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Bharti airtel: A new formula

September 30, 2011
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With a new look, a new logo and the promise to meet every customer requirement, Bharti airtel has been aggressively repositioning its brand. The exercise, conducted throughout 2011, marks a new inflection point in the company’s journey as well as its shift to the age of data.

The operator’s target segment is the country’s youth, the 18-20-year age group, which is the largest user of data services. Focusing on these users, Bharti airtel has tied up with the Formula 1 Group to host the premier motorsport event in India in October 2011.  The contract has a tenure of three years.

The estimated $8.5 million sponsorship package covers naming rights (the event is called the Formula 1 Airtel Grand Prix of India), signages at the circuit and spectator entrances, podium branding, trophies, paddock club hospitality and merchandise. To ensure brand recall, the airtel logo will be flashed for at least 25 per cent of the live TV broadcast of the qualifying sessions and the race.

“Formula 1 as a sport and airtel as a brand share the same synergies. Both resonate well with global and contemporary audiences. The Airtel Grand Prix of India will be the country’s first step in the world of international motorsport,” says Sanjay Kapoor, chief executive officer, India and South Asia at Bharti airtel.

Also, the operator’s key rival Vodafone has a 10-year sponsorship contract with the McLaren Mercedes Formula 1 team since 2007 (the team is called Vodafone McLaren Mercedes). Vodafone is the official mobile partner of the team with a prominent title sponsorship branding on new cars, driver and pit crew’s overalls and helmets, etc. Moreover, the contract provides Vodafone marketing opportunities like hospitality, merchandising and promotional rights including access to drivers and track days.

Clearly, expenditure on brand building is important for Bharti. It helps the company to stay ahead of the competition. Besides, it has been an important exercise to ensure that the brand enjoys a uniform presence in all  19 countries of operations – 16 African countries, Sri Lanka, Bangladesh and India.

Performance

Big on ideas and innovation, the company has leveraged its brand and pioneered the industry’s fully outsourced business model.

It is the undoubted leader in the Indian telecom space with a wireless market share of 19.89 per cent and 170.69 million users as of July 2011. It is followed by Reliance Communications (RCOM) with 144.78 million users, Vodafone Essar with 143.01 million, Idea Cellular with 96.11 million and Bharat Sanchar Nigam Limited with 95.14 million.

From being operational in only one circle in 1995, Bharti has become a global company offering mobile voice and data, fixed line, high speed broadband, IPTV and DTH services; turnkey telecom solutions for enterprises; national and international long distance (NLD) services to carriers; etc. Its total user base across segments stood at 230 million at end-July 2011.

The company has also established  strong pan-Indian and global infrastructure. Its NLD infrastructure comprises 148,792 route km of optic fibre, while the international infrastructure includes the i2i submarine cable system connecting Chennai to Singapore and a consortium ownership of the SMW4 submarine cable system connecting Chennai and Mumbai to Singapore and Europe. Besides, the company has invested in new cable systems such as the Asia America Gateway, India Middle East and Western Europe, Unity North, the Europe India Gateway and the East Africa Submarine System. Bharti’s global network spans over 225,000 route km, covering 50 countries across five continents.

Investing in 3G

The operator has spent $3.5 billion on 3G and broadband airwaves and is betting big on the uptake of data services, which are expected to boost margins in an industry where voice calls account for more than 85 per cent of the total revenues.

So far, the company has invested Rs 120 billion-Rs 130 billion in 3G rollouts, excluding the licence fee and infrastructure spends. To make good its investment, it rolled out services in early 2011 and has since launched services in all circles where it has licences. In areas where the operator  does not have licences, Bharti has partnered with Vodafone Essar and Idea Cellular to provide pan-Indian 3G services. These operators plan to use each other’s networks through intra-circle roaming arrangements. Bharti’s current 3G user base stands at over 3 million.

Its 3G plans are priced competitively and come with a validity of 1-30 days. Customers can avail of up to 2 GB of free data download at a monthly rate of Rs 750. Downloads beyond this limit are charged at Re 0.10 per 10 kb. The operator has a comprehensive 3G product portfolio including mobile TV and entertainment, video calls, live video streaming, high definition gaming and high speed internet.

Balance sheet woes

Financially, Bharti has taken a serious beating in the past several quarters. Weighed down by losses from its African operations and the high spend on 3G network rollout, the operator reported a bigger-than-expected 28 per cent fall in profits in the quarter ended June 2011 over the same quarter in the previous year.

In 2010, Bharti ventured into Africa by acquiring most of Zain’s mobile operations in the continent to become the world’s fifth largest mobile operator by subscribers. But the high operational costs in Africa have kept the company’s margins under pressure. Though company officials say that the African business is improving, the operator is yet to report profits from this venture.

Bharti’s total net loss from its African operations stood at Rs 3.02 billion as of June 2011.

Its net profit dropped from Rs 16.81 billion in the quarter ended June 2010 to Rs 12.15 billion in the quarter ended June 2011. The total consolidated revenues, however, increased from Rs 122.85 billion to Rs 169.75 billion during this period.

Like other operators, Bharti’s ARPUs have dropped as a result of low tariffs and high incremental costs. According to the Telecom Regulatory Authority of India (TRAI),  monthly ARPUs from Indian operations declined 2 per cent in the quarter ended June 2011 to Rs 190 from Rs 194 in March 2011. The company’s ARPU fell 12 per cent from Rs 216 for the quarter ended June 2010 to Rs 190 for the quarter ended June 2011.

With 14 operators in each circle as against two to three globally, there has been cut-throat competition and frequent tariff cuts in the Indian market, which the operators can ill afford. This is in addition to the expensive 3G spectrum acquisition in 2010, which made a major dent on the operators’ balance sheets. Today, most telecom companies have a huge debt burden. According to analysts, Vodafone Essar, which has a rich parent, is perhaps better off, but mid-sized operators are under significant financial pressure.

Strategic decisions

Bharti has reasons for concern after reporting net losses for six straight quarters. To improve the situation, after nearly two years of vicious tariff cuts, the operator recently increased call rates by 20 per cent in circles like Delhi, Andhra Pradesh and Uttar Pradesh.

This has been a significant move and has made the industry sit up and take notice. “Telecom is probably the only industry where tariffs have been falling continuously despite increasing inflation. Declining margins, high 3G and broadband wireless (BWA) spectrum prices, limited spectrum availability and rural rollout aspirations leave us with little choice but to make some price corrections,” Kapoor says.

Expectedly, rivals Vodafone Essar, Idea Cellular, Tata Teleservices Limited and RCOM have followed suit. Though TRAI has sought clarification on the price hike issue, operators are unlikely to roll back tariffs.

In fact, Bharti has indicated that tariffs may be raised further in the next few months and be made applicable to more circles. This is aimed at offsetting low revenues from rural markets.

Analysts say this is a relevant and strong move. “The tariff hike is a strategic and courageous move. It would have been risky had Vodafone Essar, Idea Cellular and RCOM not followed suit,” says Dr Mahesh Uppal, director, ComFirst.

Also, Bharti’s stance can trigger an increasing tariff trend, which would boost sector growth. “From here on, we will see strong growth in the sector with increasing tariffs. As the market matures, operators will increasingly chase high-value customers,” notes Prashant Singhal, telecom leader, Ernst & Young.

Recently, Bharti restructured its businesses to maximise operational efficiencies. The company now operates under two customer business units, one serving corporate clients (business-to-business) and the other handling retail offerings (business-to-customer).

Announcing the new organisational set-up, Sunil Bharti Mittal, chairman and managing director, Bharti airtel, said, “The new structure is aimed at greater business and functional synergies, providing a common interface to customers, and creating a delayered and more agile organisation.”

The business-to-consumer unit, which includes mobile, telemedia, digital TV, m-commerce and mobile advertising, has two segments – consumer business and market operations. Market operations in India and South Asia are divided into three regions, each headed by an operations director.

The business-to-business unit functions under Drew Kelton and focuses on corporates and small and medium businesses, besides undersea cable offerings.

Bharti has also entered the tablet market. Bharti Teletech, the operator’s handset arm, has launched the Magiq tablet at a competitive price of Rs 9,999. The Android-based device supports Wi-Fi and 3G and allows users to make calls from any SIM card, regardless of the service provider.

Analysts’ view

According to industry experts, a focused management team, a wider vision as compared to its peers, presence across emerging markets and strong business synergies are Bharti’s key strengths.

An analyst from PricewaterhouseCoopers says, “airtel has achieved an enormous scale of operations. It also has a strong inclination towards innovation. The operator’s IT system and product development takes place in closer alignment with its partners than most other telecom companies. Bharti has also maintained and extended its reach across emerging markets.”

“As a private incumbent, airtel enjoys all the advantages of incumbency. For example, it is usually the top operator in many areas, including market share, revenues and infrastructure assets,” says Uppal.

However, most analysts feel that while it is commendable that the operator has extended its reach beyond Indian shores, there exists a risk of Bharti overstretching itself. “In the past several months, there seems to be a marked lack of talent in managing so many territories and in making the most of the available opportunities,” says a senior telecom analyst at Anand Rathi Securities.

Uppal also points to a concern on the regulatory front. “The operator’s focus on regulatory issues is becoming somewhat diluted, which means that it could be caught off guard when a new development occurs on this front,” he says.

Of late, the operator has come under the Enforcement Directorate’s scanner for alleged contravention of the provisions of the Foreign Exchange Management Act in relation to the 2G spectrum issue. The Securities and Exchange Board of India (SEBI) has also received complaints alleging that the shareholding of Bharti’s promoter group was increased from 60.91 per cent as on June 30, 2007 to 67.15 per cent on September 30, 2008 without providing an open offer. This is allegedly in violation of Regulation 11 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

The operator has, however, denied these charges stating that it adheres to the standards of corporate governance and has always complied with the rules and regulations of various agencies and the Department of Telecommunications. The company has assured that it will cooperate with the authorities in the investigation process.

Going forward, industry experts believe that Bharti would profit from the provision of enterprise communication services to emerging corporate segments. Also, a bold move such as a venture with major IT players like IBM for providing localised data services to lower-tier consumers, where mass uptake opportunities exist, may pay off.

Thrust areas

According to company officials, 2011-12 would be an exciting year of transformation. Tariffs have stabilised to some extent, which could help the company grow and lead to consolidation for the industry.

Turning around the African business  will be a key focus area for Bharti. It is aiming at revenues of $5 billion and an EBITDA (earnings before interest, taxes, depreciation and amortisation) of $2 billion from these operations by end-March 2013, with a subscriber base of 100 million.

The operator is looking at a leadership position in the African 3G market. In September 2011, it tied up with the Rwanda Utilities Regulatory Agency to provide 2G and 3G GSM mobile services in the country. With this licence, the company’s footprint in the continent has increased to 17 countries. Bharti plans to invest over $100 million in its Rwanda operations over the next three years.

3G will continue to be a key business area in India, where the company plans to launch services in over 1,500 cities by March 2012. Bharti is looking to leverage technologies like 3G, BWA and LTE to address the rapidly increasing data demand in the Indian market. “3G customers are fairly accretive in terms of ARPUs and their propensity to use data is high. We expect significant uptake of data services by Indian customers as has been the case in other parts of the world where 3G services have been launched,” says Kapoor.

In addition, Bharti envisages a bigger role for itself in the underserved rural market. Currently, rural users constitute about 40 per cent of the operator’s subscriber base. To increase this share, the company plans to provide basic voice connectivity across the country.

It is also looking to value-added services (VAS) and mobile internet usage to improve ARPUs. According to a company official, “We believe that there is significant scope for improving ARPUs by increasing the adoption of VAS and mobile internet on both 2G and 3G.”

Despite a few hurdles along the way, Bharti has maintained its leadership position in the Indian telecom market and, as industry experts believe, will continue to maintain its dominance going forward.

 
 
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