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Bharti Airtel: Strategic moves to maintain its lead

March 27, 2014
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After 15 straight quarters of dwindling net profits, India’s leading telecom operator Bharti Airtel recorded an increase in profits in the quarter ended December 2013. Driven by growth in data revenues and higher returns due to a hike in tariffs, the company’s net profit increased by 115 per cent to Rs 6.1 billion in the quarter ended December 2013 as against Rs 2.84 billion in the corresponding period of the preceding year.

Over the last two years, Bharti Airtel, like other operators, has been trying to cope with hyper competition, a huge debt burden and thinning margins. It also has to contend with high spectrum payouts and litigation challenges related to its Nigerian operations. These challenges notwithstanding, the operator seems to be turning the corner and has started 2014 on the right note.

Apart from the positive trend in profits, in early 2014, Bharti Airtel became the first Indian operator to cross the 200 million mobile customer mark, thereby accounting for over 20 per cent of the total wireless subscriber base in the country.

The company has been playing its cards strategically. In the recent auction, it acquired spectrum in the 900 MHz band and expanded its spectrum holding in the 1800 MHz band. In February 2014, it purchased struggling mobile operator Loop Mobile for an estimated Rs 7 billion. Airtel was also able to raise significant funds through multiple bond issues in 2013 and 2014, despite the weak investment climate in global markets.

Given the improvement in its operational and financial performance, in March 2014, rating agency Standard & Poor’s (S&P) increased the company’s long-term corporate credit rating from “BB+” to “BBB-”, implying a stable outlook. According to Abhishek Dhingra of S&P, the rating was revised with the expectation that the company will use its significant free operating cash flow and funds raised through strategic moves for reducing its leverage to a level that is in line with an intermediate financial risk profile.

These are good tidings for the operator, which is gearing up for the next phase of growth through data services.

Strengthening its Indian operations

Bharti Airtel operates in 20 countries across Asia and Africa, but India continues to be its main market, accounting for about 65 per cent of its revenue. Over the past year, it has been streamlining its operations to improve its balance sheet.

The return of pricing power on the voice front is positive for the operator’s business going forward. In 2013, it cut down on promotional offers including discounts and free minutes to improve voice ARPUs, apart from hiking 2G tariffs. This resulted in an increase in revenue realisation per month. During the quarter ended December 2013, the company’s minutes of usage and voice ARPU grew by 6 per cent and 5 per cent year on year to 255 billion and Rs 161 respectively.

Airtel’s management believes that there is room for further tariff hikes with tariff rationalisation increasing in the industry, which will improve voice revenues in the near future. According to an analyst from Morgan Stanley, the increase of every paise will add an incremental two percentage points to the company’s earnings before interest, taxes, depreciation and amortisation.

Spectrum acquisition

With its existing licences due to expire in November 2014, Airtel had to buy airwaves in the 900 MHz band in the Delhi, Mumbai and Kolkata circles in the recently held auction. This will enable it to continue using the efficient 900 MHz band for voice services in these metro circles. Also, Airtel can aggregate spectrum in the 900 MHz and 2100 MHz bands to enhance 3G coverage and capacity through carrier aggregation technology, which is the prevalent norm in mature telecom markets.

Expecting aggressive competition from Reliance Jio Infocomm Limited (RJIL) in the 4G space, Airtel bought spectrum in the 1800 MHz band in 15 circles including Delhi and Mumbai. It will use the spectrum to launch 4G services on the long term evolution-frequency division duplex (LTE FDD) platform. This will be in addition to its ongoing LTE-time division duplex (LTE TDD) roll-out in the 2300 MHz band and provide the operator a pan-Indian 4G footprint. Currently, Airtel is the only operator offering 4G services in India, with 0.1 million 4G subscribers. For buying 115 MHz of airwaves, Airtel will have to pay Rs 185.29 billion. It will make an upfront payment of Rs 54.25 billion, and the remaining amount will be paid in 10 annual instalments of Rs 13.1 billion each after the two-year moratorium.

Acquisitions

Airtel has strengthened its presence in the Mumbai circle by acquiring Loop Mobile for Rs 7 billion. The move will add about 3 million high-ARPU users of Loop to Airtel’s subscriber base. “The acquisition of Loop will not only provide the company additional high-ARPU subscribers but also good tower infrastructure in an important circle like Mumbai,” says Swati Agrawal, chief general manager and regional head, north, CARE Ratings. Further, Airtel can offer 3G and 4G services to these high-ARPU customers, whose data usage is likely to be high. This will strengthen Airtel’s position in the Mumbai circle, which is dominated by Vodafone India in terms of subscriber and revenue market share.

Airtel has also completed the acquisition of the remaining 49 per cent stake in Qualcomm’s broadband business, Wireless Business Services, which holds 4G licences in the Delhi, Mumbai, Andhra Pradesh and Kerala circles. This will allow Airtel to expedite its 4G service roll-out in these circles, especially in the high-ARPU Delhi and Mumbai circles, where the launch is scheduled for end-2014.

Restructuring debt through strategic measures

Bharti Airtel has been struggling with a huge debt burden since its acquisition of Zain’s African operations. The company’s debt increased from Rs 23.92 billion as of end-December 2010 to Rs 618.44 billion in end-December 2012, which implies that restructuring debt has become a key priority for Airtel. To this end, the operator is taking measures such as raising low-cost, long-term funds from the international bond markets and divesting stake in various infrastructure assets.

In the past two years, Airtel has attracted investments of $1.26 billion through the sale of 5 per cent stake to private equity player Qatar Foundation Endowment. In March 2013, it raised $1 billion in the European market through its subsidiary Bharti Airtel International (Netherlands) BV by issuing 10-year unsecured senior bonds with a coupon of 5.12 per cent. Within a month, the operator raised an additional $500 million through a tap issue of the existing bond series due in 2023 with a coupon rate of 5.12 per cent. While the proceeds from the first round of the bond issue were utilised to repay debt maturing before March 31, 2013, those from the second issue were used for servicing debt maturing thereafter.

In December 2013, Airtel raised Euro 750 million through another bond issue to pay off its high-cost debt. Substituting high-interest loans with low-cost funds will benefit the operator significantly as this would reduce finance costs, thereby enhancing future profit margins.

Meanwhile, Airtel has been in discussions with several potential investors for the sale of minority stake in the enterprise and landline businesses. The operator has valued the enterprise and landline businesses at Rs 65 billion and Rs 170 billion respectively.

Airtel is reportedly also looking to sell its Sri Lankan business, Bharti Airtel Lanka, to UAE-based operator Etisalat. Bharti Airtel Lanka is the fourth largest operator in the country and has been facing severe competition from the incumbents (Etisalat, Dialog Axiata and Mobitel). To gain market share, it adopted a price reduction strategy, but this did not succeed entirely as the incumbents followed suit.

Bharti Airtel has also offered its tower assets in the Bangladesh and African markets for sale. In Bangladesh, the operator owns about 4,000 towers and intends to raise at least $200 million from the asset sale. In the African market, it is planning to sell 15,000-20,000 towers for $1.5 billion-$2 billion, which may be undertaken in phases or on a country-by-country basis. Initially, 5,000 towers in the Nigerian market are expected to be sold for $500 million-$550 million.

Given that Airtel will have to make huge spectrum payments in the future, these measures will be crucial to ensure that its balance sheet is not overleveraged. Agrawal believes that the company’s future debt will depend on its ability to derive returns on investments made through effective monetisation of voice and data services along with its non-core assets.

 

Challenge from competitors

With the Indian telecom industry stabilising to some extent, operators will now look at the next level of growth. With access to significant capital, Vodafone Plc is expanding its operations in India under Project Spring. The company has earmarked an investment of $3 million for strengthening its Indian operations over the next two years. Vodafone has also reacquired spectrum in the 900 MHz band and bought additional spectrum in the 1800 MHz band, which can be used to improve 2G network coverage and/or launch 4G services. Moreover, Idea Cellular has increased its 1800 MHz spectrum holdings and will be looking to offer 4G services in this band.

RJIL, meanwhile, is planning an aggressive 4G service launch with network roll-out in progress in the Delhi and Mumbai circles. The company is expected to be very aggressive in terms of implementing its marketing and pricing strategies. RJIL has bought spectrum in the 1800 MHz band and is likely to deploy LTE-FDD in this band to offer data services. This spectrum can also be used to offer voice services, which will allow it to compete with Bharti Airtel.

Interestingly, RJIL will use Airtel’s infrastructure to provide 4G services. In December 2013, the companies signed an infrastructure sharing deal, which came as a surprise to the industry. As per the agreement, they would use each other’s optic fibre cable (OFC) network, wireless towers, undersea cable networks, etc. to avoid network duplication. While the deal will enable Airtel to earn significant income from RJIL, it stands to lose out on its competitive advantage, a nationwide network. With Airtel having already establised fibre connectivity in several circles, the infrastructure sharing deal will help RJIL in expediting its 4G service launch, and avoiding right-of-way issues and network roll-out costs. Therefore, the agreement is expected to benefit RJIL more than Airtel.

Analysts believe that Airtel still has an edge in the Indian market. According to Dr Mahesh Uppal, director, ComFirst, “While Airtel faces competition in the market, it has the advantage of being an incumbent player.” But like most other operators, Airtel’s success will depend on how it manages the challenges facing the industry. Improving network efficiency and quality of service, reducing opex, increasing data revenues and rural telecom penetration, and stabilising its international operations will be important for the operator to maintain its leadership position.

Betting on data

The hyper competition in the Indian telecom sector may have come down to some extent, but the data segment has taken off very recently. As an early mover, Airtel has an edge in this space. Moreover, it has significant spectrum holdings in the 1800 MHz and 2300 MHz bands and a large OFC network across the country.

With growth in the voice business slowing down, the company is banking on data services, which have been witnessing increasing adoption, driven by the growing use of smartphones, social networking websites and bandwidth-intensive applications such as online gaming and video services.

Airtel’s quarterly performance shows an increase in the number of data subscribers in the past year. The data user base on its network grew by about 31 per cent from 41.48 million in December 2011 to 54.42 million in December 2012. In addition, the 3G subscriber base increased by 83 per cent from 5.18 million to 9.48 million during this period. With growing 3G adoption, the average data usage per customer increased by 54 per cent from 161 MB to 249 MB.

Considering the rising demand for high speed broadband connectivity, Airtel launched 4G services in Bengaluru, Pune, Chandigarh and Kolkata in 2012-13. To drive uptake, the operator reduced tariffs for 4G services to bring them at par with 3G services. However, despite the tariff reduction, 4G service uptake has been modest, largely due to an underdeveloped device ecosystem. Nevertheless, the segment offers a huge opportunity for the company going forward.

Apart from data, rural services, enterprise offerings and value-added services are likely to drive the company’s business growth over the next few years. The enterprise segment contributes 10 per cent to its overall revenue. With the enterprise clientele comprising high-ARPU customers, Airtel is targeting a higher revenue contribution from the segment.

The rural market is another big opportunity for the operator owing to the proliferation of m-commerce and voice services. According to Sunil Bharti Mittal, chairman, Bharti Airtel Enterprises, “Airtel Money, which is currently available in 18 of the 20 global markets we are present in, is redefining banking and commerce in multiple ways, particularly in remote rural regions with negligible or no banking infrastructure.”

In all, Bharti Airtel is well positioned as the country’s largest operator, especially in light of its rising profitability, high adoption of data services and the improving regulatory environment. That said, overcoming issues such as losses from its African operations and a leveraged balance sheet are crucial to its success in the future.

 
 
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