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Bharti Airtel - Global ambitions stalled?

October 15, 2009
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It's happened again. For the second time in two years, the efforts of Bharti Airtel and South African telecom operator MTN to create one of the world's largest transcontinental mobile phone carriers, with a subscriber base of over 200 million across India, Africa and the Middle East and a net worth of over $20 billion, have foundered.

The first time round, a year ago, the call dropped over control issues of the joint entity. This time, the no-show stemmed from the South African government's reluctance to allow its flagship corporate to lose the national flavour. It asked for dual listing of the combined entity, which the Indian government, though stating openness to the idea, was unable to offer (not under any timeline at least), as it would require full capital account convertibility.

Since the dual listing development had never been part of the negotiations, Bharti decided to call it quits before the September-end deadline. "We believe this particular deal did not call for dual listing. It was only when the Government of South Africa started talking to its Indian counterpart did the issue crop up. We hope that the South African government will review its position in future and allow both companies an opportunity to reengage," noted Sunil Bharti Mittal, the 57-year-old, high-profile entrepreneur CMD of Bharti Enterprises.

But as of now, the deal, for sure, is over.

Deal damper
While the talks ended as a damper, the outcome was not entirely unexpected. All along, it was understood that the negotiations could swing either way. For months, speculation and debate had been rampant on the price and complexity of the $24 million deal. Aside from investors, bankers, analysts and industry watchers, telecom regulators and politicians of both countries were also closely following the progress of the talks.

Under the initial terms of the deal outlined in May, Bharti had proposed to use cash and shares to buy a 49 per cent stake in MTN, while the South African firm and its shareholders were to pay cash and shares for a 36 per cent interest in the Indian company. Over the next few months, the deal was modified and vigorous efforts were made to close it. This included talk of Bharti considering the possibility of increasing the cash component by reducing the share of GDRs.

It was worth the try because, had the deal worked out, it would have enabled Bharti to push growth in a highly competitive telecom market. It would have given the operator exposure to new markets ripe for growth, apart from eventually enabling substantial cost savings, technology sharing and financial muscle for further expansion.

But, as Mittal pragmatically pointed out, "You cannot really predict these kinds of things, especially in very large deals as issues can crop up at any time. Both parties were committed to taking the deal forward. Since it involved cross-shareholding, MTN required approval from its government to invest in India. That kind of regulation does not exist on the Indian side. Since the approval did not come, we decided to terminate it. From our side, we have to keep moving forward."

Company profile
With over 110 million telecom users, Bharti Airtel is the undisputed leader in the private sector mobile telephony space. Its swift growth as a successful corporate entity is in many ways symbolic of the trailblazing pace of India's telecom sector. Last year, it left behind state-owned telecom operator Bharat Sanchar Nigam Limited (BSNL) to become the leading integrated telecom company in the country. As of August 2009, its closest rival in the wireless space is Reliance Communications (RCOM) with 84 million mobile subscribers. Vodafone Essar and BSNL follow with 81 million and 52 million mobile subscribers respectively.

Bharti Airtel offers mobile, fixed line, broadband, national and international long distance, satellite and enterprise services, leveraging its nationwide optic fibre backbone and TV services. It operates through three key divisions: mobility, telemedia and enterprise. It is also engaged in the passive telecom infrastructure service business through its subsidiary, Bharti Infratel. The company is, moreover, part of the consortium that jointly owns and has developed the next-generation undersea cable system SEA-ME-WE4.

The company's mobile business is, however, its main growth vehicle. Bharti Airtel claims nearly 25 per cent share of the wireless market. Its telecom network and distribution chain are among the largest in India, covering 425,000 towns and villages. It has more than 100,000 base transceiver stations and over 1.5 million retail and distribution outlets. As a brand, Bharti Airtel's services reach nearly every corner of the country.

For fiscal year 2009-10, the company has earmarked about $5 billion as capital expenditure. Of this, about $2.5 billion is likely to go towards expansion of mobile services and about $2.5-$3 billion would go towards the tower business run by Bharti Infratel and Indus Towers.

Key strengths
When Bharti Airtel offered Delhi's first mobile service in 1995, it was a Rs 250 million firm making Rs 50 million in profit. The story now is much bigger. As Mittal stated in a leading business daily, "By next year, we will touch revenues of $10 billion. As of now, we are one of the top five companies in the country, with a market capitalisation of $32 billion, employing 40,000 people."

However, to sustain this level of growth requires a huge effort. The company faces competition not only from deeppocketed and entrenched players but also from new and upcoming players from diverse backgrounds including realty. To keep ahead, therefore, the company needs to invest hugely, innovate its offerings, improve service quality, differentiate its marketing strategies and look for new business streams.

The company believes it is, above all, a question of scale. "It is a lesson we learnt early. One cannot afford to be small in this sector. One either expands aggressively and gathers size or gets acquired," notes Mittal. The company's carefully crafted strategies have always been in line with this.

Bharti's key strengths are its management, sound financials and strategic partnerships. Right from the start, it has maintained that its employees are its biggest assets. It is one of the few companies that has been able to retain industry stalwarts such as Akhil Gupta, Manoj Kohli and Jagbir Singh among its top management, and cherry-pick the best talent in the industry. The company often juggles its management team to achieve the best organisational structure to effectively drive the company's strategy and operations.

Outsourcing is the other key strategy that has helped the company scale up swiftly. In fact, Bharti Airtel has made outsourcing the cornerstone of its business strategy. It pioneered the outsourcing model in 2004 by awarding a major contract to Ericsson. "We needed to focus on customers, service delivery and brand development. Therefore, we outsourced everything else, including IT, networks and call centres. Today, the model is being adopted globally in the telecom sector," notes Manoj Kohli, CEO and joint managing director, Bharti Airtel.

The company has signed multi-billion dollar contracts with network vendors such as Ericsson and Nokia Siemens Networks (NSN), which build, operate and manage its mobile network. In April this year, it tied up with Alcatel-Lucent, which manages and maintains its intercity networks. Bharti Airtel is the minority partner in the 26:74 joint venture (JV). It will pay the JV company $500 million for managing its landline and broadband business in 100 cities for the next five years. Bharti Airtel is also in the process of finalising an outsourcing agreement for the management and maintenance of its 80,000 km-plus intercity optic fibre cable network for a period of five years. The deal is estimated to be worth around $500 million.

Financially too, Bharti is on a strong wicket. It has benefited significantly from its continuous focus on profitability and returns on equity and capital investment. According to Amit Ahire, research analyst with Ambit Capital, the company is on stronger turf than most international players. Its financial performance has been better than that of its peers in developed markets like Europe and America.

Bharti Airtel snapshot Chairman and managing director: Sunil Bharti Mittal
Market capitalisation: Rs 1.31 trillion (October 14, 2009)
Shareholding pattern: Promoter holding 67.41 per cent; institutional investors 27.47 per cent; other investors 3.9 per cent; and general public 1.22 per cent
Wireless market share: 24 per cent
Mobile subscribers: 110 million (September 2009)
Fixed line subscribers: 2.89 million (August 2009)
Internet and broadband subscribers: 1.15 million (June 2009)
Domestic operations: Pan-India
Global mobile operations: Sri Lanka, Seychelles, Jersey and Guernsey

For the quarter ended June 2009, Bharti reported a 24 per cent year-onyear increase in net profits. Its net profit in the reporting quarter stood at Rs 25.17 billion as compared to Rs 20.25 billion in the corresponding period in 2008-09. Due to a 6 per cent gain in the rupee against the dollar in the quarter ended June 2009, the company registered a foreign exchange gain of Rs 2.5 billion against a loss of Rs 1.68 billion in the corresponding period last year. A deferred tax income of Rs 2.38 billion also helped boost the quarterly net profit. Further, the company's revenues grew by 17 per cent, from Rs 84.83 billion in the quarter ended June 2008 to Rs 99.42 billion in the quarter ended June 2009.

"From the profitability perspective, despite having one of the lowest ARPUs, the company has managed to be extremely profitable with EBITDA margins generally above 40 per cent. It is really commendable how it managed a low-cost operation and has yet been profitable," notes Romal Shetty, national telecommunications head, KPMG.

Scope for growth
There is no doubt that Bharti Airtel is today one of the strongest telecom brands in the country. "Brand building is something it has managed very well," affirms Shetty. However, with the entry of a number of new players, the telecom scenario is set to change, which may require Bharti to rework its strategies. In the past six months, at least five mobile brands have been launched, including MTS from the Shyam Sistema stable, while Datacom, Unitech and STel are waiting to roll out services. Meanwhile, old rivals RCOM and TTSL have further stirred up competition by aggressively rolling out GSM services –­ RCOM earlier this year and TTSL more recently under the TATA DOCoMO brand name.

Bharti is likely to feel the heat sooner rather than later. "With six to seven new operators coming in, there will now be 1213 operators per circle. The competition is as intense as it can get. Moreover, the metro, tier 1 and tier 2 markets are nearly saturated. So, companies are now moving to tier 3 cities and the rural areas which do not have high ARPUs," points out Shetty.

Already, Bharti Airtel's ARPUs have been falling. In the quarter ended June 2009, its cellular ARPUs slipped to Rs 278 from Rs 350 in the same quarter of the previous year. The challenge, therefore, will be to keep EBITDA margins constant when the company rolls out services in rural areas. "Given the electricity and diesel issues in rural areas, sustaining the current EBITDA margins will be challenging unless the company is able to control its electricity costs," observes Sridhar Pai, CEO, Tonse Telecom.

Also, as Dr Mahesh Uppal, director, ComFirst points out, "Airtel's ARPUs are a little lower than Vodafone's. This will make Vodafone a formidable competitor. For that matter, any global player that comes into the market with a similar profile will be a formidable opponent that Bharti will have to watch out for."

Falling tariffs triggered by packages like one-second billing or pay per call as seen in the past few months are not helping Bharti Airtel's case either. "A war on price points will only put operators in this crowded sector under more pressure. Prices are already at rock-bottom and there is very little cushion available for it to go down further," says a senior Bharti official.

Analysts are of the view that expansion into other countries is key for Bharti if it wants to sustain its pace of growth or find a place among the top five companies in the world in revenue terms. Globally (except in China and the US), the large telecom companies owe their growth to expansion beyond their home countries. Vodafone, France Telecom, Deutsche Telekom, America Movil and Telecom Italia are classic examples.

For Bharti, it makes good business sense to expand globally as the returns from the Indian market are likely to slide over the years as the market saturates. So far, it hasn't had much success in its global acquisition attempts. But analysts are optimistic. Says Deven Choksey, chief executive of K.R. Choksey Shares and Securities, "It is not the end of the story. It probably has to look at something smaller than MTN or some other region to enter."

One possibility could be Kuwaiti telecom firm Zain, which is selling 46 per cent stake, say bankers. The other is acquisition of Millicom's assets in Sri Lanka, where it already has mobile operations. The company is also operating in Seychelles, and Jersey and Guernsey, and is very margin focused and clear on its acquisition strategy. According to Bharti officials, the company's global aspirations are intact and it is looking at all emerging markets for expansion possibilities. It is looking at opportunities to replicate its low-cost model in emerging markets where there is sufficient scale to allow the company to emerge as a strong global telecom company. "We will continue to explore international expansion opportunities," says Kohli.

Moving on
Meanwhile, it is business as usual at Bharti Airtel's headquarters. With 3G auctions round the corner, the company is gearing up for its 3G launch. "If everything goes well and on time with regard to spectrum auction, we will have spectrum allocation by February or March. By next Diwali, we would have commercially launched 3G services in India," says Kohli.

Today, over 56 per cent of the subscriber additions are from outside the major cities. According to Sanjay Kapoor, deputy CEO, Bharti Airtel, "India's subscriber base will continue to climb as only 35 per cent of households currently have cellphones and around 50 per cent should be able to afford them." To tap this potential, the company is aggressively targeting the rural areas. It has set up a separate team to develop strategies to best tap the potential of rural users. Further, Airtel service centres have been set up in rural areas which will deal with customer queries and issues. In Maharashtra, for instance, the company has covered 1,500 villages with Airtel service centres. These centres serve as one-stop shops for mobile customers in villages. In addition, as a part of the IFFCO association, Bharti Airtel is offering free information services to farmers who purchase an Airtel connection through IFFCO Kisan Sanchar Limited, a JV between Bharti Airtel and IFFCO. Airtel IFFCO is present in 35 districts in Maharashtra across 32,000 villages through 1,000 cooperative societies.

On the network front, Bharti Airtel recently entered into an agreement with Australia Japan Cable (AJC) to interconnect their current and future networks in the Pacific Island of Guam. Under the deal, Bharti Airtel will link its assets on the upcoming Asia-America Gateway (AAG) cable with AJC, which connects Australia to Guam and Japan. The joint network is expected to carry commercial traffic from late 2009 onwards. The deal will enable Bharti Airtel to carry voice and data for telecom operators in Singapore, the US west coast and Australia. Currently, Bharti Airtel is part of four different consortiums that are building undersea links across the world. These cables are set to become operational by end-2009, enabling it to target business opportunities across a number of countries in Asia and Africa. The company has invested over Rs 15 billion in existing and upcoming cable routes in the past two years.

Value-added services (VAS) is another key focus area. Bharti Airtel has partnered with UK-based in-flight solutions company AeroMobile to offer in-flight cellphone connectivity to its customers. This will enable customers to make and receive calls on their mobiles on select international airlines. Bharti Airtel will be the first Indian telecom company to offer this facility. It has also become the first telecom operator in India to have an independent developers' community. Close to 1,000 developers have signed up for the Airtel Open Developers Community (AODC) which will develop applications and services for its mobile, landline, internet, IPTV and direct-tohome (DTH) customers. Bharti Airtel will provide AODC members a software development kit, the main set of tools needed to write applications, as well as training to build applications across the three screens –­ PC, mobile and TV.

The company is getting more aggressive on the IPTV front as well. It is positioning the service as part of its tripleplay offerings. The space was earlier dominated by operators offering the service over the broadband network of staterun operators Mahanagar Telephone Nigam Limited and BSNL.

DTH is the other service that Bharti Airtel is betting big on. Launched in October 2008, it marked the company's entry into the media and entertainment business. Bharti Airtel plans to leverage its 110 million subscriber base and brand name to expand this service. Airtel Digital TV, the sixth player in the market, is hoping to take the current 3 per cent DTH penetration to the 225 million Indian households across 62 cities in the first phase.

In all, Bharti Airtel accounts for nearly a fourth of the country's mobile telephony market and nearly a third of the total telecom revenues generated in the country. With a pan-Indian presence and a varied basket of services to offer, the company is likely to remain a frontrunner for a long while yet.

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