In this article, we shall be looking at various cost components that form a part of Idea Cellular's operating costs and try and find out how they have moved vis-à-vis the revenues of the company over the past few years. The article is structured so as to give the reader an idea of what constitutes a particular cost head, what is its nature and the likely direction of the same going forward. Also to make understanding easy, we have arranged the costs in descending order i.e. a cost that forms the highest component of the total operating expenditure has been discussed first.
Roaming and access charges
The roaming and access charges are paid when an Idea subscriber is utilizing another operator's network to make or receive calls. Thus, Idea pays to the other operators and long distance carriers a pass-through charge and a termination charge (i.e. an Inter Connect Usage charge (IUC)). The IUC is negotiated (within a range) by Idea from operator to operator. This is a variable charge and is directly dependent on the number of its subscribers utilizing other's network. This charge has shown a declining trend as a percentage of revenues over the last three years and is likely to see a downtrend in the near future as the company rolls out its services to more circles. Also having obtained the long distance license, the company will not have to pay charges to long distance carriers.
Subscriber acquisition and servicing expenditure
Subscriber acquisition costs include the cost of SIMs, commissions and discount to dealers, customer verification expenses, collection and telemarketing expenses and expenditures on customer retention and loyalty programmes. This cost is offset in part by a one-time activation fee that is charged to new customers. The cost component, which is partly fixed and partly variable in nature has been growing fairly consistently over the years and has a direct relationship with the growth in operating revenues. However, so far, its been growing at a faster rate than its revenues and given its trend, we don't expect it to subside significantly anytime soon.
Network operating expenditure
The expense head constitutes power and fuel costs, rental payments, annual maintenance charges for network (payable to vendors of equipment like Nokia, Ericsson, and Siemens), network related insurance and other expenses related to mobile network. However, the growth in this cost is on account of the increasing capex that the company has been making over the years. As the company continues to expand into new circles, one can see a rise in this expense. Although, if the company is successful in negotiating favourably its infrastructure sharing contracts, there may be a marginal reduction in the growth of these charges. Further, if it is able to utilise the existing capacity in most optimum manner possible, then this expense as a percentage of sales should come down over the years.
License and WPC charges
The company pays license fees and spectrum usage charges to the Department of Telecommunication (DOT) and the Wireless and Planning Commission wing of the DOT respectively. The spectrum charges are paid as GSM fees and Microwave Royalty, which is calculated as a percentage of the company's annual adjusted gross revenues (AGR). The license fee is also paid as a percentage of AGR and is as follows 10%, 8% and 6% of AGR for Delhi, A, B and C Circles respectively. With companies increasingly tapping rural areas, we believe this cost head to come down as a percentage of revenues going forward.
Personnel expenditure
The personnel expenditure constitutes of salaries, contribution to employee benefit funds, allowances, variable performance pay, recruitment and training costs etc. With the company growing at a frenetic pace, this expense head has gone up in absolute terms but as a percentage of sales has remained fairly constant. As the growth is unlikely to slow down in the medium term, we expect this cost head to remain constant as a percentage of sales. Once the operations become mature, personnel expenditure may stabilise at lower levels.
Advertisement, business promotion and administration expenses
The advertising and business promotion expenses are spent towards brand and product advertising, corporate campaigns, and business promotion. With the company planning to enter new circles, we do not foresee any significant drop in the same as a percentage of sales. Administration expenses are incurred on repairs and maintenance of non-network equipment and buildings, payment of utilities for office, printing and stationery charges, travel and conveyance expenses etc. These expenses seem to be of a fixed nature as they have come down significantly over the years.
Conclusion
As can be inferred from the above analysis, the cost are more evenly spread over numerous costs heads with no single cost head being the source of a majority of the total operating costs. This reduces the vulnerability of the operating profits to an adverse movement in a particular cost head. Further, since operating profit margins have improved over the past few years (up from 26% in FY02 to 37% in FY06) their sensitivity to adverse changes in operating expenditure has reduced building a natural safe guard against such untoward events. While we may be unable to predict operating margins in a precise manner, the risk of going too wrong in our margin assumptions stands considerably reduced.