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Bharti Airtel: Profits under pressure
The telecom success story seems to be losing some of its shine. Clouded by controversy, policy ambiguity and regulatory uncertainty, the signs of strain are beginning to tell on the sector. Telecom operators, in particular, are feeling the heat, burdened as they are with competitive pressures, falling ARPUs, thin margins and bitter price wars.
Mid-2011, there was an attempt by operators to shore up profitability through a tariff hike, but this failed to achieve the desired results. Meanwhile, huge investments in acquiring 3G licences and rolling out networks dented operator reserves, while the slow uptake of 3G services offered little respite or returns on these investments.
In this scenario, Bharti Airtel’s untrammelled drop in net profits – for the tenth quarter in a row (including April-June 2012) – does not come as a surprise. Profits, which had peaked at Rs 20.44 billion in the fourth quarter of 2009-10, slipped to
Rs 7.75 billion in the quarter ended June 2012, marking a 37 per cent decrease over the corresponding quarter in 2011-12.
Clearly, Bharti’s ambitious purchase of mobile operations in 15 African countries also dented its balance sheet. Loans for acquiring Zain’s African operations in 2010 accounted for 75 per cent of its net debt of $12 billion as of June 2012. Therefore, while the operator’s revenue market share and subscriber base improved, profits were hit during the quarter, a result of its aggressive tariff pricing and increase in sales and marketing expenses.
Following the disappointing quarterly results, Bharti Airtel has been downgraded by Morgan Stanley, Standard Chartered, Credit Suisse and Goldman Sachs. Morgan Stanley has downgraded the company to “equal-weight” from “overweight” and has reduced its target price from Rs 366 to Rs 280. According to the rating agency, the company has been focusing on subscriber growth at the expense of operating margins. Also, Bharti Airtel has slashed 3G rates in the past six months, when its overall sequential data revenue growth was declining.
Most rating agencies expect Bharti Airtel’s operations to be relatively weak in India and Africa going forward. “We see further downside risks, if Bharti Airtel continues to maintain/regain market share at the expense of profitability,” reads a Goldman Sachs note.
These downgrades could impact the operator’s financial health further, especially because Bharti Airtel is looking to reduce its debt burden by listing its tower subsidiary, Bharti Infratel.
Market experts, however, expect the company to overcome these challenges. “Ratings by international agencies have more impact on the stock of a company than its position in the market. Though Bharti Airtel has a huge debt burden, it has the capability to tide over this and other challenges,” says Kunal Bajaj, telecom analyst and entrepreneur.
Dr Mahesh Uppal, director, ComFirst, agrees. “All companies are impacted by such downgrades to some extent. The importance of the perception of international and national analysts cannot be denied. However, Bharti Airtel has some inherent advantages to overcome such challenges. It has a higher proportion of lucrative customers. It has a strong nationwide network, and its upgrade will involve only incremental costs,” he says.
Leading the mobile segment
In many ways, Bharti Airtel’s swift rise as a successful corporate entity is symbolic of the spectacular growth witnessed by the Indian telecom sector.
From offering telecom services in one circle in 1995, the company has become the country’s largest operator with over 200 million subscribers. It offers mobile voice and data, fixed line, 3G and 4G, national long distance and international long distance, IPTV and DTH services as well as enterprise solutions.
Globally, Bharti Airtel operates in 20 countries – 17 African nations besides India, Sri Lanka, Bangladesh – and is the world’s fifth largest telecom carrier by subscribers. In terms of infrastructure, the company owns 148,792 route km of optic fibre. Its global infrastructure comprises over 225,000 route km of networks, covering 50 countries and five continents. The company’s footprint has increased through the ownership of the i2i submarine cable system connecting Chennai to Singapore, consortium ownership of the Sea-Me-We 4 submarine cable system connecting Chennai and Mumbai to Singapore and Europe, and investments in new cable systems such as the Asia America Gateway, India Middle East and Western Europe, Unity, Europe India Gateway and East Africa Submarine System.
To achieve optimal operational efficiency, Bharti Airtel has divided its business into two units, one serving corporate clients (business-to-business [B2B]) and the other handling retail offerings (business-to-customer [B2C]). The B2C 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. The B2B unit focuses on corporates, and small and medium businesses, besides undersea cable services.
The wireless business has been the biggest growth driver for Bharti Airtel. The operator leads this segment with a 20.67 per cent market share as of July 2012 (according to the Telecom Regulatory Authority of India [TRAI]), followed by Vodafone India (16.96 per cent), Reliance Communications (RCOM) (14.68 per cent), Idea Cellular (12.88 per cent), Bharat Sanchar Nigam Limited (BSNL) (10.81 per cent) and Tata Teleservices Limited (TTSL) (8.52 per cent).
As on March 31, 2012, the company’s fixed line voice and data solutions user base stood at 3.3 million customers and the digital TV customer base was 7.2 million.
3G and more
After spending $3.5 billion on 3G and broadband airwaves, the service provider has invested Rs 120 billion-Rs 130 billion in 3G roll-outs, excluding the licence fee and infrastructure development costs. These services are currently available in over 1,100 cities across 13 licensed circles. The operator’s 3G subscriber base has crossed 9 million.
Despite the slow uptake of 3G services, the company plans to continue to focus on this segment. “The overall response to our 3G services has been encouraging. With increasing 3G handset penetration, depth and availability of content, and network expansion, the long-term outlook for service adoption is positive,” notes K. Srinivas, president, consumer business, Bharti Airtel.
To increase service uptake, Bharti Airtel has reduced 3G tariffs by 70 per cent. Under the new plan, volume-based browsing rates have been brought down from Re 0.10 per 10 kB to Re 0.03 per 10 kB.
Meanwhile, Bharti Airtel has gained an edge over its peers, in particular Reliance Infotel, by launching 4G services in Kolkata and Bengaluru. These services have been launched on long term evolution-time division duplexing (LTE-TDD) networks, making India one of the first countries to commercially offer 4G through this platform. As per industry estimates, Airtel’s 4G services have received an enthusiastic response, with over 3,180 users.
Also, for faster roll-out of 4G networks, the company has signed major contracts with vendors such as Ericsson, Huawei and Nokia Siemens Networks. Huawei recently won a contract to plan, design, supply and deploy LTE networks for the operator in Karnataka.
Going forward, analysts expect significant activity in the 4G space, especially with Reliance Infotel entering the space. The widely held view is that Reliance Infotel’s entry will impact the entire industry, but it remains to be seen whether it can deliver on the wireless front.
Advantages, issues and analyst views
According to industry experts, a management team comprising telecom professionals, extensive pan-Indian and global infrastructure, and innovative branding and marketing strategies and partnerships are Bharti Airtel’s key strengths.
“Airtel has the strength and the capability to stay ahead in the business. When it comes to the Indian market, it would be hard to doubt its capabilities to understand the telecom business, as the company has grown with the Indian consumer. It has the largest market share and highest number of subscribers,” says Abhishek Chauhan, senior consultant, information and communication technology practice, South Asia and Middle East, Frost & Sullivan.
However, there is a growing market perception that the company needs to improve its operations and service delivery. Analysts say that the pursuit of market share and global expansion has impacted Bharti Airtel’s performance and service quality, especially in the prepaid mobile and broadband segments. This makes the operator vulnerable to customer churn. “The operator has to proactively increase and protect its customer base, especially in the prepaid segment. As the leader and the oldest player in the market, Bharti Airtel should anticipate and tackle the threat of prepaid as well as 3G customers migrating to other networks,” notes Bajaj.
Leveraging its strong operations in India and international markets, and introducing customer benefits could help the company in this regard. “Bharti Airtel can initiate loyalty programmes and provide more returns to its customers,” Bajaj says.
Service convergence can be another solution. Bajaj points out that while companies like RCOM and Tata Communications are fully converged players with a strong presence in the wireless, wireline and enterprise segments, Bharti Airtel has never made any attempts to leverage this.
Reducing its debt burden is another area of concern for the company. According to a study by CLSA, the operator’s debt increased by six times in 2010-11 as compared to the previous year and by 12 per cent in 2011-12 to Rs 693 billion. As per the report, about 28 per cent of this debt either needs to be paid back by 2012-13 or be rolled over, thereby putting further pressure on the company.
Also, costs are expected to rise significantly, given that Airtel has to renew its licence in 2014. According to Uppal, the licence renewal will entail much higher payments for spectrum. Therefore, analysts feel that the company should focus on data and enterprise services. According to Chauhan, data and related value-added services (VAS), and the enterprise business should be the operator’s key focus areas over the next two years. “On the data front, Bharti Airtel needs to innovate on content. The company is currently offering utility services and vernacular VAS. Typically, these are the growth areas on the consumer side,” he says.
Another area of concern is Bharti’s African business. Despite major investments and the launch of innovative services, this segment has failed to generate profits. While analysts were expecting a turnaround in the first quarter of 2012-13, the firm posted a drop of two percentage points in net profits over the previous quarter. Moreover, Bharti Airtel’s board has given a cautious outlook on the African business.
The way forward
Market experts are of the view that regulatory developments over the next 12 months and Bharti Airtel’s position on key issues related to data, customer experience and debt will decide its future performance.
Meanwhile, the operator plans to list its tower company, Bharti Infratel, in the near future. It aims to raise Rs 45 billion through this initial public offering (IPO) and has completed the draft red herring prospectus for the same. The company has shortlisted several banks including Standard Chartered Bank and JP Morgan to manage the share flotation for Bharti Infratel and the Bank of America, Merrill Lynch, HSBC, UBS and Kotak Mahindra for issuing the IPO.
Expanding its 3G and 4G footprint is a key priority for the operator. Going forward, it aims to launch 4G services in Karnataka, Maharashtra (including Mumbai), Punjab, Delhi, Haryana and Kerala.
Over the next few years, the biggest challenge will be the preparation of an effective strategy for the data segment. “Data is where the next battle will be fought. Airtel will face major challenges from its competitors in this segment,” says Uppal.
Also, according to Srinivas, the Indian telecom space is set to witness significant growth in areas like agriculture-, health- and education-related applications, which will be driven by voice and data-based VAS.
Therefore, Bharti’s key business priorities include expanding the reach of its m-commerce, m-health and B2B segments. “We have already introduced services like airtel money, the Mediphone voice-based application, and data centre and managed service solutions. In the future, the emphasis will be on expanding these product portfolios,” says Srinivas.
Meanwhile, on the enterprise side, Airtel has established a strong portfolio of services, targeting both large, and small and medium enterprises.The operator accounts for about one-fourth of the country’s mobile telephony market and nearly one-third of the total telecom revenues. With a pan-Indian presence and a diverse service portfolio, the company is likely to remain a frontrunner in the foreseeable future despite the challenges.
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