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Bharti Airtel: Cutting through a maze of challenges

June 26, 2013
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For several years running, Sunil Bharti Mittal-promoted Bharti Airtel has been the undisputed leader in the Indian telecom market. As of March 31, 2013, it had 188.19 million wireless subscribers and 21.69 per cent market share. The operator’s rapid rise – from the time it began as a small company offering mobile services in Delhi only, in 1995 – is symbolic of the strong growth witnessed in the Indian telecom industry.

Today, the company offers mobile voice and data, fixed line, 3G, national and international long distance, IPTV and direct-to-home (DTH) services. It also manages 82,083 tower sites through Bharti Infratel and Indus Towers. In 2012, Bharti Airtel raced ahead of its rivals to offer 4G services in the country. These services were launched on long term evolution-time division duplexing networks, making India one of the first countries to commercially offer 4G services through this platform. As per industry estimates, Bharti Airtel currently has over 3,200 4G users. Going forward, analysts expect significant activity in the 4G space, especially with the entry of Reliance Jio Infocomm in this market. Bharti is currently the only operator to provide high-bandwidth 4G services in four circles – Bengaluru, Chandigarh, Kolkata and Pune.

Globally, the company operates in 20 countries: 17 African countries besides India, Sri Lanka and Bangladesh. It is the world’s fifth largest telecom operator in terms of subscribers. Business Week has ranked Bharti Airtel among the six best performing technology companies in the world. Bharti has made large infrastructure investments over the past decade and a half, and currently owns a 171,610 route km optic fibre network across India. Its global infrastructure includes over 225,000 route km of networks, covering 50 countries and five continents.

Industry analysts attribute Bharti Airtel’s swift success to Mittal’s business astuteness and strong support from his core team. According to the former managing director of a telecom firm, “In the formative years of the telecom sector, Mittal’s perspective was sharper than that of others. He was able to grab opportunities that he saw while others dithered.” Also, Mittal’s outsourcing and “minutes factory” business model, which has driven low-cost mobile telephony in the country, is well known.

However, the past four years have been rough for the operator with its financial performance witnessing a major slide. During 2012-13, it registered a net profit of Rs 22.75 billion, the lowest in seven years. This marked a decrease of about 50 per cent from Rs 42.59 billion in 2011-12. Its earnings before interest, taxes, depreciation and amortisation margin, though still high, declined from 33.2 per cent in 2011-12 to 31 per cent in 2012-13. The company’s market capitalisation declined from Rs 1,279 billion to Rs 1,108 billion during this period.

The biggest challenge for the company is servicing its debt, which stood at Rs 638.39 billion as of March 31, 2013. This debt was raised largely to fund the $9 billion acquisition of Zain’s African operations in 2010.

The financial pressure is expected to increase in the coming years as the operator needs funds to pay the one-time spectrum fee and to renew its licences for the Delhi and Kolkata circles in November 2014. While the company has obtained a stay order from the Delhi High Court on the Rs 52 billion one-time payment for spectrum held beyond 4.4 MHz, it will need to participate in an auction for licence extension in the two circles as the government has rejected its application for automatic renewal.

Borrowing additional funds is not prudent for the operator. Besides, its funding options have become limited as it already has a huge debt on its books. In this scenario, reviewing its existing business strategy and tapping new revenue streams are the only way forward for the company.

Key concerns

The major challenges faced by Bharti Airtel in the past two years include hypercompetition, a difficult regulatory environment, falling margins and a decline in almost all operational metrics.

The entry of new players in the market in 2008 led to a price war and incumbents like Bharti were forced to offer services at rock-bottom prices. While low-cost mobile services resulted in subscriber growth, the operating margins slid significantly. “The cut-throat competition in the last two to three years has impacted incumbent players,” says a senior research analyst at Kotak Securities. As a corrective measure, all operators hiked 2G tariffs in 2012. This has helped companies like Bharti improve their margins to some extent.

In addition, acquiring 3G and broadband wireless access (BWA) spectrum in 2010 turned out to be a costly affair for the operator – it spent Rs 122.95 billion on acquiring 3G spectrum in 13 circles and another Rs 33.14 billion for BWA airwaves in four circles. These investments have not paid off as 3G service uptake has been below expectations, while the 4G ecosystem is yet to mature.

Moreover, the company has been losing market share to its peers. Competitors such as Vodafone India and Idea Cellular have been registering stronger financials as well as net subscriber additions over the past several quarters. “Bharti Airtel is a clear market leader in various circles on most parameters. However, over the past few quarters, players such as Vodafone India have been steadily increasing their industry revenue share in comparison to Bharti Airtel,” says Dr Mahesh Uppal, director, ComFirst (India). Also, Idea Cellular nearly doubled its market share from 9.5 per cent to 17 per cent in the last four years, while Bharti Airtel lost market share during this period.

In addition, Bharti’s African operations have been a big drag on its resources, as the venture is yet to record profits. As against the target of $5 billion for 2012-13, the venture’s actual revenue achievement was about $4.4 billion. The net loss for the company’s African operations increased from Rs 132.86 billion in 2011-12 to Rs 220.98 billion in 2012-13. “The African operations have not been as per expectations. Even after three years of launch, the business has not turned profitable as the company’s ‘minutes factory’ model has not yielded the desired results. Improving operational efficiency and targeting non-voice revenue streams will be important for an improvement in business performance,” notes Swati Agarwal, chief general manager and regional head, north, CARE Ratings.

Akhil Gupta, deputy group chief executive officer and managing director, Bharti Enterprises, disagrees. “Overall, the performance has been satisfactory. From where we began in 2010 to where we are three years later, the progress has been satisfactory. But Africa is a market where one has to be patient in terms of witnessing big shifts,” he explains.

Revival strategies

Experts believe Bharti urgently needs a game changing idea to revive growth as well as a sound regulatory strategy. Moreover, if the growing number of dropped calls and the lack of network coverage are any indication, the operator needs to significantly improve its service delivery, especially in the mobile and broadband segments. As a market leader, the company needs to proactively improve its quality of service. This will also make the operator less vulnerable to customer churn.

A key positive for Bharti is its strong operational performance. The share of active users in the total subscriber base increased from 91.7 per cent to 95.1 per cent between March 2012 and 2013. The monthly churn improved from 8.8 per cent to 3.2 per cent during this period. The company’s ARPU increased by 2 per cent from Rs 189 in March 2012 to Rs 193 in March 2013, primarily on account of higher network usage and stable tariffs. Also, its large network coverage offers some key advantages to the operator. As of March 2013, Bharti’s services were available across 465,482 towns covering about 87 per cent of the country’s population.

Bharti Airtel has undertaken a restructuring exercise to bring all businesses under two verticals – individuals and enterprises. The entire country has been divided into eight regions, instead of the three divisions previously, in order to ensure greater focus on each region. Moreover, Bharti acquired spectrum for the Assam circle in the November 2012 auctions, which will augment its operations in the region. While the results of the restructuring exercise will be visible over time, Bharti is already a much leaner organisation today.

To ease pressures on the financial front, the operator has been taking several initiatives. One such step has been a hike in tariffs. In 2012, most operators increased service prices to combat cost challenges. While Bharti did not hike the headline tariffs after the initial 20 per cent increase, it has been consciously reducing promotional offers and discounts. This is likely to offer long-term gains to the operator.

To raise funds, the company recently divested 5 per cent stake to Doha-based Qatar Foundation Endowment for around Rs 67.96 billion. In January 2013, it completed a $1.5 billion bond issue, one of the largest in the country. Prior to that, in December 2012, the company listed its tower subsidiary Bharti Infratel on the national bourses.

Further, it has sold the majority of its stake in value-added services (VAS) company Comviva Technologies to Tech Mahindra. Bharti is now in the process of valuing its telemedia, enterprise and DTH businesses, and intends to sell minority stakes in each segment to reduce debt. These three businesses are valued at about Rs 110 billion, Rs 65 billion and Rs 60 billion respectively.

In a key development, the operator has acquired Alcatel-Lucent’s share in their joint venture company, Alcatel-Lucent Managed Network Service India, which managed Bharti Airtel’s fixed line and broadband networks. Bharti is now planning to invite rival operators Vodafone India and Idea Cellular to form a consolidated entity along the lines of Indus Towers.

Global challenges and opportunities

Although the financial performance of its African business has been below expectations, Bharti has been generating adequate cash to cover its capital costs and taxes. Financial experts also expect the income from these operations to cover interest payments on the acquisition debt. A primary reason for the company’s weak performance in the region is the increasing competition in Nigeria – Bharti’s biggest market in Africa. The company has been forced to reduce tariffs by about 30 per cent in the country to remain competitive, which has impacted its margins.

Despite posing economic and regulatory challenges, Africa presents major opportunities as an emerging telecom market. For instance, Kenya’s internet subscriber base grew by 75 per cent during 2012.  Bharti is committed to making good its African investment. The company will focus on maximising its data revenues. “As compared to India, the tariffs are six to seven times higher in Africa due to high manpower, transportation and other costs. The income levels in Africa are lower than or the same as in India, which is a challenge. But improving political and economic prospects, and a large youth population make it a promising future market – particularly for data and data-linked m-commerce services,” says Gupta.

To add revenue streams, Bharti is looking to expand its operations in the South Asia region. It has bid for licences in Myanmar. It has recently submitted its final bid as part of a consortium and is amongst the 11 bidders looking to acquire telecom licences in the country. While such moves would require additional investments, these markets can offer key long-term benefits. Myanmar has a wireless penetration of just 10 per cent and the country has only two government-owned operators. This means that Bharti has the opportunity to cater to 60 million subscribers with almost no competition.

The way forward

Initiatives in the data space and enhancing rural services are likely to drive the company’s business growth over the next year. In fact, data services are steadily becoming a top priority for Bharti. The share of non-voice revenues in the operator’s total revenues grew from 16.2 per cent in March 2012 to 17.4 per cent in March 2013. Currently, the company has over 43 million mobile internet users and 6.4 million active 3G customers. Its 3G services are available in over 1,100 towns through home-grown and shared networks. In terms of 4G expansion, Bharti plans to launch services in Mumbai and Delhi where it holds broadband wireless licences by virtue of its acquisition of Qualcomm’s broadband business in India.

The operator is charting growth on the rural front as well. According to the Cellular Operators Association of India (COAI), Bharti had the largest number of GSM rural subscribers as of April 2013. This is a result of collaborations with VAS providers to offer applications in local languages.  “The company can derive higher value propositions from the VAS market, which offers significant potential, especially in rural areas. Also, rural ARPUs remain underleveraged. This segment may offer a bigger opportunity than the company’s international operations,” says Harish Bijoor, brand expert and chief executive officer, Harish Bijoor Consultants, Inc.

On the rural front, Bharti is also focusing on the m-commerce market. The company’s mobile money initiative – Bharti Airtel Money – has generated a positive response in the 15 countries where it has been launched. This prepaid mobile wallet allows users to make bill payments, book e-tickets, undertake online shopping and money transfers, etc. through their handsets. The service is emerging as an important tool to financially empower rural customers. Going forward, the operator can provide payment services to India’s unbanked millions through this platform.

The company is on the right track in terms of focusing on customer experience. It recently inaugurated a network experience centre, which merges network monitoring and customer experience management. The facility has a 3,600 square feet video-wall, which monitors and analyses the company’s network operations and presents them in a unified video view.

Of late, Bharti Airtel has also been focusing on its enterprise customers to increase revenues. This business division will focus on delivering efficient cloud-based solutions, data centre services, managed video offerings, etc. The company recently set up a data centre in Mumbai.

Bharti Airtel’s future, like that of most other telecom operators, will depend largely on how it manages the many challenges facing the industry. Improving network efficiency, reducing operational expenditure, increasing data revenues and rural telecom penetration, stabilising its international operations and improving revenue realisations will be important for the operator to maintain its leadership position.

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