-24.

G. Mechanics of Moving to the Optimal

(21) If your firm's actual debt ratio is different from its recommended" debt ratio, how should they getfrom the actual to the optimal? In particular,

Idea had a 6% improvement compared to last FY in average realized rate and they have also mentionedseparately that growth is never a line function; it is always a step function. There is a model that idea havepursued in the past and in that model for idea the theme always had been growth. The model in the pastwas driven mostly by subscriber growth which led to volume growth. Now, idea are experimenting with thesecond model of correcting the debt rates which had fallen to unreasonable levels. While idea were growingat a very good pace in terms of revenue its translation to EBITDA was not at a healthy pace. Idea have now tomove on to the second model where they have to clamped down on a large component of free andpromotional minutes. They have to start the clamp down for new customers, its effect was seen on churnand then they have to clamp down on existing customers especially on U&R programs as well as value

vouchers, which give discounted minutes.

(22) Should they do it gradually over time or should they do it right now?

This would effect the elasticity so as aware Q2 or the monsoon period is a weak quarter for idea becausethey have a very higher percentage of customers from the rural areas and rural customers typically tend tospeak less during the period of monsoons. So idea has to wait to see if the overall impact of slower minutesgrowth than what they had also projected on account of elasticity has effect during the season. The right


16/19

time to be able to give a clear indication of that would be in the period of October to December. Having saidthat,industry is operating in a disciplined manner. Same kind of fear was seen when idea started reducingthetrade margins on subscriber acquisition. Given the fact that in spite of trade margin reduction,Idea has 37.5%of incremental VLR share, idea have been able to hold on to VLR growth and idea company are extremelyconfident that even with this (ARPM) change idea will be able to hold on to VLR growth.

(23) Should they alter their existing mix (by buying back stock or retiring debt) or should they take newprojects with debt or equity?

Idea have reached an enviable position of net debt-to- EBITDA. also for running ideas operations they do notneed any cash. Idea have a huge amount of headroom available to be able to increase their overall debtwhich has fallen down to very low levels. Having said that there will be bunching of payments that isgoing tohappen. License renewal for idea is due in 2015 and 2016. In their discussion with DoT, there isa possibilitythat DoT may ask for payments one or one and a half years before the license renewaland they need toprepare for that eventuality. Secondly, as aware that at this point Idea hasnot completed its Pan Indiafootprint for the 3G and Wireless Broadband and they will evaluateopportune point of time for these. Havingsaid that, this is an enabling resolution; this is not adecision of capital injection at all. They are very

committed to be able to take any form of capitalinjection only if their business model gives sufficient returnon investments as well as return-on-equity.Over the last one year, return-on-investment, return-on-capitalemployed, return-onequityhas been going up and idea is reaching very competitive levels of performanceand there is noreason for them to be able to do capital injection unless they are convinced as managementthat they willdeliver business model which will enhance the overall return-on-equity. .

(24) What type of financing should this firm use? In particular, should it be short term or long term?What currency should it be in? What special features should the financing have?

The financing required for such investments may not be available to idea on acceptable termsor at all and company may be restricted by their existing or future financing arrangements. Ifthey decide to raise additional fundsthrough the incurrence of debt, their interest obligations willincrease and they may be subject to additionalcovenants, which, among other things, could limittheir ability to access cash flows from their operations andsignificantly affect financial measuressuch as their earnings per share (EPS).Their ability to raiseadditional funds through the issueof equity may be restricted by, among other things, the limitations on foreign ownership imposedby Indian law.If idea do raise additional fundsthrough the issuance of equity, their ownershipinterest in company will be diluted. Any inability to obtainsufficient financing could result in thedelay or abandonment of companys development and expansion plans, thefailure to meet roll-out obligations pursuant to companys licenses or its inability to continue to provideappropriatelevels of service in all or a portion of their markets (which may lead to penalties or lossoflicense). As a result, if adequate capital is not available, there could be a material adverseeffect on companys business, results of operations, financial condition and prospects. We haveentered into various financing arrangements that contain provisions t hat restrict companysability to do,among other things, any of the following:

incur additional debt; pay dividends; merge into or acquire any other company;


17/19

issue Equity Shares; make investments or dispose of assets; and enter into, amend or terminate material contracts.

In addition to the restrictions listed above, company is required to maintain certain financialratios underfinancing arrangements. These financial ratios and the restrictive provisions couldlimit its flexibility toengage in certain business transactions or activities, which could put ideacompany at a competitive disadvantage and could have a material adverse effect on ourbusiness, results of operations, financial condition and prospects.

H. Dividend Policy

(25) How has this company returned cash to its owners? Has it paid dividends, bought back stock or

spun off assets?

Company has not paid any dividends since incorporation and do not anticipate paying any dividends intheforeseeable future. Company can not be in a position to pay dividends until it has cleared itsaccumulated losses. Additionally, its debt arrangements restrict its ability to pay dividends unless theymaintain certain financial ratios and adequate reserves and obtain approval from their lenders. Inaddition, to pay a dividend, they will need the approval of the Promoters. They also will need to paydividends to any preference shareholders prior to considering paying any dividends on its Equity Shares.Further, the declaration and payment of any dividends in the future will be recommended by their Board,in their own discretion, and will depend on a number of factors, including Indian legal requirements,companys earnings, cash generated from operations, capital requirements and overall financialcondition.

(26) Given this firm's characteristics today, how would you recommend that they return cash tostockholders (assuming that they have excess cash)?

They should return cash to stock holders as per companies act.

G. Framework for Analyzing Dividends(27) How much could this firm have returned to its stockholders over the last few years?How much did it actually return?

The return to its stockholders over the last few years is reflected through EPS

Earnings Per Share

Periods 2012 2013June 0.54 0.71


18/19

September 0.32 0.72

December 0.61 0.69

March 0.72227 0.92983

This is inidicative of the fact that EPS has grown in each quarter compared to the previous year.

(28) Given this dividend policy and the current cash balance of this firm, would you push thefirm to change its dividend policy (return more or less cash to its owners)?

Announcement Date Effective Date Dividend Date Dividend(%) Remarks

25/04/2013 05/09/2013 Final 3% Rs.0.3000 per share(3%)Final Dividend

The dividend policy of Idea Cellular entails a payout of 3 %. Compared to the othercompanies in the telecommunications,

(29) How does this firm's dividend policy compare to those of its peer group and to the restof the market?H. Firm Value

The firm value of Idea Cellular has intrinsic strength compared to other telco companies who havemore cash rich but would not know what to do with their cash (Airtel) or would have much higherdebt leverage (Reliance) who find it difficult to handle their debt or would have deeper investments(Vodafone) with lesser returns to Investments.

(30) What is the "key variable" (risk, growth, leverage, profit margins...) drivingthe firms value? If you were hired to enhance value at this firm, what would bethe path you would choose?

The revenue growth for the Indian telecom sector came downto 9.2% in FY 12-13 (over FY 11-12),compared to 15.5% growthachieved last year FY 11-12 (over FY 10-11). The reduced thruston promotional customer acquisition spending coupled with newsubscriber verification norms, led to

fewer subscriber additionsto the Industry and better management of subscriber acquisitioncost. The reduced thrust on tariff led competition resulting instabilized and rationalized tariffs goingforward along with rapiddata growth, provide opportunity for sustained revenue growthin future. The launch of 3G services in FY 10-11 has opened upthe market for new opportunitytowards data and relatedapplications and resulted in improved addition of datasubscribers. As the fixed line broadband market in India is notdeveloped, 3G should become thepreferred choice for usage ofany broadband based application in future, though lower


19/19

penetration of Smartphone remains a challenge. While, theCompany continues to grow in terms ofvoice revenues, it isfocused towards increasing subscriber base in 3G space andbuilding future ready network for data opportunity. TheCompay believes that data offers substantialopportunity incoming years.The regulatory environment governing telecom sector in Indiais currently uncertain and prone tolitigations. Idea Cellular has several ongoing litigations, the adverse determination ofwhich is a risk. Idea Cellular believes in sound CorporateGovernance Practices and believes that theselitigations wouldbe settled in due course to the best interest of all stakeholders.The seven initial licenses of Idea Cellularr followed by two otherlicenses, all with an initial spectrumallocated in 900 MHz band,are due for extension in December 2015 and April 2016respectively. Apart from these nine licenses, another lot of sixlicenses with spectrum in 1800 MHzband are due for extensionbetween FY 2022 to FY 2027. The Company runs a risk ofextension at unfavorable terms. The Company is hopeful thatthe continuation of services on a levelplaying field andprotection of investment will be ensured by the Government inthe interest of all stakeholders like subscribers, employees andshareholders.The Companys business is dependent on key Network and ITequipment suppliers for managementand continuity of itsNetwork, IT and business processes. Idea Cellular is in

partnership with global leaders in Network equipment and ITservices and enjoys very long standinghealthy relations with allits suppliers.

The telecom sector is characterized by technological changesand competition from new technologiesis an inherent threat.However, till date, the Indian telecom sector has not faced anyIdea Cellular, with an assortment of spectrum in 900/1800/210 MHz has an attractive spectrumfootprint to adapt to any futuretechnological changes.The strong and customer focused wireless operators shouldcontinue to exploit the growthopportunities offered by thesecond largest wireless market (by number of subscribers) inthe world, in both voice as well as data segment. Though, someof the recent regulatory developmentsare posing a temporarybottleneck to growth, Idea Cellular believes that in thelong run, these would impact all operators similarly. The operators with superior networks, superiorquality of services, superior brand image, superior organization and superior managementprocesses, would keep on consolidating their competitivepositions in the Indian telecom sector.During the last few years,Idea has shown continuous improvement across all the operatingparameters, while consolidating its position as the No. 3 operatorin the wireless market. The clearvision of your company and sheerpassion for excellent execution has not only improved its positionin the service areas where it started operations in the last 3 years,but also increased the RMS in itsleadership service areas. Idea Cellular remains confident to sail over this uncertain regulatoryphase and consolidate its position the wireless market.

fm assignment 2

Documents