Managing Costs Strategically

- A Road to Success

By
Manoj Misra
Head of Regulatory(SP)
Vodafone-India
 Controlling Overheads for Target
Costing

(A decision making problem needs

ABC Approach)
Telecom Industry at a glance
Telecom Industry at a glance
 Telecom Industry's Financial Performance

Statement of Industry's Financial Performance (Rs. in Crore)

S. No. Particulars 2012-13 2011-12

1 Revenue from Telecom services 191145 176597

2 Total Revenue 202074 185930

3 EBITDA 31132 25562

4 EBITDA Margin 15.41% 13.75%

5 Operating Expenditure of telecom Industry 170942 160369

6 Opex as % of Total Revenue 84.59% 86.25%

7 Capital Employed 297430 327939

Source: TRAI's Annual Report 2012-13 and Vodafone-India Analysis

 Cost structure and profitability of the wireless segment
S. No Particulars 2008 2013

1 EBITDA Margin 36.50% 15%

2 OPEX as % Revenue 63.50% 85%

3 PBIT Margin 21.40% 10%

4 RoCE 19.50% 7%

5 Opex-Capex Ratio

Opex 67% 71%

Capex 33% 29%

Total Costs (Opex+Capex) 100% 100%

Source: TRAI
 What do we mean by cost accounting definitions
Accounting definitions of cost are based on two concepts
Operating expenses
Depreciation to account for fixed assets

Accounting definition of cost

Operating activities + Fixed assets

Annual opex Depreciation charge

e.g., network
e.g., depreciation on
maintenance,
network equipment
Other staff costs
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 What do we mean by cost economic definitions
When estimating the (economic) cost of a service, it is necessary to
consider a third aspect, the economic cost of capital.

Economic definition of cost

Operating activities + Fixed assets + Capital

Annual opex Depreciation charge Cost of capital

e.g., network
e.g., depreciation on Capital employed *
maintenance,
network equipment WACC
Other staff costs

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Generally accepted Regulatory Practices for
Assessment of Telecom Pricing/Network Services
Assessment of Level of competition
Know about the SMP operator and its present marketing strategy
Position of assesse company in the relevant market
Regulatory Norms for SMP operator
Assessment of management expectation
Understand the management expectation about the market and product
Risk assessment of proposed product
Assessment of required revenue of product / Network service
Estimation of cost of services based on golden regulatory principles that whatever
efficient costs have been incurred to provide the network services should be covered from
the service/ product.
Cost will include both Capex and Opex including reasonable rate of return (WACC)
Approach for estimation of cost of service
Identification of sources of data i.e. annual statutory accounts , Regulatory accounts
Cost modeling for estimation of cost of service i.e. FAC Vs. LRIC
Cost base i.e. Historical cost Vs. Current cost
Thank You